PlayAGS(AGS) - 2023 Q1 - Quarterly Report

Filing Information This section provides the essential details of the Form 10-Q filing, including the registrant's identification, the reporting period, and its classification under SEC regulations Form 10-Q Details This section provides the essential details of the Form 10-Q filing, including the registrant's identification, the reporting period, and its classification under SEC regulations | Detail | Value | | :--- | :--- | | Registrant Name | PLAYAGS, INC. | | Commission File Number | 001-38357 | | Quarter Ended | March 31, 2023 | | Common Stock Trading Symbol | AGS | | Exchange | New York Stock Exchange | | Shares Outstanding (as of May 5, 2023) | 37,916,876 | | Filer Status | Accelerated filer, Emerging growth company | PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the reporting period ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements of PlayAGS, Inc. for the three months ended March 31, 2023, and 2022, including balance sheets, statements of operations and comprehensive loss, changes in stockholders' equity, and cash flows, along with detailed explanatory notes Condensed Consolidated Balance Sheets | Metric (in thousands) | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $676,107 | $684,751 | | Total Liabilities | $621,150 | $635,390 | | Total Stockholders' Equity | $54,957 | $49,361 | Condensed Consolidated Statements of Operations and Comprehensive Loss | Metric (in thousands, except per share data) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $83,175 | $72,857 | 14.2% | | Income from Operations | $11,746 | $5,678 | 106.9% | | Net Loss | $(334) | $(12,594) | (97.3)% | | Basic and Diluted Loss Per Common Share | $(0.01) | $(0.34) | (97.1)% | Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total Stockholders' Equity | $54,957 | $33,649 | Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,167 | $7,070 | | Net cash used in investing activities | $(13,103) | $(16,149) | | Net cash used in financing activities | $(3,380) | $(52,968) | | Net decrease in cash, cash equivalents and restricted cash | $(12,323) | $(62,045) | Notes to the Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's business, significant accounting policies, and specific financial statement line items, offering crucial context for the reported financial figures Note 1. Description of the Business and Summary of Significant Accounting Policies - PlayAGS, Inc. designs and supplies gaming products and services across three segments: Electronic Gaming Machines (EGM), Table Products, and Interactive Games[16] Revenues by Segment (in thousands) | Segment | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | EGM | | | | Gaming operations | $52,413 | $47,296 | | Equipment sales | $24,145 | $19,610 | | Table Products | | | | Gaming operations | $3,706 | $3,397 | | Equipment sales | $388 | $83 | | Interactive | | | | Gaming Operations | $2,523 | $2,471 | | Total Revenue | $83,175 | $72,857 | - Key accounting policies include revenue recognition (operating leases for gaming operations, ASC 606 for equipment sales), inventory valuation (FIFO at net realizable value), depreciation of property and equipment (straight-line), impairment testing for long-lived assets and intangibles, goodwill impairment testing, and fair value measurements[25][40][41][45][50][52] Note 2. Property and Equipment Property and Equipment, Net (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Gaming equipment | $241,157 | $232,244 | | Other property and equipment | $23,147 | $22,922 | | Less: Accumulated depreciation | $(184,274) | $(172,805) | | Property and equipment, net | $80,030 | $82,361 | | Depreciation expense (Q1) | $10,600 | $9,700 | Note 3. Goodwill and Intangibles Goodwill by Segment (in thousands) | Segment | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | EGM | $280,103 | $278,629 | | Table Products | $9,051 | $9,051 | | Interactive | $- | $- | | Total Goodwill | $289,154 | $287,680 | Intangible Assets, Net (in thousands) | Asset Type | March 31, 2023 (Net Carrying Value) | December 31, 2022 (Net Carrying Value) | | :--- | :--- | :--- | | Indefinite lived trade names | $12,126 | $12,126 | | Trade and brand names | $254 | $268 | | Customer relationships | $48,426 | $51,517 | | Contract rights under development and placement fees | $17,373 | $18,551 | | Gaming software and technology platforms | $51,185 | $51,229 | | Intellectual property | $7,888 | $8,418 | | Total Intangible Assets, Net | $137,252 | $142,109 | | Amortization expense (Q1) | $8,500 | $9,100 | Note 4. Accrued Liabilities Accrued Liabilities (in thousands) | Type | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Salary