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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 


FORM 10-Q

 

(Mark One)

 

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

for the quarter ended June 30, 2022

or

 

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

for the transition period from                          to                          .

Commission file number 001-38357

 


PLAYAGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

46-3698600

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

 

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

(Address of principal executive offices) (Zip Code)

(702) 722-6700 

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value

AGS

New York Stock Exchange

 

As of August 4, 2022, there were 37,170,797 shares of the Registrant’s common stock, $0.01 par value per share, outstanding.

 

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

 

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

 

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

 

Large accelerated filer  ☐

Accelerated filer

Non-accelerated filer ☐

Smaller reporting company  

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes   No ☐

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

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2022 AND DECEMBER 31, 2021

1

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021

2

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AT JUNE 30, 2022 AND 2021

3

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021

4

 

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5

 

 

 

ITEM 2.

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

23

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

46

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

47

 

 

 

PART II. OTHER INFORMATION

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

48

 

 

 

ITEM 1A.

RISK FACTORS

48

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

48

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

48

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

48

 

 

 

ITEM 5.

OTHER INFORMATION

48

 

 

 

ITEM 6.

EXHIBITS

49

 

 

 

 

SIGNATURES

50

 

ii

 

 
 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLAYAGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)

 

  

June 30, 2022

  

December 31, 2021

 

Assets

 

Current assets

        

Cash and cash equivalents

 $38,854  $94,977 

Restricted cash

  20   20 

Accounts receivable, net of allowance of $2,193 and $1,993, respectively

  52,931   49,426 

Inventories

  37,550   27,534 

Prepaid expenses

  7,250   4,878 

Deposits and other

  8,218   8,240 

Total current assets

  144,823   185,075 

Property and equipment, net

  75,426   74,916 

Goodwill

  287,069   285,546 

Intangible assets

  151,421   160,044 

Deferred tax asset

  7,499   7,333 

Operating lease assets

  12,257   12,503 

Other assets

  7,413   7,394 

Total assets

 $685,908  $732,811 
         

Liabilities and Stockholders’ Equity

 

Current liabilities

        

Accounts payable

 $18,828  $9,439 

Accrued liabilities

  39,210   39,165 

Current maturities of long-term debt

  6,146   6,877 

Total current liabilities

  64,184   55,481 

Long-term debt

  551,825   599,281 

Deferred tax liability, non-current

  2,795   2,653 

Operating lease liabilities, long-term

  11,556   11,871 

Other long-term liabilities

  18,970   21,954 

Total liabilities

  649,330   691,240 

Commitments and contingencies (Note 12)

          

Stockholders’ equity

        

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

      

Common stock at $0.01 par value; 450,000,000 shares authorized at June 30, 2022 and at December 31, 2021; and 37,121,715 and 36,943,770 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

  371   369 

Additional paid-in capital

  397,785   392,161 

Accumulated deficit

  (355,951)  (344,889)

Accumulated other comprehensive loss

  (5,627)  (6,070)

Total stockholders’ equity

  36,578   41,571 

Total liabilities and stockholders’ equity

 $685,908  $732,811 

 

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

 

1

 

 

PLAYAGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(amounts in thousands, except per share data)

 (unaudited)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Revenues

                

Gaming operations

 $56,640  $55,039  $109,804  $99,455 

Equipment sales

  19,944   11,798   39,637   22,741 

Total revenues

  76,584   66,837   149,441   122,196 

Operating expenses

                

Cost of gaming operations(1)

  10,868   9,677   21,137   18,353 

Cost of equipment sales(1)

  10,386   5,748   20,173   9,216 

Selling, general and administrative

  15,975   16,300   33,926   28,908 

Research and development

  10,040   9,009   20,250   17,069 

Write-downs and other charges

  342   64   435   788 

Depreciation and amortization

  19,160   18,611   38,029   37,019 

Total operating expenses

  66,771   59,409   133,950   111,353 

Income from operations

  9,813   7,428   15,491   10,843 

Other expense (income)

                

Interest expense

  8,087   11,517   17,560   22,498 

Interest income

  (214)  (276)  (423)  (564)

Loss on extinguishment and modification of debt

  -   -   8,549   - 

Other expense (income)

  277   (181)  269   (34)

Income (loss) before income taxes

  1,663   (3,632)  (10,464)  (11,057)

Income tax expense

  (121)  (251)  (588)  (596)

Net income (loss)

  1,542   (3,883)  (11,052)  (11,653)

Foreign currency translation adjustment

  (561)  886   443   24 

Total comprehensive income (loss)

 $981  $(2,997) $(10,609) $(11,629)
                 

Basic and diluted income (loss) per common share:

                

Basic

 $0.04  $(0.11) $(0.30) $(0.32)

Diluted

 $0.04  $(0.11) $(0.30) $(0.32)

Weighted average common shares outstanding:

                

Basic

  36,998   36,632   37,051   36,549 

Diluted

  36,998   36,632   37,051   36,549 

 

(1) exclusive of depreciation and amortization

 

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

 

2

 

 

PLAYAGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(amounts in thousands)

 (unaudited)

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Common stock

                

Balance, beginning of period

 $371  $366  $369  $364 

Vesting of restricted stock

  -   1   2   3 

Balance of common stock, end of period

  371   367   371   367 

Additional paid-in capital

                

Balance, beginning of period

  395,837   381,547   392,161   379,917 

Stock-based compensation expense

  1,948   3,230   5,626   4,862 

Vesting of restricted stock

  -   (1)  (2)  (3)

Balance of additional paid-in capital, end of period

  397,785   384,776   397,785   384,776 

Accumulated deficit

                

Balance, beginning of period

  (357,493)  (329,960)  (344,889)  (321,412)

Net income (loss)

  1,542   (3,883)  (11,052)  (11,653)

Restricted stock vesting and withholding

  -   (10)  (10)  (788)

Balance of accumulated deficit, end of period

  (355,951)  (333,853)  (355,951)  (333,853)

Accumulated other comprehensive loss

                

Balance, beginning of period

  (5,066)  (5,948)  (6,070)  (5,086)

Foreign currency translation adjustment

  (561)  886   443   24 

Balance of accumulated other comprehensive loss, end of period

  (5,627)  (5,062)  (5,627)  (5,062)

Total stockholders' equity

 $36,578  $46,228  $36,578  $46,228 

 

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

 

3

 

 

PLAYAGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

   

Six Months Ended June 30,

 
   

2022

   

2021

 

Cash flows from operating activities

               

Net loss

  $ (11,052 )   $ (11,653 )

Adjustments to reconcile net loss to net cash provided by operating activities:

               

Depreciation and amortization

    38,029       37,019  

Accretion of contract rights under development agreements and placement fees

    3,198       3,316  

Amortization of deferred loan costs and discount

    1,537       2,680  

Write-off of deferred loan costs and discount

    1,586       -  

Cash paid for debt prepayment penalties to prior debt holders

    848       -  

Stock-based compensation expense

    8,231       4,862  

Provision for bad debts

    273       205  

Loss on disposition of long-lived assets

    416       191  

Impairment of assets

    19       653  

Fair value adjustment of contingent consideration

    -       (56 )

Provision for deferred income tax (benefit)

    89       49  

Changes in assets and liabilities that relate to operations:

               

Accounts receivable

    (3,500 )     (3,844 )

Inventories

    (9,143 )     2,367  

Prepaid expenses

    (2,776 )     (4,270 )

Deposits and other

    106       (1,920 )

Other assets, non-current

    1,787       1,706  

Accounts payable and accrued liabilities

    5,256       4,588  

Net cash provided by operating activities

    34,904       35,893  

Cash flows from investing activities

               

Business acquisitions, net of cash acquired

    (4,750 )     -  

Proceeds from payments on customer notes receivable

    137       -  

Software development and other expenditures

    (9,852 )     (7,210 )

Proceeds from disposition of assets

    8       22  

Purchases of property and equipment

    (20,401 )     (14,191 )

Net cash used in investing activities

    (34,858 )     (21,379 )

Cash flows from financing activities

               

Repayment of prior first lien credit facilities

    (521,215 )     (2,694 )

Repayment of first lien credit facilities

    (1,438 )     -  

Repayment of incremental term loans

    (93,575 )     (475 )

Payment of financed placement fee obligations

    (2,593 )     (2,444 )

Proceeds from term loans

    569,250       -  

Payment of deferred loan costs

    (4,838 )     -  

Payment of debt prepayment penalties to prior debt holders

    (848 )     -  

Payments of previous acquisition obligation

    (287 )     (257 )

Payments on finance leases and other obligations

    (616 )     (867 )

Repurchase of stock

    (10 )     (788 )

Net cash used in financing activities

    (56,170 )     (7,525 )

Effect of exchange rates on cash and cash equivalents

    1       10  

Net increase in cash, cash equivalents and restricted cash

    (56,123 )     6,999  

Cash, cash equivalents and restricted cash, beginning of period

    94,997       81,709  

Cash, cash equivalents and restricted cash, end of period

  $ 38,874     $ 88,708  
                 

Supplemental cash flow information:

               

Non-cash investing and financing activities:

               

Leased assets obtained in exchange for new operating lease liabilities

  $ 956     $ 3,042  

Leased assets obtained in exchange for new finance lease liabilities

  $ 242     $ 318  

 

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

 

4

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

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

 

Description of Business

 

PlayAGS, Inc. (the "Company," "PlayAGS," "we," "us," or "our") is a leading designer and supplier of gaming products and services for the gaming industry. We operate in legalized gaming markets across the globe and provide state-of-the-art, value-add products in three distinct segments: Electronic Gaming Machines (“EGM”), which includes server-based systems and back-office systems that are used by Class II Native American and Mexico gaming jurisdictions and Class III Native American, commercial and charitable jurisdictions; Table Products (“Table Products”), which includes live felt table games, side-bets and progressives as well as card shufflers and Interactive Games (“Interactive”), which provides social casino games on desktop and mobile devices (our "Interactive Social" reporting unit) as well as a platform for content aggregation used by real-money gaming (“RMG”) online casino operators (our "RMG Interactive" reporting unit). Each segment’s activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line.

