UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| (Mark One) |
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| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarter ended
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
PLAYAGS, INC.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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| (Address of principal executive offices) (Zip Code) |
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| (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 |
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As of November 3, 2022, there were
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.
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).
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 ☐ | | 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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2022 AND DECEMBER 31, 2021 |
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AT SEPTEMBER 30, 2022 AND 2021 |
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| ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
(unaudited)
| September 30, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net of allowance of $ and $, respectively | ||||||||
| Inventories | ||||||||
| Prepaid expenses | ||||||||
| Deposits and other | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets | ||||||||
| Deferred tax asset | ||||||||
| Operating lease assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Current maturities of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term debt | ||||||||
| Deferred tax liability, non-current | ||||||||
| Operating lease liabilities, long-term | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 12) | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock at $ par value; shares authorized, shares issued and outstanding | ||||||||
| Common stock at $ par value; shares authorized at September 30, 2022 and at December 31, 2021; and and shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(amounts in thousands, except per share data)
(unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2022 |
2021 |
2022 |
2021 |
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| Revenues |
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| Gaming operations |
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| Equipment sales |
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| Total revenues |
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| Operating expenses |
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| Cost of gaming operations(1) |
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| Cost of equipment sales(1) |
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| Selling, general and administrative |
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| Research and development |
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| Write-downs and other charges |
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| Depreciation and amortization |
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| Total operating expenses |
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| Income from operations |
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| Other expense (income) |
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| Interest expense |
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| Interest income |
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| Loss on extinguishment and modification of debt |
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| Other expense (income) |
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| Loss before income taxes |
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| Net income (loss) |
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| Foreign currency translation adjustment |
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| Total comprehensive income (loss) |
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| Basic and diluted income (loss) per common share: |
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| Basic |
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| Diluted |
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| Weighted average common shares outstanding: |
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| Basic |
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| Diluted |
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(1) exclusive of depreciation and amortization
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands)
(unaudited)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
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| 2022 |
2021 |
2022 |
2021 |
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| Common stock |
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| Balance, beginning of period |
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| Vesting of restricted stock |
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| Balance of common stock, end of period |
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| Additional paid-in capital |
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| Balance, beginning of period |
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| Stock-based compensation expense |
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| Modification of liability awards to equity |
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| Vesting of restricted stock |
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| Balance of additional paid-in capital, end of period |
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| Accumulated deficit |
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| Balance, beginning of period |
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| Net income (loss) |
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| Restricted stock vesting and withholding |
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| Balance of accumulated deficit, end of period |
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| Accumulated other comprehensive loss |
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| Balance, beginning of period |
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| Foreign currency translation adjustment |
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| Total stockholders' equity |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended September 30, |
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| 2022 |
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| Cash flows from operating activities |
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| Net loss |
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| Adjustments to reconcile net loss to net cash provided by operating activities: |
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| Depreciation and amortization |
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| Accretion of contract rights under development agreements and placement fees |
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| Amortization of deferred loan costs and discount |
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| Write-off of deferred loan costs and discount |
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| Cash paid for debt prepayment penalties to prior debt holders |
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| Stock-based compensation expense |
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| Provision for bad debts |
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| Disposal of long-lived assets |
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| Impairment of assets |
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| Fair value adjustment of contingent consideration |
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| Provision for deferred income tax (benefit) |
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| Changes in assets and liabilities that relate to operations: |
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| Deposits and other |
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| Accounts payable and accrued liabilities |
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| Net cash provided by operating activities |
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| Cash flows from investing activities |
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| Business acquisitions, net of cash acquired |
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| Proceeds from payments on customer notes receivable |
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| Software development and other expenditures |
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| Proceeds from disposition of assets |
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| Purchases of property and equipment |
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| Repayment of prior first lien credit facilities |
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| Payment of deferred loan costs |
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| Payment of debt prepayment penalties to prior debt holders |
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| Payments of previous acquisition obligation |
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| Payments on finance leases and other obligations |
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| Repurchase of stock |
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| Net cash used in financing activities |
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| Effect of exchange rates on cash and cash equivalents |
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| Net increase in cash, cash equivalents and restricted cash |
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| Cash, cash equivalents and restricted cash, beginning of period |
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| Cash, cash equivalents and restricted cash, end of period |
$ | $ | ||||||
| Supplemental cash flow information: |
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| Non-cash investing and financing activities: |
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| Leased assets obtained in exchange for new operating lease liabilities |
$ | $ | ||||||
| Leased assets obtained in exchange for new finance lease liabilities |
$ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
PlayAGS, Inc. (the "Company," "PlayAGS," "we," "us," or "our") is a leading designer and supplier of gaming products and services for the gaming industry. We operate in legalized gaming markets across the globe and provide state-of-the-art, value-add products in three distinct segments: Electronic Gaming Machines (“EGM”), which includes server-based systems and back-office systems that are used by Class II Native American and Mexico gaming jurisdictions and Class III Native American, commercial and charitable jurisdictions; Table Products (“Table Products”), which includes live felt table games, side-bets and progressives as well as card shufflers 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 Starwall, Orion Curve Premium and Big Red ("Colossal Diamonds") as well as cabinets available for sale or lease notably the Orion Portrait, Orion Slant, Orion Curve, Orion Upright, and ICON cabinets. In addition to providing complete EGM units, we offer conversion kits that allow existing game titles to be converted to other game titles offered within that operating platform.
Table Products
Our Table Products include both internally developed and acquired proprietary table products, side-bets, progressives, and table technology related to blackjack, poker, baccarat, craps and roulette. We have acquired a number of popular proprietary brands, including In Bet Gaming (“In Bet”), Buster Blackjack, Double Draw Poker and Criss Cross Poker that are based on traditional well-known public domain games such as blackjack and poker; however, these proprietary games provide intriguing betting options that offer more excitement and greater volatility to the player, ultimately enhancing our casino customers’ profitability. In addition, we offer a single deck card shuffler for poker tables, Dex S, as well as our new second shuffler, the Pax S single-deck shuffler.
Interactive
We 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 September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| EGM | ||||||||||||||||
| Gaming operations | $ | $ | $ | $ | ||||||||||||
| Equipment sales | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Table Products | ||||||||||||||||
| Gaming operations | $ | $ | $ | $ | ||||||||||||
| Equipment sales | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Interactive | ||||||||||||||||
| Gaming Operations(1) | $ | $ | $ | $ | ||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
(1) The Interactive gaming operations revenue includes both Social and Real Money Gaming revenue streams that were previously disclosed separately.
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 to 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 September 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 September 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 September 30, 2022 and December 31, 2021, the value of raw material inventory was $
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) | ||||
| Other property and equipment (in years) |
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 September 30, 2022 and December 31, 2021 (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
| Long-term Debt | $ | $ | $ | $ | ||||||||||||
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.
On August 16, 2022, the Inflation Reduction Act ("IRA") was signed into law. The IRA, among other things, implements a 15% minimum tax on financial statement income of certain large corporations, a 1% excise tax on stock repurchases and extends, enhances, and creates several tax incentives to promote clean energy. While we continue to evaluate the IRA, at present, we do not believe it will have a material effect on our consolidated financial statements.
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):
| September 30, 2022 | December 31, 2021 | |||||||
| Gaming equipment | $ | $ | ||||||
| Other property and equipment | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Gaming equipment and other property and equipment are depreciated over the respective useful lives of the assets ranging from to years. Depreciation expense was $
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 | $ | $ | $ | $ | ||||||||||||
| Foreign currency adjustments | ||||||||||||||||
| Acquisition | ||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ||||||||||||
(1) Accumulated goodwill impairment charges for the Interactive segment as of September 30, 2022 were $
Intangible assets consist of the following (in thousands):
| September 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 | $ | $ | - | $ | $ | $ | - | $ | |||||||||||||||||||
| Trade and brand names | ( | ) | ( | ) | ||||||||||||||||||||||||
| Customer relationships | ( | ) | ( | ) | ||||||||||||||||||||||||
| Contract rights under development and placement fees | ( | ) | ( | ) | ||||||||||||||||||||||||
| Gaming software and technology platforms | ( | ) | ( | ) | ||||||||||||||||||||||||
| Intellectual property | ( | ) | ( | ) | ||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
Intangible assets are amortized over their respective estimated useful lives ranging from to years. Amortization expense related to intangible assets was $
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
The Company enters into development agreements and placement fee agreements with certain customers to secure floor space under lease agreements for its gaming machines. Amounts paid in connection with the development agreements are repaid to the Company in accordance with the terms of the agreement, whereas placements fees are not reimbursed. Amounts paid against the placement fee agreements with payment terms greater than ninety days are disclosed in the Financing section of the Condensed Consolidated Statement of Cash Flows. Amounts paid for the placement fee agreements with the agreement terms less than ninety days, are disclosed in the Investing section of the Condensed Consolidated Statement of Cash Flows.