and payroll tax accrual | $10,194 | $13,255 | | Taxes payable | $3,034 | $2,903 | | Current portion of operating lease liability | $2,490 | $2,287 | | License fee obligation | $1,000 | $1,000 | | Placement fees payable | $6,314 | $6,314 | | Accrued other | $8,772 | $11,503 | | Total Accrued Liabilities | $31,804 | $37,262 | Note 5. Long-Term Debt Long-Term Debt (in thousands) | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | First Lien Credit Facilities (Term loans, net) | $554,558 | $555,453 | | Finance leases | $609 | $688 | | Total debt | $555,167 | $556,141 | | Less: Current portion | $(6,036) | $(6,060) | | Long-term debt | $549,131 | $550,081 | - The First Lien Credit Facilities include a $575.0 million New Term Loan Facility maturing on February 15, 2029, and a $40.0 million New Revolving Credit Facility terminating on February 15, 2027[76][78] - Borrowings under the Amended Credit Agreement bear interest at SOFR (subject to a 0.75% floor for term loans) plus an applicable margin of 4.00%, resulting in an 8.7% interest rate as of March 31, 2023[77][73] - As of March 31, 2023, there were no required financial covenants for the company's debt instruments[82] Note 6. Stockholders' Equity - As of March 31, 2023, the company had 37,904,589 shares of common stock outstanding, with 450,000,000 shares authorized[84] - The board of directors approved extending a share repurchase program to August 11, 2023, with $47.0 million remaining available out of $50.0 million authorized[87] Note 7. Write-Downs and Other Charges Write-Downs and Other Charges (in thousands) | Period | Amount | | :--- | :--- | | Three Months Ended March 31, 2023 | $204 | | Three Months Ended March 31, 2022 | $93 | - The charges in Q1 2023 were primarily related to the impairment of intangible assets and the disposal of long-lived assets[89] Note 8. Basic and Diluted Loss Per Share Basic and Diluted Loss Per Common Share | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Basic Loss Per Share | $(0.01) | $(0.34) | | Diluted Loss Per Share | $(0.01) | $(0.34) | - No potentially dilutive securities were included in the EPS calculation for both periods due to the reported net loss, making their effect anti-dilutive[92][93][94] Note 9. Benefit Plans 401(k) Plan Expense (in millions) | Period | Expense | | :--- | :--- | | Three Months Ended March 31, 2023 | $0.7 | | Three Months Ended March 31, 2022 | $0.6 | - As of March 31, 2023, 5,070,407 shares remained available for issuance under the 2018 Omnibus Incentive Plan[98] Note 10. Stock-Based Compensation - As of March 31, 2023, unrecognized compensation expense was $5.0 million for restricted stock and units (2.2-year weighted average period) and $9.2 million for phantom stock units (2.1-year weighted average period)[100] - An amendment to performance-based restricted stock units for the CEO and CFO resulted in an incremental fair value of $3.9 million, to be recognized over service and performance periods[101] Stock Options Outstanding (as of March 31, 2023) | Metric | Value | | :--- | :--- | | Number of Options Outstanding | 1,162,088 | | Weighted Average Exercise Price | $9.05 | | Remaining Contract Term (years) | 2.1 | | Aggregate Intrinsic Value (in thousands) | $385 | Restricted Stock and Units Outstanding (as of March 31, 2023) | Metric | Value | | :--- | :--- | | Shares Outstanding | 1,608,788 | | Weighted Average Grant Date Fair Value (per share) | $6.71 | Phantom Stock Units Outstanding (as of March 31, 2023) | Metric | Value | | :--- | :--- | | Shares Outstanding | 3,350,692 | | Weighted Average Grant Date Fair Value (per share) | $5.80 | Note 11. Income Taxes Effective Income Tax Rate | Period | Effective Tax Rate | | :--- | :--- | | Three Months Ended March 31, 2023 | 78.1% benefit | | Three Months Ended March 31, 2022 | 3.9% expense | - The significant difference in the effective tax rate for Q1 2023 (78.1% benefit) compared to Q1 2022 (3.9% expense) is primarily due to changes in the valuation allowance on deferred tax assets and the expiration of the statute of limitations for certain uncertain tax positions[115] Note 12. Commitments and Contingencies - The company is involved in a consolidated securities class action lawsuit and a shareholder derivative lawsuit, both of which are currently stayed pending resolution of motions[120][122][123][124] - The Alabama Department of Revenue (ADOR) assessed $3.3 million in unpaid state and local rental taxes for 2016-2019, which the company disputes; an estimated additional $2.3 million (excluding interest) could be assessed for subsequent periods through March 31, 2023[126][127][128] - The company is