 

Electronic Gaming Machines

 

Our EGM segment offers a library of proprietary video slot titles developed for the global marketplace, and EGM cabinets which include our premium lease-only cabinets of Orion StarwallOrion Curve Premium and Big Red ("Colossal Diamonds") as well as cabinets available for sale or lease notably the Orion PortraitOrion SlantOrion CurveOrion Upright, and ICON cabinets. In addition to providing complete EGM units, we offer conversion kits that allow existing game titles to be converted to other game titles offered within that operating platform.

 

Table Products

 

Our Table Products include both internally developed and acquired proprietary table products, side-bets, progressives, and table technology related to blackjack, poker, baccarat, craps and roulette. We have acquired a number of popular proprietary brands, including In Bet Gaming (“In Bet”), Buster Blackjack, Double Draw Poker and Criss Cross Poker that are based on traditional well-known public domain games such as blackjack and poker; however, these proprietary games provide intriguing betting options that offer more excitement and greater volatility to the player, ultimately enhancing our casino customers’ profitability. In addition, we offer a single deck card shuffler for poker tables, Dex S, as well as our new second shuffler, the Pax S single-deck shuffler.

 

Interactive

 

We operate a Business-to-Business ("B2B") game aggregation platform for online real-money gaming ("RMG") operators. Through our remote gaming server, we deliver a library of more than 1,000 games, many of which are AGS titles, developed by our internal game-development studios. We also partner with a host of third-party game developers to offer game content across mobile, desktop, and social channels – wherever and whenever players want to engage.

 

AGS also offers Business-to-Consumer (“B2C”) free-to-play social casino apps that players across the globe can enjoy anytime online or on their mobile device. 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 or the player  may purchase additional virtual goods. Our social casino library includes over 600 game titles in a variety of different games, including video slots, spinning reels, video poker, blackjack, bingo, and tournaments. Our most popular app, Lucky Play Casino, offers mobile players all the thrills of Vegas casinos. Players can choose from dozens of AGS player-favorite slot games, as well as other casino classics like video poker, blackjack, and bingo. Our apps also feature in-app tournaments, rumbles, VIP bonuses, and unique interactive challenges.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures required by generally accepted accounting principles (“GAAP”) are omitted or condensed in these condensed consolidated financial statements. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) that are necessary for a fair statement of the Company's financial position, results of operations and cash flows for the interim periods have been made. The interim results reflected in these condensed consolidated financial statements are not necessarily indicative of results to be expected for the full fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires the Company to make decisions based upon estimates, assumptions, and factors considered relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of the estimates and assumptions. Accordingly, actual results could differ materially from those anticipated.

 

Revenue Recognition

 

Leasing of equipment in both our EGM and Table Products segments is accounted for under lease accounting guidance in ASC 842, "Leases" (ASC 842) and is recorded in gaming operations revenue. Our remaining revenue streams are accounted for under ASC 606 "Revenue from contracts with customers" (ASC 606) including equipment sales in our EGM and, to a lesser extent, in our Table Products segments. Revenue earned in our Interactive segment is recorded in gaming operations revenue.

 

The following table disaggregates our revenues by type within each of our segments (amounts in thousands):

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

EGM

                

Gaming operations

 $50,538  $49,432  $97,834  $89,036 

Equipment sales

  19,929   11,761   39,539   22,675 

Total

 $70,467  $61,193  $137,373  $111,711 
                 

Table Products

                

Gaming operations

 $3,499  $2,793  $6,896  $5,520 

Equipment sales

  15   37   98   66 

Total

 $3,514  $2,830  $6,994  $5,586 
                 

Interactive (gaming operations)

                

Social gaming revenue

 $515  $580  $1,030  $1,289 

Real-money gaming revenue

  2,088   2,234   4,044   3,610 

Total

 $2,603  $2,814  $5,074  $4,899 

 

Gaming Operations

 

Gaming operations revenue is earned by providing customers with gaming machines, gaming machine content licenses, table products, back-office equipment and linked progressive systems, which are collectively referred to as gaming equipment, under participation arrangements. The participation arrangements convey the right to use the equipment (i.e., gaming machines and related integral software) for a stated period of time, which typically ranges from one to three years upon which the contract continues on a month-to-month basis thereafter. In some instances, the Company will enter into arrangements for longer periods of time; however, many of these arrangements include the ability of the customer to cancel the contract and return the games to the Company, a provision which renders the contracts effectively month-to-month contracts. The Company will also enter into lease contracts with a revenue sharing arrangement whereby the lease payments due from the customer are variable. Our participation arrangements are accounted for as operating leases primarily due to these factors. In some instances, we will offer a free trial period during which no revenue is recognized. If during or at the conclusion of the trial period the customer chooses to enter into a lease for the gaming equipment, we commence revenue recognition according to the terms of the agreement.

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Under participation arrangements, the Company retains ownership of the gaming equipment installed at the customer facilities and receives either revenue based on a percentage of the win per day generated by the gaming equipment or a fixed daily fee. Thus, in our consolidated financial statements the Company records revenue monthly related to these arrangements and the gaming equipment is recorded in property and equipment, net on our balance sheet and depreciated over the expected life of the gaming equipment.

 

The majority of the Company’s leases require the Company to provide maintenance throughout the entire term of the lease. In some cases, a performance guarantee exists that, if not met, provides the customer with the right to return the gaming machines to the Company. This performance guarantee is considered a cancellation clause, a provision which renders the contracts effectively month-to-month contracts. Accordingly, the Company accounts for these contracts in a similar manner with its other operating leases as described above.

 

Gaming operations revenue is also earned from the licensing of table product content and is earned and recognized primarily on a fixed monthly rate. Our B2C social casino products earn revenue from the sale of virtual coins or chips, which is recorded when the purchased coins or chips are used by the customer. B2C social casino revenue is presented gross of the platform fees. B2B social casino products earn revenue primarily based on a percentage of the monthly revenue generated by the white label casino apps that we build and operate for our customers. RMG revenue is earned primarily based on a percentage of the revenue produced by the games on our platform as well as monthly platform fees and initial integration fees. RMG revenue is presented net of payments to game and content suppliers.

 

Equipment Sales

 

Revenues from contracts with customers are recognized and recorded when the following criteria are met:

 

 

We have a contract that has been approved by both the customer and the Company. Our contracts specify the products being sold and payment terms and are recognized when it is probable that we will collect substantially all of the contracted amount; and

 

Control has been transferred and services have been rendered in accordance with the contract terms.

 

Equipment sales are generated from the sale of gaming machines, table products and licensing rights to the integral game content software that is installed in the related equipment, parts, and other ancillary equipment. Also included within the deliverables are delivery, installation and training, all of which occur within a few days of arriving at the customer location. Equipment sales do not include maintenance beyond a standard warranty period. The recognition of revenue from the sale of gaming devices occurs as the customer obtains control of the product and all other revenue recognition criteria have been satisfied. Our contracts include a fixed transaction price. Amounts are due from customers within 30 to 90 days of the invoice date and to a lesser extent we offer extended payment terms of 12 to 24 months with payments due monthly during the extended payment period.

 

The Company enters into revenue arrangements that  may consist of multiple performance obligations, which are typically multiple distinct products that  may be shipped to the customer at different times. For example, sales arrangements  may include the sale of gaming machines and table products to be delivered upon the consummation of the contract and additional game content conversion kits that will be delivered at a later date when requested by the customer to replace the game content on the customer’s existing gaming machines. Products are identified as separate performance obligations if they are distinct, which occurs if the customer can benefit from the product on its own and is separately identifiable from other promises in the contract.

 

Revenue is allocated to the separate performance obligations based on relative standalone selling prices determined at contract inception. Standalone selling prices are primarily determined by prices that we charge for the products when they are sold separately. When a product is not sold separately, we determine the standalone selling price with reference to our standard pricing policies and practices. We elected to exclude from the measurement of the transaction price, sales taxes and all other items of a similar nature, and also elected to account for shipping and handling activities as a fulfillment of our promise to transfer the goods. Accordingly, shipping and handling costs are included in cost of sales.