For development agreements in the form of a loan, interest income is recognized on the repayment of the notes based on the stated rate or, if not stated explicitly in the development agreement, on an imputed interest rate. If the stated interest rate is deemed to be other than a market rate or zero, a discount is recorded on the note receivable as a result of the difference between the stated and market rate and a corresponding intangible asset is recorded. The intangible asset is recognized in the 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 $
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| Salary and payroll tax accrual | $ | $ | ||||||
| Taxes payable | ||||||||
| Current portion of operating lease liability | ||||||||
| License fee obligation | ||||||||
| Placement fees payable | ||||||||
| Accrued other | ||||||||
| Total accrued liabilities | $ | $ | ||||||
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| First Lien Credit Facilities: | ||||||||
| Term loans, interest at SOFR, subject to a floor plus % (% at September 30, 2022), net of unamortized discount and deferred loan costs of $ million at September 30, 2022 | $ | $ | ||||||
| Term loans, interest at LIBOR or base rate plus % (% at December 31, 2021), net of unamortized discount and deferred loan costs of $ million at December 31, 2021 | ||||||||
| Incremental term loans, interest at LIBOR or base rate plus ( at December 31, 2021), net of unamortized discount and deferred loan costs of $ million at December 31, 2021 | ||||||||
| Finance leases | ||||||||
| Total debt | ||||||||
| Less: Current portion | ( | ) | ( | ) | ||||
| Long-term debt | $ | $ | ||||||
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 $
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, and (ii) in the case of revolver borrowings,
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
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
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
An additional $
As of September 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.
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
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 $
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 September 30, 2022, the Company identified an error related to the fair value of adjustments to contingent consideration and recorded an adjustment of million, of which approximately million relates to periods prior to January 1, 2022. The Company evaluated the impact of the error and concluded that prior periods were not materially misstated and the adjustment did not have a material impact to the current year financial statements. The adjustment was recorded in other long-term liabilities and had no effect on the Condensed Consolidated Statements of Cash Flows.
During the three months ended September 30, 2022, the Company recognized $
During the nine months ended September 30, 2022, the Company recognized $
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 September 30, 2022 | ||||
| Numerator: | ||||
| Net income | $ | |||
| Net income attributable to participating securities | $ | |||
| Net income attributable to common stock | $ | |||
| Denominator: | ||||
| Weighted average of common shares outstanding | $ | |||
| Potential dilutive effect of stock options | $ | |||
| Weighted average of common shares outstanding | $ | |||
There were
Excluded from the calculation of diluted EPS for the three months ended September 30, 2022 were
Excluded from the calculation of diluted EPS for the three months ended September 30, 2021 were
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 both the three months ended September 30, 2022 and 2021 was $
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 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
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
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
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTE 10. STOCK-BASED COMPENSATION
The Company has granted equity or equity-based awards to eligible participants under its incentive plans. The awards include options to purchase the Company’s common stock, restricted stock or restricted stock units and phantom stock units. These awards include a combination of service and market conditions, as further described below.
We recognize stock-based compensation on a straight-line basis over the vesting period for time-based awards and we recognize the expense for awards with market conditions over the service period derived from the related valuation. As of September 30, 2022, there was
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
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
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
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
A summary of the changes in stock options outstanding during the nine months ended September 30, 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 | $ | $ | ||||||||||||||
| Granted | $ | - | $ | |||||||||||||
| Exercised | $ | - | $ | - | ||||||||||||
| Canceled or forfeited | ( | ) | $ | - | $ | - | ||||||||||
| Options outstanding as of September 30, 2022 | $ | $ | ||||||||||||||
| Options exercisable as of September 30, 2022 | $ | $ | ||||||||||||||
Restricted Stock and Restricted Stock Units
Restricted stock awards and restricted stock units are typically eligible to vest in equal installments of
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 nine months ended September 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 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Canceled or forfeited | ( | ) | $ | |||||
| Restricted Stock and Restricted Stock Units Outstanding as of September 30, 2022 | $ | |||||||
Phantom Stock Units
Phantom stock awards are typically eligible to vest in equal installments of
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 nine months ended September 30, 2022 is as follows:
| Shares Outstanding | Weighted Average Grant Date Fair Value (per share) | |||||||
| Phantom Stock Outstanding as of December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Canceled or forfeited | ( | ) | $ | |||||
| Phantom stock outstanding as of September 30, 2022 | $ | |||||||
PLAYAGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
NOTE 11. INCOME TAXES
The Company's effective income tax rate for the three months ended September 30, 2022, was a benefit of 134.0%. The difference between the federal statutory rate of
The Company's effective income tax rate for the nine months ended September 30, 2022, was a benefit of
As of September 30, 2022, the statute of limitations has expired for all uncertain tax positions covered by the indemnification agreement with the prior owners of Cadillac Jack (acquired in May of 2015), accordingly, no indemnification receivable is recorded in other assets in the financial statements and
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 $
On June 25, and July 31, 2020 putative class action lawsuits were filed in the United States District Court for the District of Nevada (the "Court"), by two separate plaintiffs against PlayAGS, Inc. (the "Company") and certain of its officers, individually and on behalf of all persons who purchased or otherwise acquired Company securities between August 2, 2018 and August 7, 2019. The complaints alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) by making false and misleading statements concerning the Company’s forward-looking financial outlook and accounting for goodwill and intangible assets in its iGaming reporting unit, resulting in injury to the purported class members when the value of the Company’s common stock declined following its release of its Second Quarter 2019 results on August 7, 2019.
On August 4, 2020, a third plaintiff (“OPPRS”) filed a putative class action lawsuit in the same court asserting similar claims to those alleged in the first two class action complaints, based on substantially the same conduct, on behalf of a slightly larger class (stretching back to May 3, 2018). Specifically, OPPRS claimed that the Company, certain of its officers, and certain entities that allegedly beneficially held over 50% of the Company’s common stock at the beginning of the class period, violated Sections 10(b) and 20(a) of the Exchange Act by allegedly making false and misleading statements concerning the Company’s forward-looking financial outlook and accounting for goodwill and intangible assets in its iGaming reporting unit, and the adequacy of its internal controls over financial reporting, resulting in injury to the purported class when the Company’s common stock price declined following the release of its Second Quarter 2019 results. In addition, based on substantially similar alleged false or misleading statements, OPPRS asserted claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, on behalf of all persons who purchased Company common stock pursuant and/or traceable to the Company’s August 2018 and March 2019 secondary public offerings. These secondary-offering claims were brought against the same defendants identified above, plus certain of the Company’s directors and the underwriters.
On October 28, 2020, the Court consolidated these three related putative class actions into In re PlayAGS, Inc. Securities Litigation and appointed OPPRS as lead plaintiff. On January 11, 2021, the lead plaintiff filed an Amended Complaint in the consolidated action against the same set of defendants, again asserting claims (i) under Sections 10(b) and 20(a) of the Exchange Act, with an even larger putative class period ( May 3, 2018 through March 4, 2020), and (ii) under Sections 11, 12(a)(2) and 15 of the Securities Act on behalf of the same putative class as in OPPRS’s previous complaint. The Amended Complaint alleges that statements the defendants made about, among other things, the Company’s growth, financial performance, and forward-looking financial outlook were materially false or misleading because the Company omitted to state that, according to plaintiffs, its market strength was declining, its growth strategies were unsustainable, and it was experiencing challenges in the Oklahoma market. Plaintiffs claim that the purported class was injured when the common stock price declined after the alleged “truth” was revealed following release of the Company’s financial reports on August 7, 2019, November 7, 2019, and March 4, 2020. Plaintiffs also assert that the Company violated Regulation S-K Items 303 and 105 by failing to disclose these same alleged negative trends and significant risks in the registration materials for the Company’s secondary offerings. Unlike the previous complaints, the Amended Complaint does not allege false or misleading statements concerning the Company’s accounting for the iGaming reporting unit or the adequacy of the Company’s internal controls over financial reporting.
On February 23, 2021 the Court granted the lead plaintiff’s unopposed motion to file a Second Amended Complaint. The Second Amended Complaint was filed on March 25, 2021 and asserts substantially the same claims as the Amended Complaint but extends the beginning of the putative class period back to January 26, 2018. 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. On June 9, 2022, the court stayed the derivative action, pursuant to a stipulation between the parties, pending resolution of the motion to dismiss the consolidated securities class action. 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 $
We believe that we were not required to collect and remit Alabama state lease/rental tax on our leases of EGMs in the state as those leases are on federally designated Indian reservation land and because federal Indian trading laws and Indian gaming laws, as well as the U.S. Constitution, preempt application of the rental tax to these transactions with the Native American tribe. We have disputed ADOR’s audit findings in accordance with applicable state and local tax procedures and ADOR rules. Our dispute is currently in the discovery phase at the Alabama Tax Tribunal, which is the independent tax court for the state of Alabama. We expect a hearing for this dispute at the Alabama Tax Tribunal will be scheduled in 2023.
We have not accrued the $
.