currently unable to estimate the probability or amount of liability related to the securities class action or shareholder derivative matters[125] Note 13. Operating Segments - The company operates in three segments: EGM, Table Products, and Interactive, with performance evaluated based on revenues and segment Adjusted EBITDA[129][130] Revenues and Adjusted EBITDA by Segment (in thousands) | Segment | Q1 2023 Revenues | Q1 2022 Revenues | Q1 2023 Adjusted EBITDA | Q1 2022 Adjusted EBITDA | | :--- | :--- | :--- | :--- | :--- | | EGM | $76,558 | $66,906 | $34,032 | $30,195 | | Table Products | $4,094 | $3,480 | $2,251 | $1,829 | | Interactive | $2,523 | $2,471 | $220 | $742 | | Total | $83,175 | $72,857 | $36,503 | $32,766 | Note 14. Acquisitions - On January 3, 2022, the company acquired intangible assets related to the Lucky Lucky trade name from Aces Up Gaming for $4.8 million, allocated primarily to tax-deductible goodwill ($1.2 million) and intangible assets ($3.5 million)[136] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and results of operations for the three months ended March 31, 2023, compared to the prior year, including segment-specific analysis and key business drivers Cautionary Statement Regarding Forward-Looking Statements - The report contains forward-looking statements that involve known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from projections[138] Overview - PlayAGS, Inc. is a leading designer and supplier of Electronic Gaming Machines (EGMs), Table Products, and Interactive games for the gaming industry[140] - Approximately 71% of total revenue for Q1 2023 was generated through recurring contracted lease agreements (revenue sharing or fee-per-day) and Interactive gaming operations[140] - The EGM segment represents 92% of Q1 2023 revenue, offering a library of over 550 proprietary game titles and various cabinet options for lease or sale[141] - The Table Products segment offers over 60 unique products, including live felt games, side bets, progressives, and shufflers, with nearly all revenue being recurring[143][144] - The Interactive segment operates a B2B game aggregation platform for online real-money gaming (RMG) and B2C free-to-play social casino apps[145][146] Key Drivers of Our Business - Revenue is driven by consumer spending on revenue share installed base, daily fees and selling prices of EGMs, revenue share percentage, customer capital budgets, replacement of existing EGMs, casino expansion/development, new gaming jurisdictions, competitiveness of products, and macroeconomic factors[148] - Expenses are influenced by fluctuations in labor costs, component prices, energy prices, gaming license costs, maintenance expenses, and tariff increases[148] Results of Operations Consolidated Statements of Operations (in thousands) | Metric | Q1 2023 | Q1 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Gaming operations revenue | $58,642 | $53,164 | $5,478 | 10.3% | | Equipment sales revenue | $24,533 | $19,693 | $4,840 | 24.6% | | Total revenues | $83,175 | $72,857 | $10,318 | 14.2% | | Cost of gaming operations | $11,756 | $10,269 | $1,487 | 14.5% | | Cost of equipment sales | $12,333 | $9,787 | $2,546 | 26.0% | | Selling, general and administrative | $17,205 | $17,951 | $(746) | (4.2)% | | Research and development | $10,789 | $10,210 | $579 | 5.7% | | Write-downs and other charges | $204 | $93 | $111 | 119.4% | | Depreciation and amortization | $19,142 | $18,869 | $273 | 1.4% | | Total operating expenses | $71,429 | $67,179 | $4,250 | 6.3% | | Income from operations | $11,746 | $5,678 | $6,068 | 106.9% | | Interest expense | $13,704 | $9,473 | $4,231 | 44.7% | | Loss on extinguishment and modification of debt | $- | $8,549 | $(8,549) | (100.0)% | | Loss before income taxes | $(1,523) | $(12,127) | $10,604 | (87.4)% | | Income tax benefit (expense) | $1,189 | $(467) | $1,656 | (354.6)% | | Net loss | $(334) | $(12,594) | $12,260 | (97.3)% | - Gaming operations revenue increased primarily due to a 12.7% rise in EGM Revenue Per Day (RPD) and an increase in the domestic EGM installed base, partially offset by a decrease in the international EGM installed base[150] - Equipment sales increased due to a 17.4% increase in EGM units sold (1,121 units in Q1 2023 vs. 955 in Q1 2022)[151] - Selling, general and administrative expenses decreased by $0.7 million, mainly due to a $3.4 million decrease in non-cash stock-based compensation, partially offset by a $1.9 million increase in salaries and benefits[154] - Interest expense increased by 44.7% due to a higher effective interest rate, despite a decrease in the outstanding term loan balance[158] Segment Operating Results - Segment