 

Revenue allocated to any undelivered performance obligations is recorded as a contract liability. The balance of our contract liabilities was not material as of  June 30, 2022 and December 31, 2021.

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist primarily of deposits held at major banks and other marketable securities with original maturities of 90 days or less.

 

Restricted Cash

 

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

 

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 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.

 

Allowance for Expected Credit Losses 

 

Management estimates the allowance for expected credit losses balance using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in the current environmental economic conditions and reasonable and supportable forecast. The allowance for expected credit losses on financial instruments is measured on a collective (pool) basis when similar risk characteristics exist. The financial instruments that do not share risk characteristics, such as receivables related to development agreements, are evaluated on an individual basis. Expected credit losses are estimated over the contractual term of the related financial instruments, adjusted for expected prepayments when appropriate, based on a historical model that includes periodic write-offs, recoveries, and adjustments to the reserve. Historically, the identified portfolio segments have shared low collectability risk with immaterial write-off amounts. The Company made an accounting policy election not to present the accrued interest receivable balance on a separate statement of financial position line item. Accrued interest receivable is reported within the respective receivables line items on the consolidated balance sheet. 

 

For the period ended  June 30, 2022, there was no material activity in allowance for credit losses. 

 

Inventories

 

Inventories consist primarily of parts and supplies that are used to repair and maintain machinery and equipment as well as EGMs in production and finished goods held for sale. Inventories are stated at net realizable value. Cost of inventories is determined using the first-in, first-out (“FIFO”) method for all components of inventory. The Company regularly reviews inventory quantities and updates estimates for the net realizable value of inventories. This process includes examining the carrying values of parts and ancillary equipment in comparison to the current fair market values for such equipment (less costs to sell or dispose). Some of the factors involved in this analysis include the overall levels of the inventories, the current and projected sales levels for such products, the projected markets for such products and the costs required to sell the products, including refurbishment costs. Changes in the assumptions or estimates could materially affect the inventory carrying value. As of  June 30, 2022 and December 31, 2021, the value of raw material inventory was $32.7 million and $22.1 million, respectively. As of  June 30, 2022 and December 31, 2021, the value of finished goods inventory was $4.8 million and $4.0 million, respectively. There was no work in process material as of  June 30, 2022 and December 31, 2021.

 

Property and Equipment

 

The cost of gaming equipment, consisting of fixed-base player terminals, file servers and other support equipment as well as other property and equipment, is depreciated over their estimated useful lives, using the straight-line method for financial reporting. The Company capitalizes costs incurred for the refurbishment of used gaming equipment that is typically incurred to refurbish a machine in order to return it to its customer location. The refurbishments extend the life of the gaming equipment beyond the original useful life. Repairs and maintenance costs are expensed as incurred. The Company routinely evaluates the estimated lives used to depreciate assets. The estimated useful lives are as follows:

 

Gaming equipment (in years)

  1 to 5 

Other property and equipment (in years)

  3 to 6 

 

Financed leased cars and leasehold improvements are amortized / depreciated over the life of the contract.

 

The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company groups long-lived assets for impairment analysis at the lowest level for which identifiable cash flows can be measured independently of the cash flows of other assets and liabilities. This is typically at the individual gaming machine level or at the cabinet product line level. Impairment testing is performed and losses are estimated when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets’ carrying amount.

 

When the estimated undiscounted cash flows are not sufficient to recover the asset’s carrying amount, an impairment loss is measured to the extent the fair value of the asset is less than its carrying amount.

 

The Company measures recoverability of assets to be held and used by comparing the carrying amount of an asset to future cash flows expected to be generated by the asset. The Company’s policy is to impair, when necessary, excess or obsolete gaming machines on hand that 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 position.

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Intangible Assets

 

The Company reviews its identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses are recognized for identifiable intangibles, other than goodwill, when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets’ carrying amount.

 

When the estimated undiscounted cash flows are not sufficient to recover the intangible asset’s carrying amount, an impairment loss is measured to the extent the fair value of the asset is less than its carrying amount.

 

Certain trade names have an indefinite useful life and the Company tests these trade names for possible impairment at least annually, on October 1, or whenever events or changes in circumstances indicate that the carrying value may be impaired. We perform a qualitative assessment to determine if it is more likely than not that the fair value of the asset is less than its carrying amount. If we believe, as a result of our qualitative assessment, that it is more likely than not that the fair value of the asset is less than its carrying amount, the quantitative impairment test is required.

 

Costs of Capitalized Computer Software

 

Internally developed 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.

 

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 the carrying amount of the reporting unit exceeds the fair value of the reporting unit. 

 

Acquisition Accounting

 

The Company applies the provisions of ASC 805,Business Combinations” (ASC 805), in accounting for business acquisitions. It requires us to recognize separately from goodwill the fair value of assets acquired and liabilities assumed on the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Significant estimates and assumptions are required to value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable. These estimates are inherently uncertain and subject to refinement and typically include the calculation of an appropriate discount rate and projection of the cash flows associated with each acquired asset. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Fair Value of Financial Instruments

 

The Company applies the provisions of ASC 820,Fair Value Measurements” (ASC 820) to its financial assets and liabilities. Fair value is defined as a market-based measurement intended to estimate the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. These inputs are categorized as follows:

 

 

Level 1 - quoted prices in an active market for identical assets or liabilities;

 

Level 2 - quoted prices in an active market for similar assets or liabilities, inputs other than quoted prices that are observable for similar assets or liabilities, inputs derived principally from or corroborated by observable market data by correlation or other means; and

 

Level 3 - valuation methodology with unobservable inputs that are significant to the fair value measurement.

 

The carrying values of the Company’s cash and cash equivalents, restricted cash, receivables and accounts payable approximate fair value because of the short term maturities of these instruments. The fair value of our long-term debt is based on the quoted market prices for similar issues (Level 2 inputs). The following table presents the estimated fair value of our long-term debt as of  June 30, 2022 and  December 31, 2021 (in thousands):

 

  

June 30, 2022

  

December 31, 2021

 
  

Carrying Amount

  

Fair Value

  

Carrying Amount

  

Fair Value

 

Long-term Debt

 $574,298  $542,752  $615,743  $613,706 

 

 

Accounting for Income Taxes

 

We conduct business globally and are subject to income taxes in U.S. federal, state, local, and foreign jurisdictions. Determination of the appropriate amount and classification of income taxes depends on several factors, including estimates of the timing and probability of realization of deferred income taxes, reserves for uncertain income tax positions and income tax payment timing.

 

We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Taxes on income of our foreign subsidiaries are provided at the tax rates applicable to the tax jurisdictions in which they are located. Future tax benefits are recognized to the extent that realization of those benefits is considered more likely than not and a valuation allowance is established for deferred tax assets which do not meet this threshold.

 

The recoverability of certain deferred tax assets is based in part on estimates of future income and the timing of temporary differences, and the failure to fully realize such deferred tax assets could result in a higher tax provision in future periods.

 

We apply the accounting guidance to our uncertain tax positions and under the guidance, we may recognize a tax benefit from an uncertain position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the issue. The amount recognized in the financial statements is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement.

 

We are required to make significant judgments when evaluating our uncertain tax positions and the related tax benefits. We believe our assumptions are reasonable; however, there is no guarantee that the final outcome of the related matters will not differ from the amounts reflected in our income tax provisions and accruals. We adjust our liability for uncertain tax positions based on changes in facts and circumstances such as the closing of a tax audit or changes in estimates. Our income tax provision may be impacted to the extent that the final outcome of these tax positions is different than the amounts recorded.

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Contingencies

 

The Company assesses its exposures to loss contingencies including claims and legal proceedings and accrues a liability if a potential loss is considered probable and the amount can be estimated. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, if the actual loss from a contingency differs from management’s estimate, there could be a material impact on the results of operations or financial position. Operating expenses, including legal fees, associated with contingencies are expensed when incurred.

 

Foreign Currency Translation

 

The financial statements of the Company’s foreign subsidiaries are translated into U.S. dollars at the period end rate of exchange for asset and liability accounts and the weighted average rate of exchange for income statement accounts. The effects of these translations are recorded as a component of other accumulated comprehensive income (loss) in stockholders’ equity.

 

Recently Issued Accounting Pronouncements

 

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326). ASU No. 2022-02 eliminates the accounting guidance for troubled debt restructurings by creditors in ASC 310-40 and requires disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases. ASU No. 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years with earlier adoption permitted. We are currently evaluating the provisions of the amendment and do not anticipate a significant effect on our financial statements.

 

We have not adopted any new accounting pronouncements in the current year and there has not been any other recently issued accounting guidance that will have a significant effect on our financial statements. 