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
Segment revenues include leasing, licensing, or selling of products within each reportable segment. Segment Adjusted EBITDA includes the revenues and operating expenses from each segment adjusted for:
| • | Write-downs and other include items related to loss on disposal or impairment of long-lived assets and fair value adjustments to contingent consideration; |
| • | Depreciation, amortization; |
| • | Loss on extinguishment and modification of debt primarily relates to the refinancing of long-term debt, in which deferred loan costs and discounts related to old senior secured credit facilities were written-off; |
| • | Other adjustments are primarily composed of the following: |
| • | Costs and inventory and receivable valuation charges associated with the COVID-19 pandemic, professional fees incurred for projects, costs incurred related to public offerings, contract cancellation fees and other transaction costs deemed to be non-operating in nature; |
| • | Acquisition and integration-related costs related to the purchase of businesses and to integrate operations and obtain costs synergies; |
| • | Restructuring and severance costs, which primarily relate to costs incurred through the restructuring of the Company’s operations from time to time and other employee severance costs recognized in the periods presented; |
| • | Legal and litigation related costs, which consist of payments to law firms and settlements for matters that are outside the normal course of business; |
| • | Other non-cash charges are costs related to non-cash charges and losses on the disposition of assets, non-cash charges on capitalized installation and delivery, which primarily includes the costs to acquire contracts that are expensed over the estimated life of each contract and non-cash charges related to accretion of contract rights under development agreements; and |
| • | Non-cash stock-based compensation includes non-cash compensation expense related to grants of options, restricted stock, and other equity awards. |
Revenues in each segment are attributable to third parties and segment operating expenses are directly associated with the product lines included in each segment such as research and development, product approval costs, product-related litigation expenses, sales commissions and other directly-allocable sales expenses. Cost of gaming operations and cost of equipment sales primarily include the cost of products sold, service, manufacturing overhead, shipping and installation.
Segment Adjusted EBITDA excludes other income and expense, income taxes and certain expenses that are managed outside of the operating segments.
The following provides financial information concerning our reportable segments for the three and nine months ended September 30, 2022 and 2021 (amounts in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues by segment | ||||||||||||||||
| EGM | $ | $ | $ | $ | ||||||||||||
| Table Products | ||||||||||||||||
| Interactive | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| Adjusted EBITDA by segment | ||||||||||||||||
| EGM | ||||||||||||||||
| Table Products | ||||||||||||||||
| Interactive | ||||||||||||||||
| Subtotal | ||||||||||||||||
| Write-downs and other: | ||||||||||||||||
| Disposal of long-lived assets | ( | ) | ||||||||||||||
| Impairment of long-lived assets | ||||||||||||||||
| Fair value adjustments to contingent consideration | ( | ) | ||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Interest expense, net of interest income and other | ||||||||||||||||
| Loss on extinguishment and modification of debt | ||||||||||||||||
| Other adjustments | ||||||||||||||||
| Other non-cash charges | ||||||||||||||||
| Non-cash stock-based compensation | ||||||||||||||||
| Loss before income taxes | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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 $
Our results of operations for the nine months ended September 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.
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 nine months ended September 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 nine months ended September 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 Starwall, Orion Curve Premium, Orion Rise, and Big Red ("Colossal Diamonds"). Also, our core cabinets that are available for sale and lease include the Orion Portrait, Orion Slant, Orion Curve, Orion Upright and ICON. In addition to providing complete EGM units, we offer conversion kits, which are essentially software containing new games that allow existing game titles to be converted to other game titles offered within that operating platform.
We design all of our cabinets with the intention of capturing the attention of players on casino floors while aiming to maximize operator profits. We offer our customers the option of either leasing or purchasing our EGMs and associated gaming systems. Currently, we derive a substantial portion of our revenues from EGMs installed under revenue sharing or fee-per-day lease agreements, also known as “participation” agreements, and we refer to such revenue generation as our “participation model.”
Table Products
In addition to our existing portfolio of EGMs, we also offer our customers more than 60 unique table product offerings, including live felt table games, side bet offerings, progressives, card shufflers, signage, and other ancillary table game equipment. Our table products are designed to enhance the table games section of the casino floor (commonly known as “the pit”). 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 September 30, 2022, we had an installed base of nearly 5,000 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.
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 September 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 September 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."
Results of Operations
Three Months Ended September 30, 2022 compared to the Three Months Ended September 30, 2021
The following tables set forth certain selected condensed consolidated financial data for the three months ended September 30, 2022 and 2021 (in thousands):
| Three Months Ended September 30, | $ |
% |
||||||||||
| 2022 |
2021 |
Change |
Change |
|||||||||
| Consolidated Statements of Operations: |
||||||||||||
| Revenues |
||||||||||||
| Gaming operations |
$ | 56,592 | $ | 53,231 | $ | 3,361 | 6.3 | % | ||||
| Equipment sales |
21,667 | 14,046 | 7,621 | 54.3 | % | |||||||
| Total revenues |
78,259 | 67,277 | 10,982 | 16.3 | % | |||||||
| Operating expenses |
||||||||||||
| Cost of gaming operations |
10,375 | 9,641 | 734 | 7.6 | % | |||||||
| Cost of equipment sales |
11,857 | 6,805 | 5,052 | 74.2 | % | |||||||
| Selling, general and administrative |
16,955 | 15,913 | 1,042 | 6.5 | % | |||||||
| Research and development |
9,702 | 9,269 | 433 | 4.7 | % | |||||||
| Write-downs and other charges |
1,389 | 197 | 1,192 | 605.1 | % | |||||||
| Depreciation and amortization |
18,950 | 18,441 | 509 | 2.8 | % | |||||||
| Total operating expenses |
69,228 | 60,266 | 8,962 | 14.9 | % | |||||||
| Income from operations |
9,031 | 7,011 | 2,020 | 28.8 | % | |||||||
| Other expense (income) |
||||||||||||
| Interest expense |
10,291 | 10,700 | (409 | ) | (3.8 | )% | ||||||
| Interest income |
(305 | ) | (263 | ) | (42 | ) | 16.0 | % | ||||
| Other expense (income) |
445 | 1,126 | (681 | ) | (60.5 | )% | ||||||
| Loss before income taxes |
(1,400 | ) | (4,552 | ) | 3,152 | (69.2 | )% | |||||
| Income tax benefit |
1,876 | 2,723 | (847 | ) | (31.1 | )% | ||||||
| Net income (loss) |
$ | 476 | $ | (1,829 | ) | $ | 2,305 | (126.0 | )% | |||
Revenues
Gaming Operations.
Gaming operations revenue increased primarily due to an increase in our EGM segment. EGM RPD increased 8.5% compared to the prior year from $22.40 per day to $24.31 per day. The increase in gaming operations revenue is also attributable to an increase in our domestic EGM installed base year over year, offset by a decrease in our international EGM installed base due primarily to removal of machines in our installed based that had been inactive since the COVID-19 pandemic closures as well as due to some casino closures and the imposition of new gaming taxes in one Mexican state that compelled casino operators to remove units. The international installed base also decreased due to our strategic decision to wind down our modest Philippines operation given the ongoing COVID-related challenges facing the market. The increase in gaming operations revenue is also attributable to a $0.9 million increase in Table Products revenue related to an increase in our installed base as well as with our acquisition of Lucky Lucky.
Equipment Sales.
The increase in equipment sales was primarily due to an increase of 351 EGMs sold year over year. We sold 1,014 EGM units during the three months ended September 30, 2022, compared to 663 EGM units in the prior year period.
Operating Expenses
Cost of gaming operations. The increase in the cost of gaming operations was primarily the result of increased direct expenses and related costs compared to the prior year period due to increased activity, headcount, and supply chain logistics costs. As a percentage of gaming operations revenue, costs of gaming operations was 18.3% for the three months ended September 30, 2022 compared to 18.1% for the prior year period.
Cost of Equipment Sales. The increase in cost of equipment sales is attributable to the increase in the number of units sold compared to the prior year period. As a percentage of equipment sales revenue, costs of equipment sales was 54.7% for the three months ended September 30, 2022 compared to 48.4% for the prior year period, which fluctuated year over year primarily due to increased product costs, which are the result of increased freight and increased cost of component parts used in the assembly of our products.
Selling, general and administrative. The increase in selling, general and administrative expenses is primarily due to an increase in salaries and benefits of $1.3 million as well as additional support and selling costs incurred in the current period, partially offset by a $2.0 million decrease in non-cash stock-based compensation.
Research and development. The increase in research and development expense is primarily due to a $0.3 million increase in non-cash stock-based compensation and a $0.3 million increase in professional fees.
Write-downs and other charges. During the three months ended September 30, 2022, the Company recognized $1.4 million in write-downs and other charges a fair value adjustment to contingent consideration of $1.5 million, most of which related to prior period immaterial accounting misstatements. The adjustment was recorded in other long-term liabilities and had no affect on the condensed consolidated statement of cash flows.The Company used level 3 fair value measurements based on projected cash flows. The contingent consideration was originally recorded in a business acquisition of table game product in 2017 and is payable periodically based on a percentage of product revenue earned on the purchased table games. During the three months ended September 30, 2021, the Company recognized $0.2 million in write-downs and other charges primarily related to the disposal of long-lived assets.
Depreciation and amortization. The increase was predominantly due to a $0.7 million increase in depreciation from new placements of machines on lease, offset by a $0.2 million decrease in amortization expense.