performance is measured by revenue, segment-specific Adjusted EBITDA, and unit placements, with Adjusted EBITDA excluding certain non-cash and non-operating items[163][164][166] Electronic Gaming Machines (EGM) EGM Segment Key Performance Indicators | Metric | Q1 2023 | Q1 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total EGM revenues (in thousands) | $76,558 | $66,906 | $9,652 | 14.4% | | EGM Adjusted EBITDA (in thousands) | $34,032 | $30,195 | $3,837 | 12.7% | | Total installed base, end of period | 22,608 | 23,112 | (504) | (2.2)% | | Total revenue per day (RPD) | $26.06 | $23.13 | $2.93 | 12.7% | | EGM units sold | 1,121 | 955 | 166 | 17.4% | | Average sales price (ASP) | $19,587 | $19,276 | $311 | 1.6% | - The increase in EGM gaming operations revenue was driven by a 12.7% increase in EGM RPD and growth in the domestic installed base, despite a 13.2% decrease in the international installed base due to inactive machines, casino closures, and new gaming taxes in Mexico[173][171] - EGM Adjusted EBITDA margin decreased slightly to 44.5% in Q1 2023 from 45.1% in Q1 2022, due to increased cost of equipment sales and operating expenses[175] Table Products Table Products Segment Key Performance Indicators | Metric | Q1 2023 | Q1 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Table Products revenues (in thousands) | $4,094 | $3,480 | $614 | 17.6% | | Table Products Adjusted EBITDA (in thousands) | $2,251 | $1,829 | $422 | 23.1% | | Table products installed base, end of period | 5,278 | 4,418 | 860 | 19.5% | | Average monthly lease price | $230 | $249 | $(19) | (7.6)% | - The increase in Table Products gaming operations revenue is attributed to a 19.5% increase in the installed base, driven by the success of progressives like Bonus Spin Xtreme and the growing installed base of Pax S and Dex shufflers[180][177] - Equipment sales saw a significant increase of 367.5%, primarily due to higher sales of Pax S single-deck shufflers[181][177] Interactive Interactive Segment Key Performance Indicators | Metric | Q1 2023 | Q1 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Interactive revenue (in thousands) | $2,523 | $2,471 | $52 | 2.1% | | Interactive Adjusted EBITDA (in thousands) | $220 | $742 | $(522) | (70.4)% | - Gaming operations revenue increased by 2.1%, primarily due to higher Real Money Gaming (RMG) revenues from Canadian and US-based operators, partially offset by decreased international and social casino revenues as resources were strategically refocused on the North American RMG market[185] - Interactive Adjusted EBITDA decreased by 70.4%, mainly due to increased operating expenses[186] Total Adjusted EBITDA Reconciliation to Net Loss Total Adjusted EBITDA Reconciliation (in thousands) | Metric | Q1 2023 | Q1 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(334) | $(12,594) | $12,260 | (97.3)% | | Income tax (benefit) expense | $(1,189) | $467 | $(1,656) | (354.6)% | | Depreciation and amortization | $19,142 | $18,869 | $273 | 1.4% | | Interest expense, net of interest income and other | $13,269 | $9,256 | $4,013 | 43.4% | | Loss on extinguishment and modification of debt | $- | $8,549 | $(8,549) | (100.0)% | | Write-downs and other | $204 | $93 | $111 | 119.4% | | Other adjustments | $413 | $111 | $302 | 272.1% | | Other non-cash charges | $2,454 | $2,190 | $264 | 12.1% | | Non-cash stock-based compensation | $2,544 | $5,825 | $(3,281) | (56.3)% | | Total Adjusted EBITDA | $36,503 | $32,766 | $3,737 | 11.4% | Liquidity and Capital Resources - The company expects to fund its liquidity requirements for the next twelve months through cash on hand, additional financing, and cash flows from operating activities[196] - As of March 31, 2023, the company had $25.4 million in cash and cash equivalents and $40.0 million available under its revolving credit facility, believing it has sufficient liquidity for the next twelve months[198] Historical Cash Flows (in thousands) | Cash Flow Activity | Q1 2023 | Q1 2022 | Change ($) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $4,167 | $7,070 | $(2,903) | | Net cash used in investing activities | $(13,103) | $(16,149) | $3,046 | | Net cash used in financing activities | $(3,380) | $(52,968) | $49,588 | | Net decrease in cash, cash equivalents and restricted cash | $(12,323) | $(62,045) | $49,722 | - The decrease in operating cash flow was due to a $9.8 million increase in cash used for assets and liabilities, partially offset by a $6.8 million improvement in net loss adjusted for non-cash expenses[202] - The decrease in cash used in investing activities was primarily due to a $4.8 million decrease in business acquisitions, partially