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

NOTE 2. PROPERTY AND EQUIPMENT

 

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

 

  

June 30, 2022

  

December 31, 2021

 

Gaming equipment

 $212,243  $196,748 

Other property and equipment

  22,429   23,973 

Less: Accumulated depreciation

  (159,246)  (145,805)

Property and equipment, net

 $75,426  $74,916 

 

Gaming equipment and other property and equipment are depreciated over the respective useful lives of the assets ranging from one to six years. Depreciation expense was $9.6 million for the three months ended June 30, 2022 and 2021. Depreciation expense was $19.3 million and $19.0 million for the six months ended June 30, 2022 and 2021, respectively. 

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

NOTE 3. GOODWILL AND INTANGIBLES

 

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

  

Gross Carrying Amount

 
  

EGM

  

Table Products

  

Interactive(1)

  

Total

 

December 31, 2021

 $277,725  $7,821  $-  $285,546 

Foreign currency adjustments

  293   -   -   293 

Acquisition

  -   1,230   -   1,230 

Balance at June 30, 2022

 $278,018  $9,051  $-  $287,069 

 

(1) Accumulated goodwill impairment charges for the Interactive segment as of  June 30, 2022 were $8.4 million.

 

Intangible assets consist of the following (in thousands):

 

      

June 30, 2022

  

December 31, 2021

 
  

Useful Life

  

Gross

  

Accumulated

  

Net Carrying

  

Gross

  

Accumulated

  

Net Carrying

 
  

(years)

  

Value

  

Amortization

  

Value

  

Value

  

Amortization

  

Value

 

Indefinite lived trade names

 

Indefinite

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

Trade and brand names

  5 - 7   14,990   (14,616)  374   14,870   (14,495)  375 

Customer relationships

  5 - 12   219,147   (161,415)  57,732   218,247   (155,140)  63,107 

Contract rights under development and placement fees

  1 - 7   42,395   (20,697)  21,698   42,535   (17,639)  24,896 

Gaming software and technology platforms

  1 - 7   187,402   (137,388)  50,014   177,686   (126,182)  51,504 

Intellectual property

  10 - 12   21,845   (12,368)  9,477   19,345   (11,309)  8,036 

Total intangible assets

     $497,905  $(346,484) $151,421  $484,809  $(324,765) $160,044 

 

Intangible assets are amortized over their respective estimated useful lives ranging from one to twelve years. Amortization expense related to intangible assets was $9.6 million and $9.0 million for the three months ended June 30, 2022 and 2021, respectively. Amortization expense related to intangible assets was $18.7 million and $18.0 million for the six months ended June 30, 2022 and 2021, respectively. 

 

13

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Management reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We recorded no impairments for the six months ended June 30, 2022. We recorded impairments related to internally developed gaming titles of $0.7 million for the six months ended June 30, 2021, as it was determined by management that the gaming titles would no longer be used. 

 

The Company enters into development agreements and placement fee agreements with certain customers to secure floor space under lease agreements for its gaming machines. Amounts paid in connection with the development agreements are repaid to the Company in accordance with the terms of the agreement, whereas placements fees are not reimbursed. For development agreements in the form of a loan, interest income is recognized on the repayment of the notes based on the stated rate or, if not stated explicitly in the development agreement, on an imputed interest rate. If the stated interest rate is deemed to be other than a market rate or zero, a discount is recorded on the note receivable as a result of the difference between the stated and market rate and a corresponding intangible asset is recorded. The intangible asset is recognized in the financial statements as a contract right under development agreement and amortized as a reduction in revenue over the term of the agreement. Placement fees can be in the form of cash paid upfront or free lease periods and are accreted over the life of the contract and the expense is recorded as a reduction of revenue. We recorded a reduction of gaming operations revenue from the accretion of contract rights under development agreements and placement fees of $1.6 million and $1.6 million for the three months ended June 30, 2022 and 2021, respectively. We recorded a reduction of gaming operations revenue from the accretion of contract rights under development agreements and placement fees of $3.2 million and $3.3 million for the six months ended June 30, 2022 and 2021, respectively. 

 

 

NOTE 4. ACCRUED LIABILITIES

 

Accrued liabilities consist of the following (in thousands):

 

  

June 30, 2022

  

December 31, 2021

 

Salary and payroll tax accrual

 $14,619  $16,994 

Taxes payable

  4,420   4,016 

Current portion of operating lease liability

  2,222   2,137 

License fee obligation

  1,000   1,000 

Placement fees payable

  6,314   6,314 

Accrued other

  10,635   8,704 

Total accrued liabilities

 $39,210  $39,165 

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

NOTE 5. LONG-TERM DEBT

 

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

 

  

June 30, 2022

  

December 31, 2021

 

First Lien Credit Facilities:

        

Term loans, interest at SOFR, subject to a 0.75% floor plus 4.0% (6.2% at June 30, 2022), net of unamortized discount and deferred loan costs of $16.3 million at June 30, 2022

 $557,236  $- 

Term loans, interest at LIBOR or base rate plus 3.5% (4.5% at December 31, 2021), net of unamortized discount and deferred loan costs of $4.0 million at December 31, 2021

  -   517,247 

Incremental term loans, interest at LIBOR or base rate plus 13.0% (14.0% at December 31, 2021), net of unamortized discount and deferred loan costs of $5.6 million at December 31, 2021

  -   87,958 

Finance leases

  735   953 

Total debt

  557,971   606,158 

Less: Current portion

  (6,146)  (6,877)

Long-term debt

 $551,825  $599,281 

 

First Lien Credit Facilities

 

On February 15, 2022, AP Gaming I, LLC (the “Borrower”), a Delaware limited liability company and wholly owned indirect subsidiary of PlayAGS, Inc. (the “Company”) and AP Gaming Holdings, LLC, a Delaware limited liability company and wholly owned indirect subsidiary of the Company (“Holdings”) entered into the Amended Credit Agreement with certain of the Borrower’s subsidiaries, the lenders party thereto and Jefferies Finance LLC, as administrative agent (the "Amended Credit Agreement"). The Amended Credit Agreement amends and restates the existing credit agreement, among the Borrower, Holdings, the lenders party thereto from time to time, the Administrative Agent and the other parties named therein.

 

The Borrower is a direct subsidiary of AP Gaming Holdings, LLC, which is a direct subsidiary of AP Gaming, Inc., which is a direct subsidiary of PlayAGS, Inc.  These entities between the Borrower and PlayAGS, Inc. are holding companies with no other operations, cash flows, material assets or liabilities other than the equity interests in the Borrower.


The Amended Credit Agreement provides (i) a senior secured first lien term loan in an aggregate principal amount of $575.0 million (the “New Term Loan Facility”), the proceeds of which, together with cash on hand of the Borrower and its subsidiaries, were used by the Borrower on the Closing Date to repay all amounts outstanding under the existing term loan facilities set forth in the Existing Credit Agreement and to pay related fees and expenses, and (ii) a $40.0 million senior secured first lien revolving facility, with a $7.5 million letter of credit subfacility and a $5.0 million swingline subfacility (the “New Revolving Credit Facility”).


Borrowings under the Amended Credit Agreement bear interest at a per annum rate equal to, at the Borrower’s election, either (a) an adjusted term Secured Overnight Financing Rate ("SOFR") for the interest period in effect, subject to a floor of (i) in the case of term loan borrowings, 0.75% and (ii) in the case of revolver borrowings, 0.00% or (b) a base rate determined by the highest of (i) the prime rate in effect, (ii) the federal funds effective rate plus 0.50% and (iii) an adjusted term SOFR with an interest period of one month plus 1.00%, in each case plus an applicable margin of 4.00% for adjusted term SOFR loans and 3.00% for base rate loans.
 
The New Term Loan Facility will mature on February 15, 2029 and, commencing with the quarter ending June 30, 2022, will amortize in quarterly installments equal to 0.25% of the original aggregate principal amount of the term loans, with the balance due at maturity. The commitments under the New Revolving Credit Facility will terminate on February 15, 2027.
 
The Borrower may voluntarily repay outstanding loans under the Amended Credit Agreement at any time, without prepayment premium or penalty, except in connection with a repricing event in respect of the New Term Loan Facility, subject to customary breakage costs with respect to adjusted term SOFR loans. Any refinancing through the issuance of certain debt or any repricing amendment, in either case, that constitutes a repricing event applicable to the New Term Loan Facility resulting in a lower yield occurring at any time on or prior to August 15, 2022 will be accompanied by a 1.00% prepayment premium or fee, as applicable.
 
The Amended Credit Agreement includes customary mandatory prepayment events, affirmative covenants, negative covenants and events of default. In addition, the New Revolving Credit Facility requires the Borrower to comply on a quarterly basis, commencing on June 30, 2022, with a maximum net first lien senior secured leverage ratio of 6.70 to 1.00 if the aggregate amount of funded loans and issued letters of credit (excluding up to $5.0 million of undrawn letters of credit under the New Revolving Credit Facility and letters of credit that are cash collateralized) under the New Revolving Credit Facility on such date exceeds 35% of the then-outstanding commitments under the New Revolving Credit Facility.