Other Expense (Income), net
Interest expense. The decrease in interest expense is predominantly attributable to entering into the Amended Credit Agreement, which decreased the amount outstanding on the term loan borrowing facility, offset by an increase in our effective interest rate in the current quarter. See Item 1. "Financial Statements" Note 5. "Long-Term Debt" for a detailed discussion regarding long-term debt.
Other expense. The decrease is predominantly attributed to the prior year write-off of indemnification receivables of $0.8 million as the related liability for uncertain tax positions was also written-off due to the expiration of the statute of limitations. The remaining fluctuation is due to the effect of foreign currency fluctuation on trade payables and receivables denominated in foreign currencies.
Income Taxes. The Company's effective income tax rate for the three months ended September 30, 2022, was a benefit of 134.0%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended September 30, 2022, is primarily due to changes in our valuation allowance on deferred tax assets and the expiration of the applicable statute of limitations for certain uncertain tax positions. The Company's effective income tax rate for the three months ended September 30, 2021, was a benefit of 59.8%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended September 30, 2021 was primarily due to changes in our valuation allowance on deferred tax assets and the expiration of the applicable statute of limitations for certain uncertain tax positions.
Results of Operations
Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021
The following tables set forth certain selected condensed consolidated financial data for the nine months ended September 30, 2022 and 2021 (in thousands):
| Nine Months Ended September 30, |
$ |
% |
||||||||||||||
| 2022 |
2021 |
Change |
Change |
|||||||||||||
| Consolidated Statements of Operations: |
||||||||||||||||
| Revenues |
||||||||||||||||
| Gaming operations |
$ | 166,396 | $ | 152,686 | $ | 13,710 | 9.0 | % | ||||||||
| Equipment sales |
61,304 | 36,787 | 24,517 | 66.6 | % | |||||||||||
| Total revenues |
227,700 | 189,473 | 38,227 | 20.2 | % | |||||||||||
| Operating expenses |
||||||||||||||||
| Cost of gaming operations |
31,512 | 27,994 | 3,518 | 12.6 | % | |||||||||||
| Cost of equipment sales |
32,030 | 16,021 | 16,009 | 99.9 | % | |||||||||||
| Selling, general and administrative |
50,881 | 44,821 | 6,060 | 13.5 | % | |||||||||||
| Research and development |
29,952 | 26,338 | 3,614 | 13.7 | % | |||||||||||
| Write-downs and other charges |
1,824 | 985 | 839 | 85.2 | % | |||||||||||
| Depreciation and amortization |
56,979 | 55,460 | 1,519 | 2.7 | % | |||||||||||
| Total operating expenses |
203,178 | 171,619 | 31,559 | 18.4 | % | |||||||||||
| Income from operations |
24,522 | 17,854 | 6,668 | 37.3 | % | |||||||||||
| Other expense (income) |
||||||||||||||||
| Interest expense |
27,851 | 33,198 | (5,347 | ) | (16.1 | )% | ||||||||||
| Interest income |
(728 | ) | (827 | ) | 99 | (12.0 | )% | |||||||||
| Loss on extinguishment and modification of debt |
8,549 | - | 8,549 | N/A | ||||||||||||
| Other expense (income) |
714 | 1,092 | (378 | ) | (34.6 | )% | ||||||||||
| Loss before income taxes |
(11,864 | ) | (15,609 | ) | 3,745 | (24.0 | )% | |||||||||
| Income tax benefit |
1,288 | 2,127 | (839 | ) | (39.4 | )% | ||||||||||
| Net loss |
$ | (10,576 | ) | $ | (13,482 | ) | $ | 2,906 | (21.6 | )% | ||||||
Revenues
Gaming Operations.
Gaming operations revenue increased primarily due to an increase in our EGM segment. EGM RPD increased 11.6% compared to the prior year from $21.57 per day to $24.07 per day. The increase in gaming operations revenue is also attributable to an increase in our domestic EGM installed base year over year, offset by a decrease in our international EGM installed base due primarily to removal of machines in our installed based that had been inactive since the COVID-19 pandemic closures as well as due to some casino closures and the imposition of new gaming taxes in one Mexican state that compelled casino operators to remove units. The international installed base also decreased due to our strategic decision to wind down our modest Philippines operation given the ongoing COVID-related challenges facing the market. The increase in gaming operations revenue is also attributable to a $2.3 million increase in Table Products revenue related to an increase in our installed base as well as with our acquisition of Lucky Lucky.
Equipment Sales.
The increase in equipment sales was primarily due to an increase of 1,338 EGMs sold year over year. We sold 2,903 EGM units during the nine months ended September 30, 2022, compared to 1,565 EGM units in the prior year period. EGM equipment sales revenue also includes revenue from the sale of 429 previously leased, lower yielding units to a distributor in the prior year period, which are not included in our sold unit count or domestic average sales price.
Operating Expenses
Cost of gaming operations. The increase in the cost of gaming operations was primarily the result of increased field service and support of $1.8 million as well as direct expenses and related costs compared to the prior year period due to increased activity and supply chain logistics costs. As a percentage of gaming operations revenue, costs of gaming operations was 18.9% for the nine months ended September 30, 2022 compared to 18.3% for the prior year period.
Cost of Equipment Sales. The increase in cost of equipment sales is attributable to the increase in the number of units sold compared to the prior year period, partially offset by the sale of 429 previously leased units to distributors in the prior year period. As a percentage of equipment sales revenue, costs of equipment sales was 52.2% for the nine months ended September 30, 2022 compared to 43.6% for the prior year period, which fluctuated year over year primarily due to the difference in the cost of previously leased units sold in the prior year period, which had a lower net book value than our average new EGM units as well as increased product costs, which are the result of increased freight and increased cost of component parts used in the assembly of our products.
Selling, general and administrative. The increase in selling, general and administrative expenses is primarily due to a $1.4 million increase in salaries and benefits, a $1.3 million increase in non-cash stock-based compensation, and a $0.8 million increase in marketing costs. The remaining increase is primarily attributable to operational and support cost to maintain our current operations and our increased number of personnel.
Research and development. The increase in research and development expense is primarily due to a $1.6 million increase in salaries and benefits, a $1.0 million increase in professional fees, and a $0.4 million increase in non-cash stock-based compensation. The remaining increase is primarily attributable to operational and support costs to support our growing research and development resources.
Write-downs and other charges. During the nine months ended September 30, 2022, the Company recognized $1.8 million in write-downs and other charges primarily related to a fair value adjustment to contingent consideration of $1.5 million, most of which related to prior period immaterial accounting misstatements. The adjustment was recorded in other long-term liabilities and had no affect on the condensed consolidated statement of cash flows. The Company used level 3 fair value measurements based on projected cash flows. The contingent consideration was originally recorded in a business acquisition of table game product in 2017 and is payable periodically based on a percentage of product revenue earned on the purchased table games. During the nine months ended September 30, 2021, the Company recognized $1.0 million in write-downs and other charges primarily related to the full impairment of game titles (the Company used level 3 fair value inputs based on projected cash flows).
Depreciation and amortization. The increase was predominantly due to an increase in depreciation expense of $1.0 million driven by purchases of property and equipment and a $0.5 million increase in amortization expense related to intangible assets purchased in the Lucky Lucky acquisition as well as additional software assets placed into service.
Other Expense (Income), net
Interest expense. The decrease in interest expense is predominantly attributable to entering into the Amended Credit Agreement, which decreased the amount outstanding on the term loan borrowing facility, offset by an increase in our effective interest rate in the current quarter. See Item 1. "Financial Statements" Note 5. "Long-Term Debt" for a detailed discussion regarding long-term debt.
Loss on extinguishment and modification of debt. On February 15, 2022, in connection with entering into the Amended Credit Agreement, $8.5 million in loan costs including third-party costs and make-whole premium were expensed and included in the loss on extinguishment and modification of debt.
Other expense. The decrease is predominantly attributed to the prior year write-off of indemnification receivables of $0.8 million as the related liability for uncertain tax positions was also written-off due to the expiration of the statute of limitations. The remaining fluctuation is due to the effect of foreign currency fluctuation on trade payables and receivables denominated in foreign currencies.
Income Taxes. The Company's effective income tax rate for the nine months ended September 30, 2022, was a benefit of 10.9%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the nine months ended September 30, 2022, is primarily due to changes in our valuation allowance on deferred tax assets and the expiration of the applicable statute of limitations for certain uncertain tax positions. The Company's effective income tax rate for the nine months ended September 30, 2021, was a benefit of 13.6%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the nine months ended September 30, 2021 was primarily due to changes in our valuation allowance on deferred tax assets and the expiration of the applicable statute of limitations for certain uncertain tax positions.
Segment Operating Results
We report our business segment results by segment in accordance with the “management approach.” The management approach designates the internal reporting used by our chief operating decision maker, who is our Chief Executive Officer, for making decisions and assessing performance of our reportable segments.
See Item 1. “Financial Statements” Note 1. "Description of the Business and Summary of Significant Accounting Policies" for a detailed discussion of our three segments. Each segment’s activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of its product lines. We evaluate the performance of our operating segments based on revenues and segment Adjusted EBITDA.