offset by increased purchases of property and equipment and software development expenditures[203] - The significant decrease in cash used in financing activities ($49.6 million) was mainly attributable to the reduction of debt principal and related issuance costs in the prior period due to the Amended Credit Agreement[204] Off-Balance Sheet Arrangements - The company does not maintain any off-balance sheet transactions, arrangements, obligations, or relationships that are reasonably likely to have a material current or future effect on its financial condition[205] Critical Accounting Policies - There were no material changes to the company's critical accounting policies during the three months ended March 31, 2023, with a full description available in the Annual Report on Form 10-K for December 31, 2022[206] Recently Issued Accounting Pronouncements - The company adopted ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326), in the current quarter, which did not have a significant effect on its consolidated financial statements[61] - No other recently issued accounting guidance is expected to have a significant effect on the consolidated financial statements[62] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, primarily focusing on interest rate fluctuations affecting its variable-rate long-term debt and foreign currency exchange rate risks from international operations - The primary market risk exposure is interest rate risk associated with variable-rate long-term debt; a hypothetical 1% increase in interest rates would increase interest expense by approximately $5.7 million over the next twelve months[208] - The company is exposed to foreign currency exchange rate risk from operations in Mexico and, to a lesser extent, the United Kingdom, which can affect cash flows and earnings[209] ITEM 4. Controls and Procedures This section details management's evaluation of the effectiveness of the company's disclosure controls and procedures, concluding their effectiveness as of March 31, 2023, and reporting no material changes to internal control over financial reporting Disclosure Controls and Procedures - Management, with the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2023, ensuring timely and accurate information reporting[211] - The company acknowledges the inherent limitations of control systems, which can only provide reasonable assurance and may not prevent all errors or fraud[212][213] Changes in Internal Controls - No material changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2023[214] PART II. OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and a list of exhibits ITEM 1. Legal Proceedings This section incorporates by reference the detailed information on legal proceedings from Note 12 of the condensed consolidated financial statements - Information regarding legal proceedings is incorporated by reference from Note 12, 'Commitments and Contingencies,' in the financial statements[216] ITEM 1A. Risk Factors This section refers to the company's Annual Report on Form 10-K for a comprehensive discussion of risk factors, acknowledging that additional, currently unknown or immaterial risks may also exist - A discussion of the company's risk factors is provided in 'Item 1A. Risk Factors' of its Annual Report on Form 10-K for the year ended December 31, 2022[217] - The company acknowledges that additional risks and uncertainties not currently known or deemed immaterial could materially adversely affect its business, financial condition, or future results[217] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities and use of proceeds to report[218] ITEM 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities to report[219] ITEM 4. Mine Safety Disclosures This section confirms that there are no mine safety disclosures required for the company - No mine safety disclosures to report[219] ITEM 5. Other Information This section indicates that there is no other information to report for the period - No other information to report[220] ITEM 6. Exhibits This section lists all documents filed as exhibits to the Form 10-Q, including corporate governance documents, employment agreements, and certifications - Exhibits include corporate documents (Articles of Incorporation, Bylaws), amendments to the Omnibus Incentive Plan, employment agreements for key executives, and certifications required by the Sarbanes-Oxley Act[221] Signatures This section contains the official signatures for the Form 10-Q, confirming its submission by authorized personnel - The report was signed on May 9, 2023, by Kimo Akiona, Chief Financial Officer, Chief Accounting Officer, and Treasurer of PlayAGS, Inc[226]