 

An additional $17.6 million in loan costs including original issue discount, lender fees, third-party costs, and make-whole premium were incurred related to the Amended Credit Agreement. Given the composition of the lender group, the transaction was accounted for as a debt modification for existing lenders. As a result of the amendment, approximately $8.5 million in costs were expensed and included in the loss on extinguishment and modification of debt, and the remaining costs were capitalized and will be amortized over the term of the agreement.

 

As of June 30, 2022, there were no required financial covenants for our debt instruments.

 

Finance Leases

 

The Company has entered into leases for vehicles and equipment that are accounted for as finance leases.

 

15

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

NOTE 6. STOCKHOLDERS’ EQUITY

 

Our amended and restated articles of incorporation provide that our authorized capital stock will consist of 450,000,000 shares of common stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share. As of June 30, 2022, we have 37,121,715 shares of common stock and zero shares of preferred stock outstanding.

Common Stock


Voting Rights

 

The holders of our common stock are entitled to one vote per share on all matters submitted for action by the stockholders, and do not have cumulative voting rights with respect to the election of our directors. 

Dividend and Distribution Rights

 

All shares of our common stock are entitled to share equally in any dividends and distributions our board of directors may declare from legally available sources, subject to the terms of any outstanding preferred stock.

Share repurchase program


During 2019, the board of directors approved a share repurchase program that will permit the Company to repurchase up to $50.0 million of the Company’s shares of common stock. The board approved extending this share buyback program to August 11, 2023. As of  June 30, 2022, $47.2 million of the $50.0 million authorized by the board of directors is still available for repurchasing of the Company's shares of common stock.

 

NOTE 7. WRITE-DOWNS AND OTHER CHARGES

 

The Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) include various transactions, such as loss on disposal or impairment of long-lived assets and fair value adjustments to contingent consideration that have been classified as write-downs and other charges.

 

During the three months ended  June 30, 2022, the Company recognized $0.3 million in write-downs and other charges primarily related to the disposal of long-lived assets. During the three months ended  June 30, 2021, the Company recognized $0.1 million in write-downs and other charges primarily related to the disposal of long-lived assets.

 

During the six months ended June 30, 2022, the Company recognized $0.4 million in write-downs and other charges primarily related to the disposal of long-lived assets. During the six months ended June 30, 2021, the Company recognized $0.8 million in write-downs and other charges primarily related to the full impairment of intangible assets (the Company used level 3 fair value inputs based on projected cash flows).

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

NOTE 8. 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 includes common stock weighted for average number of shares issued during the period. Diluted EPS is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period, increased by potentially dilutive common shares that were outstanding during the period. Diluted EPS excludes all potential dilutive shares if their effect is anti-dilutive. Potentially dilutive common shares include stock options and restricted stock (see Note 10. "Stock-Based Compensation").

  

Three Months Ended June 30, 2022

 

Numerator:

    

Net income

 $1,542 

Net income attributable to participating securities

 $89 

Net income attributable to common stock

 $1,453 
     

Denominator:

    

Weighted average of common shares outstanding

 $36,998 

Potential dilutive effect of stock options

 $- 

Weighted average of common shares outstanding

 $36,998 

 

There were 2,259,427 participating securities included in the calculation of EPS for the three months ended June 30, 2022. There were no potentially dilutive securities included in the calculation of EPS for the six months ended June 30, 2022 and the three and six months ended June 30, 2021 because the Company reported a net loss in each period.

 

Excluded from the calculation of diluted EPS for the three months ended   June 30, 2022  were 1,796,053 restricted shares, subject to performance vesting conditions that have not been yet met, and 1,162,088 underwater stock options. Excluded from the calculation of diluted EPS for the six months ended June 30, 2022 were 2,292,131 restricted shares and 38,395 stock options, as such securities were anti-dilutive.

 

Excluded from the calculation of diluted EPS for the three months ended  June 30, 2021 were 1,630,927 restricted shares and 428,373 stock options, as such securities were anti-dilutive. Excluded from the calculation of diluted EPS for six months ended June 30, 2021 were 1,690,871 restricted shares and 240,045 stock options, as such securities were anti-dilutive. 

 

 

NOTE 9. BENEFIT PLANS

 

The Company has established a 401(k) plan (the “401(k) Plan”) for its employees. The 401(k) Plan allows employees to contribute a portion of their earnings, and the Company may match a percentage of the contributions on a discretionary basis. The expense associated with the 401(k) Plan for the three months ended June 30, 2022 and 2021 was $0.4 million and $0.3 million, respectively. The expense associated with the 401(k) Plan for the six months ended June 30, 2022 and 2021 was $1.0 million and $0.7 million, respectively.

 

On  April 28, 2014, the board of directors of the Company approved the 2014 Long-Term Incentive Plan (“LTIP”). Under the LTIP, the Company is authorized to grant nonqualified stock options, rights to purchase shares of common stock, restricted stock, restricted stock units and other awards to be settled in, or based upon, shares of common stock to persons who are directors and employees of and consultants to the Company or any of its subsidiaries on the date of the grant. The LTIP will terminate ten years after approval by the board. Subject to adjustments in connection with certain changes in capitalization, the maximum number of shares of common stock that  may be delivered pursuant to awards under the LTIP is 2,253,735. As of June 30, 2022, 423,268 shares remain available for issuance; however, these will not be issued and awards granted by the Company in the future are expected to be from the Omnibus Incentive Plan only.

 

On January 16, 2018, our board adopted and our stockholders approved the 2018 Omnibus Incentive Plan (the “Omnibus Incentive Plan”) pursuant to which equity-based and cash incentives may be granted to participating employees, directors and consultants. On May 8, 2020, the board of directors of the Company approved an amendment to the 2018 Plan to increase the number of shares of Common Stock authorized for issuance thereunder from 1,607,389 shares to 4,607,389 shares, an increase of 3,000,000 shares (the “2020 Plan Amendment”), which was approved by the stockholders on July 1, 2020 at the 2020 Annual Meeting of Stockholders.

 

On April 28, 2022, the board of directors of the Company approved an amendment to the 2018 Plan, as amended by the 2020 Plan Amendment, to increase the number of shares of Common Stock authorized for issuance thereunder from 4,607,389 shares to 9,607,389 shares, an increase of 5,000,000 shares (the “2022 Plan Amendment”), subject to stockholder approval at the 2022 Annual Meeting of Stockholders. On July 1, 2022, the stockholders approved the 2022 Plan Amendment increasing the total pool of shares of the Company’s Common Stock pursuant to the 2022 Plan Amendment to 9,607,389 million shares.

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

NOTE 10. STOCK-BASED COMPENSATION

 

The Company has granted equity or equity-based awards to eligible participants under its incentive plans. The awards include options to purchase the Company’s common stock, restricted stock or restricted stock units and phantom stock units. These awards include a combination of service and market conditions, as further described below.

 

We recognize stock-based compensation on a straight-line basis over the vesting period for time based awards and we recognize the expense for awards with market conditions over the service period derived from the related valuation. As of June 30, 2022, there was no unrecognized compensation expense associated with stock options, $2.8 million was associated with restricted stock and restricted stock units, and $5.4 million with phantom stock units. The unrecognized compensation expense associated with restricted and phantom stock units is expected to be recognized over a 1.4 and 1.6 year weighted average period, respectively.

 

Stock Options

 

The Company calculates the grant date fair value of stock options that vest over a service period using the Black Scholes model. For stock options and other stock awards that contain a market condition related to the return on investment that the Company’s stockholders achieve or obtaining a certain stock price, the awards are valued using a lattice-based valuation model. The assumptions used in these calculations are the expected dividend yield, expected volatility, risk-free interest rate and expected term (in years). Expected volatilities are based on implied volatilities from comparable companies. The risk-free rate is based on the U.S. Treasury yield curve for a term equivalent to the estimated time to liquidity. There were no options granted during the three and six months ended June 30, 2022.

 

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

 

Tranche A or time based options are eligible to vest in equal installments of 20% or 25% on each of the first five or four anniversaries of the date of the grant, subject to continued employment with the Company or its subsidiaries. In the event of a termination of employment without cause or as a result of death or disability, any such time based options which would have vested on the next applicable vesting date shall become vested, and the remaining unvested time based options shall be forfeited. In addition, upon a Change in Control (as defined in the incentive plans), subject to continued employment through the date of the Change in Control, all outstanding unvested time based options shall immediately vest. An 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”). These performance conditions included the achievement of investor returns or common stock trading prices. These performance conditions were achieved in October of 2018 for all Performance Options that have been granted and there are currently 493,104 Performance Options exercisable and outstanding.

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

A summary of the changes in stock options outstanding during the six months ended June 30, 2022, is as follows:

 

  

Number of Options

  

Weighted Average Exercise Price

  

Weighted Average Remaining Contract Term (years)

  

Aggregate Intrinsic Value (in thousands)

 

Options outstanding as of December 31, 2021

  1,244,073  $9.14   3.4  $193 

Granted

  -  $-   -  $- 

Exercised

  -  $-   -  $- 

Canceled or forfeited

  (81,985) $10.51   -  $- 

Options outstanding as of June 30, 2022

  1,162,088  $9.05   2.9  $- 

Options exercisable as of June 30, 2022

  1,162,088  $9.05   2.9  $- 

 

Restricted Stock and Restricted Stock Units

 

Restricted stock awards and restricted stock units are typically eligible to vest in equal installments of 25% on each of the first four anniversaries of the date of the grant, subject to continued employment with the Company or its subsidiaries. In the event of a termination of employment without cause upon or within 12 months following a change in control or as a result of death or disability, any such unvested time-based awards shall become vested.