Segment revenues include leasing, licensing or selling of products within each reportable segment. We measure segment performance in terms of revenue, segment-specific Adjusted EBITDA and unit placements. We believe that unit placements are an important gauge of segment performance for EGM’s and Table Products because it measures historical market placements of leased and sold units and provides insight into potential markets for next-generation products and service. We do not present a sold unit cumulative installed base as previously sold units may no longer be in use by our customers or may have been replaced by other models or products.
Adjusted Expenses
We have provided (i) adjusted cost of gaming operations, (ii) adjusted selling, general and administrative costs and (iii) adjusted research and development cost (collectively, the “Adjusted Expenses”) in this Form 10-Q because we believe such measure provides investors with additional information to measure our performance.
We believe that the presentation of each of the Adjusted Expenses is appropriate to provide additional information to investors about certain non-cash items that vary greatly and are difficult to predict. These Adjusted Expenses take into account non-cash stock compensation expense, acquisitions and integration related costs including restructuring and severance, initial and secondary public offering costs, legal and litigation expenses including settlement payments, new jurisdictions and regulatory licensing costs, non-cash charges on capitalized installation and delivery, non-cash charges and loss on disposition of assets and other adjustments that include costs and inventory and receivable valuation charges associated with the COVID-19 pandemic. Further, we believe each of the Adjusted Expenses provides a meaningful measure of our expenses because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against that of other peer companies using similar measures. It also provides management and investors with additional information to estimate our value.
Each of the Adjusted Expenses is not a presentation made in accordance with GAAP. Our use of the term Adjusted Expenses may vary from others in our industry. Each of the Adjusted Expenses should not be considered as an alternative to our operating expenses under GAAP. Each of the Adjusted Expenses has important limitations as an analytical tool, and you should not consider it in isolation or as a substitute for the analysis of our results as reported under GAAP.
Our definition of Adjusted Expenses allows us to add back certain non-cash charges that are deducted in calculating net income (loss) and to deduct certain gains that are included in calculating net income (loss). However, these expenses and gains vary greatly, and are difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, in the case of charges or expenses, these items can represent the reduction of cash that could be used for other corporate purposes.
Due to these limitations, we rely primarily on our GAAP cost of gaming operations, cost of equipment sales, selling, general and administrative costs and research and development costs and use each of the Adjusted Expenses only supplementally.
The tables below present each of the Adjusted Expenses and include a reconciliation to the nearest GAAP measure.
Electronic Gaming Machines
Three Months Ended September 30, 2022 compared to the Three Months Ended September 30, 2021
| Three Months Ended September 30, | $ |
% |
||||||||||||||
| (amounts in thousands, except unit data) |
2022 |
2021 |
Change |
Change |
||||||||||||
| EGM segment revenues: |
||||||||||||||||
| Gaming operations |
$ | 50,233 | $ | 47,705 | $ | 2,528 | 5.3 | % | ||||||||
| Equipment sales |
21,387 | 13,895 | 7,492 | 53.9 | % | |||||||||||
| Total EGM revenues |
71,620 | 61,600 | 10,020 | 16.3 | % | |||||||||||
| EGM segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
9,745 | 8,949 | 796 | 8.9 | % | |||||||||||
| Less: Adjustments(2) |
633 | 436 | 197 | 45.2 | % | |||||||||||
| Adjusted cost of gaming operations |
9,112 | 8,513 | 599 | 7.0 | % | |||||||||||
| Cost of equipment sales |
11,792 | 6,773 | 5,019 | 74.1 | % | |||||||||||
| Selling, general and administrative |
15,366 | 14,500 | 866 | 6.0 | % | |||||||||||
| Less: Adjustments(3) |
1,815 | 3,487 | (1,672 | ) | (47.9 | )% | ||||||||||
| Adjusted cost of selling, general and administrative |
13,551 | 11,013 | 2,538 | 23.0 | % | |||||||||||
| Research and development |
8,217 | 7,958 | 259 | 3.3 | % | |||||||||||
| Less: Adjustments(4) |
791 | 531 | 260 | 49.0 | % | |||||||||||
| Adjusted cost of research and development |
7,426 | 7,427 | (1 | ) | (0.0 | )% | ||||||||||
| Accretion of placement fees |
1,592 | 1,600 | (8 | ) | (0.5 | )% | ||||||||||
| EGM Adjusted EBITDA |
$ | 31,331 | $ | 29,474 | $ | 1,857 | 6.3 | % | ||||||||
| EGM Business Segment Key Performance Indicators ("KPI's") |
||||||||||||||||
| EGM gaming operations: |
||||||||||||||||
| EGM installed base: |
||||||||||||||||
| Class II |
11,324 | 11,272 | 52 | 0.5 | % | |||||||||||
| Class III |
4,934 | 4,495 | 439 | 9.8 | % | |||||||||||
| Domestic installed base, end of period |
16,258 | 15,767 | 491 | 3.1 | % | |||||||||||
| International installed base, end of period |
6,274 | 7,896 | (1,622 | ) | (20.5 | )% | ||||||||||
| Total installed base, end of period |
22,532 | 23,663 | (1,131 | ) | (4.8 | )% | ||||||||||
| EGM revenue per day ("RPD"): |
||||||||||||||||
| Domestic revenue per day |
$ | 31.13 | $ | 31.08 | $ | 0.05 | 0.2 | % | ||||||||
| International revenue per day |
$ | 7.34 | $ | 5.11 | $ | 2.23 | 43.6 | % | ||||||||
| Total revenue per day |
$ | 24.31 | $ | 22.40 | $ | 1.91 | 8.5 | % | ||||||||
| EGM equipment sales |
||||||||||||||||
| EGM units sold |
1,014 | 663 | 351 | 52.9 | % | |||||||||||
| Average sales price ("ASP") |
$ | 19,146 | $ | 18,970 | $ | 176 | 0.9 | % | ||||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to cost of gaming operation include non-cash stock compensation expense, non-cash charges on capitalized installation and delivery and other adjustments. |
| (3) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense, acquisitions and integration related costs including restructuring and severance, legal and litigation expenses including settlement payments and other adjustments. |
| (4) |
Adjustments to research and development costs include non-cash stock compensation expense. |
Gaming Operations Revenue
Gaming operations revenue increased primarily due to an increase in EGM RPD of 8.5% compared to the prior year from $22.40 per day to $24.31 per day. The increase in gaming operations revenue is also attributable to an increase in our domestic EGM installed base year over year, offset by a decrease in our international EGM installed base due primarily to removal of machines in our installed based that had been inactive since the COVID-19 pandemic closures as well as due to some casino closures and the imposition of new gaming taxes in one Mexican state that compelled casino operators to remove units. The international installed base also decreased due to our strategic decision to wind down our modest Philippines operation given the ongoing COVID-related challenges facing the market.
Equipment Sales
The increase in equipment sales was primarily due to an increase of 351 EGMs sold year over year. We sold 1,014 EGM units during the three months ended September 30, 2022, compared to 663 EGM units in the prior year period.
EGM Adjusted EBITDA
EGM Adjusted EBITDA includes revenues and operating expenses from the EGM segment adjusted for depreciation, amortization, write-downs and other charges, accretion of placement fees, as well as other costs. See Item 1. “Financial Statements” Note 13. "Operating Segments" for further explanation of adjustments. The increase in EGM Adjusted EBITDA is attributable to the increase in revenue described above, offset by the cost of equipment sales and an increase in operating expenses. EGM Adjusted EBITDA margin was 43.7% and 47.8% for the three months ended September 30, 2022 and 2021, respectively.