 

Certain restricted stock units are eligible to vest upon the satisfaction of certain performance conditions. Vesting occurs on the first day that the average price per share of our common stock for the prior 60 consecutive trading days exceeds certain stock prices, subject to continued employment with the Company or its subsidiaries. The performance-based restricted stock units will be forfeited if the performance target is not achieved within four years of the grant date. 

 

A summary of the changes in restricted stock and restricted stock units outstanding during the six months ended June 30, 2022, is as follows:

 

  

Shares Outstanding

  Weighted Average Grant Date Fair Value (per share) 

Restricted Stock and Restricted Stock Units Outstanding as of December 31, 2021

  1,934,876  $8.25 

Granted

  107,301  $7.48 

Vested

  (179,296) $12.81 

Canceled or forfeited

  (35,641) $8.99 

Restricted Stock and Restricted Stock Units Outstanding as of June 30, 2022

  1,827,240  $7.74 

 

Phantom Stock Units

 

Phantom stock awards are typically eligible to vest in equal installments of 25% on each of the first four anniversaries of the date of the grant, subject to continued employment with the Company or its subsidiaries. In the event of a termination of employment without cause upon or within 12 months following a change in control or as a result of death or disability, any such unvested awards shall become vested. Vesting tranches of the phantom stock awards can be settled in cash or stock at the Company’s discretion. The phantom stock awards that the Company intends to settle in cash are accounted for as liability awards and are re-measured at fair value each reporting period until they become vested with compensation expense being recognized over the requisite service period. The liability associated with such awards is included in “Accrued Liabilities” within the unaudited Condensed Consolidated Balance Sheets. All other stock-based awards are classified as equity. 

 

Certain phantom stock units are eligible to vest upon the satisfaction of certain performance conditions. Vesting occurs on the first day that the average price per share of our common stock for the prior 60 consecutive trading days exceeds certain stock prices and only if the performance date occurs prior to the fourth anniversary of the date of the grant; provided. However, if the performance date occurs prior to the first anniversary of the date of grant, vesting will occur on the first anniversary of the date of grant, subject to continued employment with the Company or its subsidiaries.

 

A summary of the changes in phantom stock outstanding during the six months ended June 30, 2022 is as follows:

 

  

Shares Outstanding

  

Weighted Average Grant Date Fair Value (per share)

 

Phantom Stock Outstanding as of December 31, 2021

  2,253,400  $6.47 

Granted

  2,669  $7.87 

Vested

  -  $- 

Canceled or forfeited

  (49,208) $6.19 

Phantom stock outstanding as of June 30, 2022

  2,206,861  $6.48 

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

NOTE 11. INCOME TAXES

 

The Company's effective income tax rate for the three months ended  June 30, 2022, was an expense of 7.3%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended June 30, 2022, is primarily due to changes in our valuation allowance on deferred tax assets. The Company's effective income tax rate for the three months ended June 30, 2021, was an expense of 6.9%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended June 30, 2021 was primarily due to changes in our valuation allowance on deferred tax assets.

 

The Company's effective income tax rate for the six months ended  June 30, 2022, was an expense of 5.6%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended June 30, 2022, is primarily due to changes in our valuation allowance on deferred tax assets. The Company's effective income tax rate for the six months ended June 30, 2021, was an expense of 5.4%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended June 30, 2021 was primarily due to changes in our valuation allowance on deferred tax assets.

 

The Company entered into an indemnification agreement with the prior owners of Cadillac Jack (acquired in May of 2015) whereby the prior owners have agreed to indemnify the Company for changes in tax positions by taxing authorities for periods prior to the acquisition.

 

As of June 30, 2022, statute of limitations has lapsed for all uncertain tax positions covered by the indemnification agreement, accordingly, no indemnification receivable is recorded in other assets in the financial statements and no change was recognized in the indemnification receivable during the three and six months ended June 30, 2022. During the three and six months ended June 30, 2021, the Company recognized an increase of less than $0.1 million in the indemnification receivable and related benefits in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for accrued interest on unrecognized tax benefits.

 

NOTE 12. COMMITMENTS AND CONTINGENCIES

 

The Company is subject to federal, state and Native American laws and regulations that affect both its general commercial relationships with its customers, as well as the products and services provided to them. Periodically, the Company reviews the status of each significant matter and assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. If a potential loss from any claim or legal proceeding is considered reasonably possible, the Company discloses an estimate of the possible loss or range of possible loss, or a statement that such an estimate cannot be made. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to their pending claims and litigation and may revise their estimates. Such revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial condition.

 

During the three months ended September 30, 2019, the Company recorded a $1.6 million loss reserve, for which insurance coverage has been triggered. In accordance with GAAP, the offsetting insurance recovery will be recognized when it is realized or realizable in a future period.

 

On June 25, and July 31, 2020 putative class action lawsuits were filed in the United States District Court for the District of Nevada (the "Court"), by two separate plaintiffs against PlayAGS, Inc. (the "Company") and certain of its officers, individually and on behalf of all persons who purchased or otherwise acquired Company securities between August 2, 2018 and August 7, 2019.  The complaints alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by making false and misleading statements concerning the Company’s forward-looking financial outlook and accounting for goodwill and intangible assets in its iGaming reporting unit, resulting in injury to the purported class members when the value of the Company’s common stock declined following its release of its Second Quarter 2019 results on August 7, 2019. 

 

On August 4, 2020, a third plaintiff (“OPPRS”) filed a putative class action lawsuit in the same court asserting similar claims to those alleged in the first two class action complaints, based on substantially the same conduct, on behalf of a slightly larger class (stretching back to May 3, 2018). Specifically, OPPRS claimed that the Company, certain of its officers, and certain entities that allegedly beneficially held over 50% of the Company’s common stock at the beginning of the class period, violated Sections 10(b) and 20(a) of the Exchange Act by allegedly making false and misleading statements concerning the Company’s forward-looking financial outlook and accounting for goodwill and intangible assets in its iGaming reporting unit, and the adequacy of its internal controls over financial reporting, resulting in injury to the purported class when the Company’s common stock price declined following the release of its Second Quarter 2019 results.  In addition, based on substantially similar alleged false or misleading statements, OPPRS asserted claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, on behalf of all persons who purchased Company common stock pursuant and/or traceable to the Company’s August 2018 and March 2019 secondary public offerings.  These secondary-offering claims were brought against the same defendants identified above, plus certain of the Company’s directors and the underwriters. 

 

On October 28, 2020, the Court consolidated these three related putative class actions into In re PlayAGS, Inc. Securities Litigation and appointed OPPRS as lead plaintiff.  On January 11, 2021, the lead plaintiff filed an Amended Complaint in the consolidated action against the same set of defendants, again asserting claims (i) under Sections 10(b) and 20(a) of the Exchange Act, with an even larger putative class period ( May 3, 2018 through March 4, 2020), and (ii) under Sections 11, 12(a)(2) and 15 of the Securities Act on behalf of the same putative class as in OPPRS’s previous complaint. The Amended Complaint alleges that the defendants made materially false and misleading statements during the class period concerning, among other things, the Company’s growth, financial performance, and forward-looking financial outlook, particularly with respect to the Oklahoma market, resulting in injury to the purported class members when the common stock price declined after the alleged “truth” was revealed following release of the Company’s financial reports on August 7, 2019, November 7, 2019, and March 4, 2020. Unlike the previous complaints, the Amended Complaint does not allege false or misleading statements concerning the Company’s accounting for the iGaming reporting unit or the adequacy of the Company’s internal controls over financial reporting. 

 

On February 23, 2021 the Court granted the lead plaintiff's unopposed motion to file a Second Amended Complaint.  The Second Amended Complaint was filed on March 25, 2021 and asserts substantially the same claims as the Amended Complaint but extends the beginning of the putative class period back to January 26, 2018.  The defendants filed motions to dismiss the second amended complaint on May 24, 2021; the lead plaintiff filed its opposition papers on July 23, 2021, and the defendants filed their replies on September 13, 2021.  The motions to dismiss are now fully briefed and await the Court's decision; no oral argument has yet been scheduled.  The defendants believe the claims are without merit, and intend to defend vigorously against them, but there can be no assurances as to the outcome.  

 

On March 18, 2022, a shareholder derivative lawsuit was filed in the United States District Court for the District of Nevada by putative stockholder Manjan Chowdhury, allegedly on behalf of the Company, that piggy-backs on the consolidated securities class action referenced above and currently pending before the same Court.  The derivative complaint names David Lopez, Kimo Akiona, and members of the Board as defendants, and generally alleges that they breached their fiduciary duties by causing or failing to prevent the same allegedly false and misleading statements asserted in the securities class action. The derivative complaint also alleges claims for contribution against Mr. Lopez and Mr. Akiona under Sections 10(b) and 21D of the Exchange Act.  The Company and the individual defendants believe the claims in the shareholder derivative action are without merit and intend to defend vigorously against them, but there can be no assurances as to the outcome. At this time, we are unable to estimate the probability or the amount of liability, if any, related to this matter.

 

In  January 2021, we obtained the results of an audit conducted by the Alabama Department of Revenue ("ADOR"), in which the ADOR assessed $3.3 million including interest in unpaid state and local rental taxes. The audit period covered from  May 2016 through  August 2019. The ADOR claims that our participation revenue and licensing fees with an Indian Tribe entity in the state of Alabama constitute a lease rental payment and are deemed taxable in nature. They claim that because such gross rental receipts are generally imposed on the lessor, such receipts should be taxable even in situations involving Indian Tribe lessees. We believe that we were not required to collect and remit Alabama state lease/rental tax on our leases of EGMs in the state as those leases are on federally designated Indian reservation land and because federal Indian trading laws and Indian gaming laws, as well as the U.S. Constitution, preempt application of the rental tax to these transactions with the Indian Tribe. As of June 30, 2022, we have not accrued the amount noted above or any additional amounts of rental tax in Alabama as we do not believe this loss is probable of payment. We plan to dispute the audit findings in the state of Alabama and in accordance with applicable state and local tax procedures and ADOR rules.

 

20

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

NOTE 13. OPERATING SEGMENTS

 

We report our business segment results by segment in accordance with the “management approach.” The management approach designates the internal reporting used by our chief operating decision maker (“CODM”), who is our Chief Executive Officer (the “CEO”), for making decisions and assessing performance of our reportable segments.

 

See Note 1. "Description of the Business and Summary of Significant Accounting Policies" for a detailed discussion of our three segments. Each segment’s activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of its product lines. We evaluate the performance of our operating segments based on revenues and segment Adjusted EBITDA, which is defined in the paragraph below.

 

Segment revenues include leasing, licensing, or selling of products within each reportable segment. Segment Adjusted EBITDA includes the revenues and operating expenses from each segment adjusted for:

 

Write-downs and other include items related to loss on disposal or impairment of long-lived assets and fair value adjustments to contingent consideration;

Depreciation, amortization;

Loss on extinguishment and modification of debt primarily relates to the refinancing of long-term debt, in which deferred loan costs and discounts related to old senior secured credit facilities were written-off;

Other adjustments are primarily composed of the following:

 

Costs and inventory and receivable valuation charges associated with the COVID-19 pandemic, professional fees incurred for projects, costs incurred related to public offerings, contract cancellation fees and other transaction costs deemed to be non-operating in nature;

 

Acquisition and integration-related costs related to the purchase of businesses and to integrate operations and obtain costs synergies;

 

Restructuring and severance costs, which primarily relate to costs incurred through the restructuring of the Company’s operations from time to time and other employee severance costs recognized in the periods presented; 

 

Legal and litigation related costs, which consist of payments to law firms and settlements for matters that are outside the normal course of business;

Other non-cash charges are costs related to non-cash charges and losses on the disposition of assets, non-cash charges on capitalized installation and delivery, which primarily includes the costs to acquire contracts that are expensed over the estimated life of each contract and non-cash charges related to accretion of contract rights under development agreements; and

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

 

Revenues in each segment are attributable to third parties and segment operating expenses are directly associated with the product lines included in each segment such as research and development, product approval costs, product-related litigation expenses, sales commissions and other directly-allocable sales expenses. Cost of gaming operations and cost of equipment sales primarily include the cost of products sold, service, manufacturing overhead, shipping and installation.

 

Segment Adjusted EBITDA excludes other income and expense, income taxes and certain expenses that are managed outside of the operating segments.

 

The following provides financial information concerning our reportable segments for the three and six months ended June 30, 2022 and 2021 (amounts in thousands): 

 

  

Three Months Ended June 30,

  

Six Months Ended June 30,

 
  

2022

  

2021

  

2022

  

2021

 

Revenues by segment

                

EGM

 $70,467  $61,193  $137,373  $111,711 

Table Products

  3,514   2,830   6,994   5,586 

Interactive

  2,603   2,814   5,074   4,899 

Total Revenues

  76,584   66,837   149,441   122,196 

Adjusted EBITDA by segment

                

EGM

  31,564   29,453   61,759   53,856 

Table Products

  2,021   1,448   3,850   2,859 

Interactive

  545   1,202   1,287   1,710 

Subtotal

  34,130   32,103   66,896   58,425 

Write-downs and other:

                

Loss on disposal of long-lived assets

  323   120   416   191 

Impairment of long-lived assets

  19   -   19   653 

Fair value adjustments to contingent consideration

  -   (56)  -   (56)

Depreciation and amortization

  19,160   18,611   38,029   37,019 

Interest expense, net of interest income and other

  8,150   11,060   17,406   21,900 

Loss on extinguishment and modification of debt

  -   -   8,549   - 

Other adjustments

  301   717   412   679 

Other non-cash charges

  2,108   2,053   4,298   4,234 

Non-cash stock-based compensation

  2,406   3,230   8,231   4,862 

Income (loss) before income taxes

 $1,663  $(3,632) $(10,464) $(11,057)

 

The Company’s CODM does not receive a report with a measure of total assets or capital expenditures for each reportable segment as this information is not used for the evaluation of segment performance. The CODM assesses the performance of each segment based on Adjusted EBITDA and not based on assets or capital expenditures due to the fact that two of the Company’s reportable segments, Table Products and Interactive, are not capital intensive. Any capital expenditure information is provided to the CODM on a consolidated basis. Therefore, the Company has not provided asset and capital expenditure information by reportable segment.

 

 

PLAYAGS, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

 

NOTE 14. ACQUISITIONS

 

On  January 3, 2022, the Company acquired certain intangible assets related to the purchase of table game-related intellectual property and an installed base of table games under the Lucky Lucky trade name from Aces Up Gaming. The acquisition was accounted for as an acquisition of business and the assets acquired were measured based on our estimates of their fair values at the acquisition date. We attribute the goodwill recognized to our ability to commercialize the products over our distribution and sales network, opportunities for synergies, and other strategic benefits. The consideration of $4.8 million was allocated primarily to tax deductible goodwill for $1.2 million and intangible assets of $3.5 million, which will be amortized over a weighted average period of approximately 9.1 years.

 

Our results of operations for the six months ended June 30, 2022 included the operating results of the Lucky Lucky installed base, the amounts of which were not material. It is not practicable to provide pro forma statements of operations giving effect to the Lucky Lucky 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.

 

 

22

 
 

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

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements.” Forward-looking statements include any statements that address future results or occurrences. In some cases you can identify forward-looking statements by terminology such as “may,” “might,” “will,” “would,” “should,” “could” or the negatives thereof. Generally, the words “anticipate,” “believe,” “continue,” “expect,” “intend,” “estimate,” “project,” “plan” and similar expressions identify forward-looking statements. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained elsewhere in this Quarterly Report on Form 10-Q as well as those discussed under “Item 1. Business” and “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year-ended December 31, 2021 are forward-looking statements. These forward-looking statements include statements that are not historical facts, including statements concerning our possible or assumed future actions and business strategies. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors, many of which are outside of our control, which could cause our actual results, performance or achievements to differ materially from any results, performance or achievements expressed or implied by such forward-looking statements. Given the risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements are made only as of the date of this Quarterly Report. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments unless required by federal securities law. New factors emerge from time to time, and it is not possible for us to predict all such factors.

 

Unless the context indicates otherwise, or unless specifically stated otherwise, references to the “Company”, “PlayAGS”, “AGS”, “we”, “our” and “us” refer to PlayAGS, Inc. and its consolidated subsidiaries.

 

Overview

 

We are a leading designer and supplier of EGMs and other products and services for the gaming industry. We operate our business in three distinct segments: EGMs, Table Products and Interactive. Each segment's activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line. Founded in 2005, we historically focused on supplying EGMs, including slot machines, video bingo machines, and other electronic gaming devices, to the Native American gaming market. Since 2014, we have expanded our product line-up to include: (i) Class III EGMs for commercial and Native American casinos permitted to operate Class III EGMs, (ii) table game products and (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. For the six months ended June 30, 2022, approximately 73% of our total revenue was generated through recurring contracted lease agreements whereby we place EGMs and table game products at our customers’ gaming facilities under either a revenue sharing agreement (we receive a percentage of the revenues that these products generate) or fee-per-day agreement (we receive a daily or monthly fixed fee per EGM or table game product), or recurring revenue from our Interactive gaming operations.