Electronic Gaming Machines
Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021
| Nine Months Ended September 30, |
$ |
% |
||||||||||||||
| (amounts in thousands except unit data) |
2022 |
2021 |
Change |
Change |
||||||||||||
| EGM segment revenues: |
||||||||||||||||
| Gaming operations |
$ | 148,067 | $ | 136,741 | $ | 11,326 | 8.3 | % | ||||||||
| Equipment sales |
60,926 | 36,570 | 24,356 | 66.6 | % | |||||||||||
| Total EGM revenues |
208,993 | 173,311 | 35,682 | 20.6 | % | |||||||||||
| EGM segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
29,179 | 25,880 | 3,299 | 12.7 | % | |||||||||||
| Less: Adjustments(2) |
1,768 | 1,364 | 404 | 29.6 | % | |||||||||||
| Adjusted cost of gaming operations |
27,411 | 24,516 | 2,895 | 11.8 | % | |||||||||||
| Cost of equipment sales |
31,923 | 15,967 | 15,956 | 99.9 | % | |||||||||||
| Selling, general and administrative |
46,449 | 40,792 | 5,657 | 13.9 | % | |||||||||||
| Less: Adjustments(3) |
8,422 | 7,390 | 1,032 | 14.0 | % | |||||||||||
| Adjusted cost of selling, general and administrative |
38,027 | 33,402 | 4,625 | 13.8 | % | |||||||||||
| Research and development |
25,760 | 22,749 | 3,011 | 13.2 | % | |||||||||||
| Less: Adjustments(4) |
2,428 | 1,737 | 691 | 39.8 | % | |||||||||||
| Adjusted cost of research and development |
23,332 | 21,012 | 2,320 | 11.0 | % | |||||||||||
| Accretion of placement fees |
4,790 | 4,916 | (126 | ) | (2.6 | )% | ||||||||||
| EGM Adjusted EBITDA |
$ | 93,090 | $ | 83,330 | $ | 9,760 | 11.7 | % | ||||||||
| EGM Business Segment Key Performance Indicators ("KPI's") |
||||||||||||||||
| EGM gaming operations: |
||||||||||||||||
| EGM installed base: |
||||||||||||||||
| Class II |
11,324 | 11,272 | 52 | 0.5 | % | |||||||||||
| Class III |
4,934 | 4,495 | 439 | 9.8 | % | |||||||||||
| Domestic installed base, end of period |
16,258 | 15,767 | 491 | 3.1 | % | |||||||||||
| International installed base, end of period |
6,274 | 7,896 | (1,622 | ) | (20.5 | )% | ||||||||||
| Total installed base, end of period |
22,532 | 23,663 | (1,131 | ) | (4.8 | )% | ||||||||||
| EGM revenue per day ("RPD"): |
||||||||||||||||
| Domestic revenue per day |
$ | 31.49 | $ | 30.41 | $ | 1.08 | 3.6 | % | ||||||||
| International revenue per day |
$ | 6.71 | $ | 4.19 | $ | 2.52 | 60.1 | % | ||||||||
| Total revenue per day |
$ | 24.07 | $ | 21.57 | $ | 2.50 | 11.6 | % | ||||||||
| EGM equipment sales |
||||||||||||||||
| EGM units sold |
2,903 | 1,565 | 1,338 | 85.5 | % | |||||||||||
| Average sales price ("ASP") |
$ | 19,368 | $ | 17,892 | $ | 1,476 | 8.2 | % | ||||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to cost of gaming operation include non-cash stock compensation expense, non-cash charges on capitalized installation and delivery and other adjustments. |
| (3) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense, acquisitions and integration related costs including restructuring and severance, legal and litigation expenses including settlement payments and other adjustments. |
| (4) |
Adjustments to research and development costs include non-cash stock compensation expense. |
Gaming Operations Revenue
Gaming operations revenue increased primarily due to an increase in EGM RPD of 11.6% compared to the prior year from $21.57 per day to $24.07 per day. The increase in gaming operations revenue is also attributable to an increase in our domestic EGM installed base year over year, offset by a decrease in our international EGM installed base due primarily to removal of machines in our installed based that had been inactive since the COVID-19 pandemic closures as well as due to some casino closures and the imposition of new gaming taxes in one Mexican state that compelled casino operators to remove units. The international installed base also decreased due to our strategic decision to wind down our modest Philippines operation given the ongoing COVID-related challenges facing the market.
Equipment Sales
The increase in equipment sales was primarily due to an increase of 1,338 EGMs sold year over year. We sold 2,903 EGM units during the nine months ended September 30, 2022, compared to 1,565 EGM units in the prior year period. EGM equipment sales revenue also includes revenue from the sale of 429 previously leased, lower yielding units to a distributor in the prior year period, which are not included in our sold unit count or domestic average sales price.
EGM Adjusted EBITDA
EGM Adjusted EBITDA includes revenues and operating expenses from the EGM segment adjusted for depreciation, amortization, write-downs and other charges, accretion of placement fees, as well as other costs. See Item 1. “Financial Statements” Note 13. "Operating Segments" for further explanation of adjustments. The increase in EGM Adjusted EBITDA is attributable to the increase in revenue described above, offset by cost of equipment sales and an increase in operating expenses. EGM Adjusted EBITDA margin was 44.5% and 48.1% for the nine months ended September 30, 2022 and 2021, respectively.
Table Products
Three Months Ended September 30, 2022 compared to Three Months Ended September 30, 2021
| Three Months Ended September 30, | $ |
% |
||||||||||||||
| (amounts in thousands, except unit data) |
2022 |
2021 |
Change |
Change |
||||||||||||
| Table Products segment revenues: |
||||||||||||||||
| Gaming operations |
$ | 3,756 | $ | 2,953 | $ | 803 | 27.2 | % | ||||||||
| Equipment sales |
280 | 151 | 129 | 85.4 | % | |||||||||||
| Total Table Products revenues |
4,036 | 3,104 | 932 | 30.0 | % | |||||||||||
| Table Products segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
211 | 159 | 52 | 32.7 | % | |||||||||||
| Less: Adjustments(2) |
63 | 69 | (6 | ) | (8.7 | )% | ||||||||||
| Adjusted cost of gaming operations |
148 | 90 | 58 | 64.4 | % | |||||||||||
| Cost of equipment sales |
65 | 32 | 33 | 103.1 | % | |||||||||||
| Selling, general and administrative |
865 | 762 | 103 | 13.5 | % | |||||||||||
| Less: Adjustments(3) |
104 | 78 | 26 | 33.3 | % | |||||||||||
| Adjusted cost of selling, general and administrative |
761 | 684 | 77 | 11.3 | % | |||||||||||
| Research and development |
528 | 691 | (163 | ) | (23.6 | )% | ||||||||||
| Less: Adjustments(4) |
27 | 21 | 6 | 28.6 | % | |||||||||||
| Adjusted cost of research and development |
501 | 670 | (169 | ) | (25.2 | )% | ||||||||||
| Table Products Adjusted EBITDA |
$ | 2,561 | $ | 1,628 | $ | 933 | 57.3 | % | ||||||||
| Table Products unit information: |
||||||||||||||||
| Table products installed base, end of period(5) |
4,969 | 3,783 | 1,186 | 31.4 | % | |||||||||||
| Average monthly lease price(5) |
$ | 243 | $ | 260 | $ | (17 | ) | (6.5 | )% | |||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to cost of gaming operation include non-cash charges on capitalized installation and delivery. |
| (3) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense, and other adjustments. |
| (4) |
Adjustments to research and development costs include non-cash stock compensation expense. |
| (5) | As a result of a comprehensive review of our unit counts, the Table Products installed base and average monthly lease price have been revised in the prior period to reflect a more accurate count of the products on lease for each period presented. The audit resulted in no changes to revenues or Adjusted EBITDA. |
Gaming Operations Revenue
The increase in Table Products gaming operations revenue is attributable to an increase in the Table Products installed base. The continuing success of our progressives such as Bonus Spin Xtreme and Royal 9, as well as the Lucky Lucky acquisition (for a detailed description of acquisitions, See Item 1. "Financial Statements" Note 14. "Acquisitions"), are the primary drivers of the increase in the Table Products installed base compared to the prior year period.
Equipment Sales
The increase in equipment sales is primarily due to an increase in the sale of shufflers in the current period, in which we sold our first Pax S single-deck shufflers.
Tables Products Adjusted EBITDA
Table Products Adjusted EBITDA includes the revenues and operating expenses from the Table Products segment adjusted for depreciation, amortization, write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 13. "Operating Segments" for further explanation of adjustments. The increase in Table Products Adjusted EBITDA is attributable to the increase in revenue described above, partially offset by an increase in operating expenses.
Table Products
Nine Months Ended September 30, 2022 compared to Nine Months Ended September 30, 2021
| Nine Months Ended September 30, |
$ |
% |
||||||||||||||
| (amounts in thousands, except unit data) |
2022 |
2021 |
Change |
Change |
||||||||||||
| Table Products segment revenues: |
||||||||||||||||
| Gaming operations |
$ | 10,652 | $ | 8,473 | $ | 2,179 | 25.7 | % | ||||||||
| Equipment sales |
378 | 217 | 161 | 74.2 | % | |||||||||||
| Total Table Products revenues |
11,030 | 8,690 | 2,340 | 26.9 | % | |||||||||||
| Table Products segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
963 | 567 | 396 | 69.8 | % | |||||||||||
| Less: Adjustments(2) |
213 | 240 | (27 | ) | (11.3 | )% | ||||||||||
| Adjusted cost of gaming operations |
750 | 327 | 423 | 129.4 | % | |||||||||||
| Cost of equipment sales |
107 | 54 | 53 | 98.1 | % | |||||||||||
| Selling, general and administrative |
2,508 | 2,140 | 368 | 17.2 | % | |||||||||||
| Less: Adjustments(3) |
214 | 193 | 21 | 10.9 | % | |||||||||||
| Adjusted cost of selling, general and administrative |
2,294 | 1,947 | 347 | 17.8 | % | |||||||||||
| Research and development |
1,528 | 1,908 | (380 | ) | (19.9 | )% | ||||||||||
| Less: Adjustments(4) |
60 | 33 | 27 | 81.8 | % | |||||||||||
| Adjusted cost of research and development |
1,468 | 1,875 | (407 | ) | (21.7 | )% | ||||||||||
| Table Products Adjusted EBITDA |
$ | 6,411 | $ | 4,487 | $ | 1,924 | 42.9 | % | ||||||||
| Table Products unit information: |
||||||||||||||||
| Table products installed base, end of period(5) |
4,969 | 3,783 | 1,186 | 31.4 | % | |||||||||||
| Average monthly lease price(5) |
$ | 243 | $ | 255 | $ | (12 | ) | (4.7 | )% | |||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to cost of gaming operation include non-cash charges on capitalized installation and delivery. |
| (3) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense, and other adjustments. |
| (4) |
Adjustments to research and development costs include non-cash stock compensation expense. |
| (5) | As a result of a comprehensive review of our unit counts, the Table Products installed base and average monthly lease price have been revised in the prior period to reflect a more accurate count of the products on lease for each period presented. The audit resulted in no changes to revenues or Adjusted EBITDA. |
Gaming Operations Revenue
The increase in Table Products gaming operations revenue is attributable to an increase in the Table Products installed base. The continuing success of our progressives such as Bonus Spin Xtreme and Royal 9, as well as the Lucky Lucky acquisition (for a detailed description of acquisitions, See Item 1. "Financial Statements" Note 14. "Acquisitions"), are the primary drivers of the increase in the Table Products installed base compared to the prior year period.
Equipment Sales
The increase in equipment sales is primarily due to an increase in the sale of shufflers in the current period, in which we sold our first Pax S single-deck shufflers.
Tables Products Adjusted EBITDA
Table Products Adjusted EBITDA includes the revenues and operating expenses from the Table Products segment adjusted for depreciation, amortization, write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 13. "Operating Segments" for further explanation of adjustments. The increase in Table Products Adjusted EBITDA is attributable to the increase in revenue described above, partially offset by an increase in operating expenses.
Interactive
Three Months Ended September 30, 2022 compared to Three Months Ended September 30, 2021
| Three Months Ended September 30, | $ |
% |
||||||||||||||
| (amounts in thousands) |
2022 | 2021 | Change | Change | ||||||||||||
| Interactive segment revenue: |
||||||||||||||||
| Gaming Operations |
$ | 2,603 | $ | 2,573 | $ | 30 | 1.2 | % | ||||||||
| Total Interactive revenue |
2,603 | 2,573 | 30 | 1.2 | % | |||||||||||
| Interactive segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
419 | 533 | (114 | ) | (21.4 | )% | ||||||||||
| Selling, general and administrative |
724 | 651 | 73 | 11.2 | % | |||||||||||
| Less: Adjustments(2) |
50 | 27 | 23 | 85.2 | % | |||||||||||
| Adjusted cost of selling, general and administrative |
674 | 624 | 50 | 8.0 | % | |||||||||||
| Research and development |
957 | 620 | 337 | 54.4 | % | |||||||||||
| Less: Adjustments(3) |
22 | 10 | 12 | 120.0 | % | |||||||||||
| Adjusted cost of research and development |
935 | 610 | 325 | 53.3 | % | |||||||||||
| Interactive Adjusted EBITDA |
$ | 575 | $ | 806 | $ | (231 | ) | (28.7 | )% | |||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense and legal and litigation expenses including settlement payments. |
| (3) |
Adjustments to research and development costs include non-cash stock compensation expense. |
Gaming Operations Revenue
The increase in gaming operations revenue is primarily attributable to an increase in RMG revenues from Canadian and the US-based operators, offset by decreased revenue from international customers and our social casino revenues due to our decision to strategically refocus our resources on growth opportunities within the regulated North American RMG market.
Interactive Adjusted EBITDA
Interactive Adjusted EBITDA includes the revenues and operating expenses from the Interactive segment adjusted for depreciation, amortization, write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 13. "Operating Segments" for further explanation of adjustments. The decrease in Interactive Adjusted EBITDA is primarily attributable to increased operating expenses and offset by an increase in revenues as described above.
Interactive
Nine Months Ended September 30, 2022 compared to Nine Months Ended September 30, 2021
| Nine Months Ended September 30, |
$ |
% |
||||||||||||||
| (amounts in thousands) |
2022 |
2021 |
Change |
Change |
||||||||||||
| Interactive segment revenue: |
||||||||||||||||
| Gaming Operations |
$ | 7,677 | $ | 7,472 | $ | 205 | 2.7 | % | ||||||||
| Total Interactive revenue |
7,677 | 7,472 | 205 | 2.7 | % | |||||||||||
| Interactive segment expenses and adjusted expenses: |
||||||||||||||||
| Cost of gaming operations(1) |
1,370 | 1,547 | (177 | ) | (11.4 | )% | ||||||||||
| Selling, general and administrative |
1,924 | 1,889 | 35 | 1.9 | % | |||||||||||
| Less: Adjustments(2) |
103 | 132 | (29 | ) | (22.0 | )% | ||||||||||
| Adjusted cost of selling, general and administrative |
1,821 | 1,757 | 64 | 3.6 | % | |||||||||||
| Research and development |
2,664 | 1,681 | 983 | 58.5 | % | |||||||||||
| Less: Adjustments(3) |
40 | 29 | 11 | 37.9 | % | |||||||||||
| Adjusted cost of research and development |
2,624 | 1,652 | 972 | 58.8 | % | |||||||||||
| Interactive Adjusted EBITDA |
$ | 1,862 | $ | 2,516 | $ | (654 | ) | (26.0 | )% | |||||||
| (1) |
Exclusive of depreciation and amortization. |
| (2) |
Adjustments to selling, general and administrative expense include non-cash stock compensation expense, legal and litigation expenses including settlement payments, and other adjustments. |
| (3) |
Adjustments to research and development costs include non-cash stock compensation expense. |
Gaming Operations Revenue
The increase in gaming operations revenue is primarily attributable to an increase in RMG revenues from Canadian and the US-based operators, offset by decreased revenue from international customers and our social casino revenues due to our decision to strategically refocus our resources on growth opportunities within the regulated North American RMG market.
Interactive Adjusted EBITDA
Interactive Adjusted EBITDA includes the revenues and operating expenses from the Interactive segment adjusted for depreciation, amortization, write-downs and other charges, as well as other costs. See Item 1. “Financial Statements” Note 13. "Operating Segments" for further explanation of adjustments. The decrease in Interactive Adjusted EBITDA is primarily attributable to increased operating expenses and offset by an increase in revenues as described above.
TOTAL ADJUSTED EBITDA RECONCILIATION TO NET INCOME (LOSS)
We have provided total Adjusted EBITDA in this Form 10-Q because we believe such measure provides investors with additional information to measure our performance.
We believe that the presentation of total Adjusted EBITDA is appropriate to provide additional information to investors about certain material non-cash items that we do not expect to continue at the same level in the future, as well as other items we do not consider indicative of our ongoing operating performance. Further, we believe total Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against that of other peer companies using similar measures. It also provides management and investors with additional information to estimate our value.
Total Adjusted EBITDA is not a presentation made in accordance with GAAP. Our use of the term total Adjusted EBITDA may vary from others in our industry. Total Adjusted EBITDA should not be considered as an alternative to operating income or net income (loss). Total Adjusted EBITDA has important limitations as an analytical tool, and you should not consider it in isolation or as a substitute for the analysis of our results as reported under GAAP.
Our definition of Adjusted EBITDA allows us to add back certain non-cash charges that are deducted in calculating net income (loss) and to deduct certain gains that are included in calculating net income (loss). However, these expenses and gains vary greatly, and are difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, in the case of charges or expenses, these items can represent the reduction of cash that could be used for other corporate purposes.
Due to these limitations, we rely primarily on our GAAP results, such as net income (loss), income from operations, EGM Adjusted EBITDA, Table Products Adjusted EBITDA or Interactive Adjusted EBITDA and use Total Adjusted EBITDA only supplementally.