 

    

EGM Segment

 

EGMs constitute our largest segment, representing approximately 92% of our revenue for the six months ended June 30, 2022. We have a library of proprietary game titles that we deliver on several state-of-the-art EGM cabinets. These include our premium lease-only cabinets Orion StarwallOrion Curve PremiumOrion Rise, and Big Red ("Colossal Diamonds"). Also, our core cabinets that are available for sale and lease include the Orion PortraitOrion Slant, Orion CurveOrion Upright and ICON. In addition to providing complete EGM units, we offer conversion kits, which are essentially software containing new games that allow existing game titles to be converted to other game titles offered within that operating platform.

 

We design all of our cabinets with the intention of capturing the attention of players on casino floors while aiming to maximize operator profits. We offer our customers the option of either leasing or purchasing our EGMs and associated gaming systems. Currently, we derive a substantial portion of our revenues from EGMs installed under revenue sharing or fee-per-day lease agreements, also known as “participation” agreements, and we refer to such revenue generation as our “participation model.” 

 

 

23

 

 

Table Products

 

In addition to our existing portfolio of EGMs, we also offer our customers more than 60 unique table product offerings, including live felt table games, side bet offerings, progressives, card shufflers, signage, and other ancillary table game equipment. Our table products are designed to enhance the table games section of the casino floor (commonly known as “the pit”). 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 capitalize on this trend, and we believe that this segment will serve as an important growth engine for the Company, including by generating further cross-selling opportunities with our EGM offerings. As of June 30, 2022, we had an installed base of 5,765 table products domestically and internationally and we believe we are presently a leading supplier of table products to the gaming industry based on number of products placed.

 

Our Table Products segment focuses on high margin recurring revenue generated by leases. Nearly all of the revenue we generate in this segment is recurring.

 

Interactive

 

We operate a Business-to-Business ("B2B") game aggregation platform for online real-money gaming ("RMG") operators. Through our remote gaming server, we deliver a library of more than 1,000 games, many of which are AGS titles, developed by our internal game-development studios. We also partner with a host of third-party game developers to offer game content across mobile, desktop, and social channels – wherever and whenever players want to engage.

 

AGS also offers Business-to-Consumer (“B2C”) free-to-play social casino apps that players across the globe can enjoy anytime online or on their mobile device. 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 or the player may purchase additional virtual goods. Our social casino library includes over 600 game titles in a variety of different games, including video slots, spinning reels, video poker, blackjack, bingo, and tournaments. Our most popular app, Lucky Play Casino, offers mobile players all the thrills of Vegas casinos. Players can choose from dozens of AGS player-favorite slot games, as well as other casino classics like video poker, blackjack, and bingo. Our apps also feature in-app tournaments, rumbles, VIP bonuses, and unique interactive challenges.

 

24

 

 

Key Drivers of Our Business

 

Our revenues are impacted by the following key factors:

 

 

the amount of money spent by consumers on our revenue share installed base;

 

the amount of the daily fee and selling price of our participation electronic gaming machines;

 

our revenue share percentage with customers;

 

the capital budgets of our customers;

 

the level of replacement of existing electronic gaming machines in existing casinos;

 

expansion of existing casinos;

 

development of new casinos;

 

opening or closure of new gaming jurisdictions both in the United States and internationally;

 

our ability to obtain and maintain gaming licenses in various jurisdictions;

 

the relative competitiveness and popularity of our electronic gaming machines compared to competitive products offered in the same facilities; and

 

general macro-economic factors, including levels of and changes to consumer disposable income and personal consumption spending.

 

The factors above were significantly affected by the COVID-19 pandemic in fiscal year 2021. Specifically, gaming operations revenue and equipment sales decreased during the period ended June 30, 2021, as a result of customers operating at limited capacity and other restrictions. Our EGM and Table Products segment operating results were disrupted due to customers operating at limited capacity and other restrictions in the prior year. As of June 30, 2022, all of the Company's customers have reopened; there are still some customers who have reopened at limited capacity and are operating under various restrictions.

 

In June 2022, the United States Supreme Court issued a ruling siding with certain Tribes in Texas (the Tribes at issue are the Ysleta del Sur and Alabama and Coushatta Indian Tribes of Texas, which operate the Speaking Rock and Naskila Gaming facilities, respectively) to allow bingo gaming on their Tribal lands, without regulatory oversight from the State of Texas. The Court's ruling determined that these Texas Tribes have the autonomy to regulate electronic bingo games on their lands, in compliance with the Indian Gaming Regulatory Act ("IGRA") like most other Tribes in the United States, regardless of the state's rules on bingo, which is permitted in the State of Texas. While the federal government agreed with the Tribes' position, the State of Texas did not. We believe that this ruling decreases the risk of these customer locations being shut down and may provide for additional placements of our product at their locations.

 

Our expenses are impacted by the following key factors:

 

 

fluctuations in the cost of labor relating to productivity;

 

overtime and training;
 

fluctuations in the price of components for gaming equipment;

 

fluctuations in energy prices that affect the cost of manufacturing and shipping of gaming equipment and parts;
 

changes in the cost of obtaining and maintaining gaming licenses;

 

fluctuations in the level of maintenance expense required on gaming equipment; and 

 

tariff increases.

 

Variations in our selling, general and administrative expenses, and research and development expenses are primarily due to changes in employment and salaries and related fringe benefits.

 

Acquisitions and Divestitures


On January 3, 2022, the Company acquired certain intangible assets related to the purchase of table game-related intellectual property and an installed base of table games under the Lucky Lucky trade name from Aces Up Gaming. For a detailed description of acquisitions, See Item 1. "Financial Statements" Note 14. "Acquisitions."

 

25

 

 

Results of Operations

 

Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021

 

The following tables set forth certain selected condensed consolidated financial data for the three months ended June 30, 2022 and 2021 (in thousands): 

 

    Three Months Ended June 30,    

$

   

%

 
   

2022

   

2021

   

Change

   

Change

 

Consolidated Statements of Operations:

                               

Revenues

                               

Gaming operations

  $ 56,640     $ 55,039     $ 1,601       2.9 %

Equipment sales

    19,944       11,798       8,146       69.0 %

Total revenues

    76,584       66,837       9,747       14.6 %

Operating expenses

                               

Cost of gaming operations

    10,868       9,677       1,191       12.3 %

Cost of equipment sales

    10,386       5,748       4,638       80.7 %

Selling, general and administrative

    15,975       16,300       (325 )     (2.0 )%

Research and development

    10,040       9,009       1,031       11.4 %

Write-downs and other charges

    342       64       278       434.4 %

Depreciation and amortization

    19,160       18,611       549       2.9 %

Total operating expenses

    66,771       59,409       7,362       12.4 %

Income from operations

    9,813       7,428       2,385       32.1 %

Other expense (income)

                               

Interest expense

    8,087       11,517       (3,430 )     (29.8 )%

Interest income

    (214 )     (276 )     62       (22.5 )%

Other (income) expense

    277       (181 )     458       (253.0 )%

Income (loss) before income taxes

    1,663       (3,632 )     5,295       (145.8 )%

Income tax expense

    (121 )     (251 )     130       (51.8 )%

Net income (loss)

  $ 1,542     $ (3,883 )   $ 5,425       (139.7 )%

 

Revenues

 

Gaming Operations.

 

Gaming operations revenue increased primarily due to an increase in our EGM segment. EGM RPD increased 5.6% compared to the prior year from $23.47 per day to $24.79 per day.  As of June 30, 2022, all of the Company's customers have reopened; there are still some customers who have reopened at limited capacity and are operating under various restrictions in response to the ongoing COVID-19 pandemic. The increase in gaming operations revenue is also attributable to an increase in our domestic EGM installed base year over year, offset by a decrease in our international EGM installed base due primarily to our strategic decision to wind down our modest Philippines operation given the ongoing COVID-related challenges facing the market. Our installed base in Mexico also decreased due to some casino closures as well as the imposition of a new gaming taxes in one Mexican state that compelled casino operators to remove units. The increase in gaming operations revenue is also attributable to a $0.7 million increase in Table Products revenue related to an increase in our installed base as well as with our acquisition of Lucky Lucky, offset by a $0.2 million decrease in our Interactive segment.

    

Equipment Sales. 

 

The increase in equipment sales was primarily due to an increase of 321 EGMs sold year over year. We sold 934 EGM units during the three months ended June 30, 2022, compared to 613 EGM units in the prior year period. 

 

Operating Expenses

 

Cost of gaming operations. The increase in the cost of gaming operations was the result of increased in-field service-related expenses and related costs of $0.7 million and a $0.2 million increase in direct expenses and related costs compared to the prior year period due to increased activity and headcount. As a percentage of gaming operations revenue, costs of gaming operations was 19.2% for the three months ended June 30, 2022 compared to 17.6% for the prior year period.

 

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Cost of Equipment Sales. The increase in cost of equipment sales is attributable to the increase in the number of units sold compared to the prior year periodAs a percentage of equipment sales revenue, costs of equipment sales was 52.1% for the three months ended June 30, 2022 compared to 48.7% for the prior year period, which fluctuated year over year primarily due to increased product costs.

 

Selling, general and administrative. The decrease in selling, general and administrative expenses is primarily due to a $1.5 million decrease in non-cash stock-based compensation, partially offset by an increase in marketing costs of $0.8 million and