The following tables reconcile net income (loss) to total Adjusted EBITDA (amounts in thousands):
Three Months Ended September 30, 2022 compared to the Three Months Ended September 30, 2021
| Three Months Ended September 30, |
$ |
% |
||||||||||||||
| 2022 |
2021 |
Change |
Change |
|||||||||||||
| Net income (loss) |
$ | 476 | $ | (1,829 | ) | $ | 2,305 | (126.0 | )% | |||||||
| Income tax (benefit) expense |
(1,876 | ) | (2,723 | ) | 847 | (31.1 | )% | |||||||||
| Depreciation and amortization |
18,950 | 18,441 | 509 | 2.8 | % | |||||||||||
| Interest expense, net of interest income and other |
10,431 | 11,563 | (1,132 | ) | (9.8 | )% | ||||||||||
| Write-downs and other(1) |
1,389 | 197 | 1,192 | 605.1 | % | |||||||||||
| Other adjustments(2) |
585 | 235 | 350 | 148.9 | % | |||||||||||
| Other non-cash charges(3) |
2,171 | 2,030 | 141 | 6.9 | % | |||||||||||
| Non-cash stock-based compensation(4) |
2,341 | 3,994 | (1,653 | ) | (41.4 | )% | ||||||||||
| Total Adjusted EBITDA |
$ | 34,467 | $ | 31,908 | $ | 2,559 | 8.0 | % | ||||||||
| (1) |
Write-downs and other include items related to loss on disposal or impairment of long-lived assets and fair value adjustments to contingent consideration. |
| (2) |
Other adjustments are primarily composed of the following: |
| • |
Costs and inventory and receivable valuation charges associated with the COVID-19 pandemic, professional fees incurred for projects, costs incurred related to public offerings, contract cancellation fees and other transaction costs deemed to be non-operating in nature; |
| • |
Acquisition and integration-related costs related to the purchase of businesses and to integrate operations and obtain costs synergies; |
| • |
Restructuring and severance costs, which primarily relate to costs incurred through the restructuring of the Company’s operations from time to time and other employee severance costs recognized in the periods presented; and |
| • |
Legal and litigation related costs, which consist of payments to law firms and settlements for matters that are outside the normal course of business. |
| (3) |
Other non-cash charges are costs related to non-cash charges and losses on the disposition of assets, non-cash charges on capitalized installation and delivery, which primarily includes the costs to acquire contracts that are expensed over the estimated life of each contract and non-cash charges related to accretion of contract rights under development agreements. |
| (4) |
Non-cash stock-based compensation includes non-cash compensation expense related to grants of options, restricted stock, and other equity awards. |
The following tables reconcile net loss to total Adjusted EBITDA (amounts in thousands):
Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021
| Nine Months Ended September 30, |
$ |
% |
||||||||||||||
| 2022 |
2021 |
Change |
Change |
|||||||||||||
| Net loss |
$ | (10,576 | ) | $ | (13,482 | ) | $ | 2,906 | (21.6 | )% | ||||||
| Income tax (benefit) expense |
(1,288 | ) | (2,127 | ) | 839 | (39.4 | )% | |||||||||
| Depreciation and amortization |
56,979 | 55,460 | 1,519 | 2.7 | % | |||||||||||
| Interest expense, net of interest income and other |
27,837 | 33,463 | (5,626 | ) | (16.8 | )% | ||||||||||
| Loss on extinguishment and modification of debt(1) |
8,549 | - | 8,549 | N/A | ||||||||||||
| Write-downs and other(2) |
1,824 | 985 | 839 | 85.2 | % | |||||||||||
| Other adjustments(3) |
997 | 914 | 83 | 9.1 | % | |||||||||||
| Other non-cash charges(4) |
6,469 | 6,264 | 205 | 3.3 | % | |||||||||||
| Non-cash stock-based compensation(5) |
10,572 | 8,856 | 1,716 | 19.4 | % | |||||||||||
| Total Adjusted EBITDA |
$ | 101,363 | $ | 90,333 | $ | 11,030 | 12.2 | % | ||||||||
| (1) |
Loss on extinguishment and modification of debt primarily relates to the refinancing of long-term debt, in which deferred loan costs and discounts related to old senior secured credit facilities were written-off. |
| (2) |
Write-downs and other include items related to loss on disposal or impairment of long-lived assets and fair value adjustments to contingent consideration. |
| (3) |
Other adjustments are primarily composed of the following: |
| • |
Costs and inventory and receivable valuation charges associated with the COVID-19 pandemic, professional fees incurred for projects, costs incurred related to public offerings, contract cancellation fees and other transaction costs deemed to be non-operating in nature; |
| • |
Acquisition and integration-related costs related to the purchase of businesses and to integrate operations and obtain costs synergies; |
| • |
Restructuring and severance costs, which primarily relate to costs incurred through the restructuring of the Company’s operations from time to time and other employee severance costs recognized in the periods presented; and |
| • |
Legal and litigation related costs, which consist of payments to law firms and settlements for matters that are outside the normal course of business. |
| (4) |
Other non-cash charges are costs related to non-cash charges and losses on the disposition of assets, non-cash charges on capitalized installation and delivery, which primarily includes the costs to acquire contracts that are expensed over the estimated life of each contract and non-cash charges related to accretion of contract rights under development agreements. |
| (5) |
Non-cash stock-based compensation includes non-cash compensation expense related to grants of options, restricted stock, and other equity awards. |
LIQUIDITY AND CAPITAL RESOURCES
We expect that primary ongoing liquidity requirements for the next twelve months after the Condensed Consolidated Financial Statements are issued will be for operating capital expenditures, working capital, debt servicing, game development and other customer acquisition activities. We expect to finance these liquidity requirements through a combination of cash on hand, additional financing, and cash flows from operating activities.
Part of our overall strategy includes consideration of expansion opportunities into underserved markets and acquisition and other strategic opportunities that may arise periodically. We may require additional funds in order to execute on such strategic growth and may incur additional debt or issue additional equity to finance any such transactions. We cannot assure you that we will be able to obtain such debt or issue any such additional equity on acceptable terms or at all.
As of September 30, 2022, the Company had $33.4 million in cash and cash equivalents and $40.0 million available to draw under its revolving credit facility. As of September 30, 2022, management believes that the Company has sufficient liquidity to fund its operating requirements and meet its obligations as they become due for at least the next twelve months after the financial statements are issued.
Indebtedness
First Lien Credit Facilities
For a detailed description of indebtedness, see Item 1. "Financial Statements" Note 5. "Long-Term Debt."
As of September 30, 2022, there were no required financial covenants for our debt instruments.
The following table summarizes our historical cash flows (in thousands):
| Nine Months Ended September 30, |
||||||||||||
| 2022 |
2021 |
Change |
||||||||||
| Cash Flow Information: |
||||||||||||
| Net cash provided by operating activities |
$ | 52,574 | $ | 54,197 | $ | (1,623 | ) | |||||
| Net cash used in investing activities |
(54,521 | ) | (36,232 | ) | $ | (18,289 | ) | |||||
| Net cash used in financing activities |
(59,585 | ) | (11,807 | ) | $ | (47,778 | ) | |||||
| Effect of exchange rates on cash and cash equivalents |
2 | (3 | ) | $ | 5 | |||||||
| Net increase in cash, cash equivalents and restricted cash |
$ | (61,530 | ) | $ | 6,155 | $ | (67,685 | ) | ||||
Operating activities
The decrease in cash provided by operating activities is attributable to a $10.5 million increase in the use of cash related for assets and liabilities that relate to operations, which primarily is due to a $7.8 million increase in the use of cash to purchase inventory. The decrease in cash provided by operating activities is offset by an improvement in our net loss adjusted for non-cash expenses that increased by $8.9 million.
Investing activities
The increase in cash used in investing activities was primarily due to a $9.5 million increase in the purchase of property and equipment and to a $4.1 million increase in software development expenditures. Cash used in investing activities also increased due to an increase in cash used in business acquisitions of $4.8 million as described in Item 1. “Financial Statements” Note 14. “Acquisitions.”
Financing activities
The increase in cash used in financing activities of $47.8 million is primarily attributable to the reduction of debt principal and payment of related debt issuance costs in conjunction with our entering into The Amended Credit Agreement as described in Item 1. “Financial Statements” Note 5. "Long-Term Debt."
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES
A description of our critical accounting policies can be found in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021. There were no material changes to our policies during the nine months ended September 30, 2022.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See related disclosure at Item 1. “Financial Statements” Note 1. “Description of the Business and Summary of Significant Accounting Policies.”
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates. Our primary exposure to market risk is interest rate risk associated with our long-term debt, which accrues interest at variable rates. Certain of our debt instruments accrue interest at SOFR subject to an interest rate floor plus an applicable margin rate. In the normal course of business, we are exposed to fluctuations in interest rates as we seek debt and equity capital to sustain our operations. All of our interest rate sensitive financial instruments are held for purposes other than trading purposes. As of September 30, 2022, less than 1% of our debt were fixed-rate instruments. Assuming a constant outstanding balance for our variable-rate long term debt, a hypothetical 1% decrease in interest rates would decrease interest expense approximately $5.7 million over the next twelve months, while a hypothetical 1% increase in interest rates would increase interest expense approximately $5.7 million over the next twelve months.
Foreign currency risk. We are exposed to foreign currency exchange rate risk that is inherent to our foreign operations. We currently transact business in Mexico and to a lesser extent in the United Kingdom using the local currency. Our settlement of inter-company trade balances requires the exchange of currencies, which results in the recognition of foreign currency fluctuations. We expect that certain operations will continue to be denominated in foreign currencies. As such, we expect our cash flows and earnings to continue to be exposed to the risks that may arise from fluctuations in foreign currency exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Exchange Act) as of September 30, 2022. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure information is recorded, processed, summarized and reported within the periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Changes in Internal Controls
No change in our internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f) occurred as of the end of the fiscal quarter covered by this report, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The information required by Item 1. "Legal Proceedings" is incorporated herein by reference from Note 12. “Commitments and Contingencies” of our notes to the condensed consolidated financial statements in this Report.
"Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2021 (the "Annual Report") includes a discussion of our risk factors. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
(a). Exhibits
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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PlayAGS, Inc. |
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| Date: |
November 8, 2022 |
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By: |
/s/ KIMO AKIONA |
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Name: |
Kimo Akiona |
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Title: |
Chief Financial Officer, Chief Accounting Officer and Treasurer (Principal Financial and Accounting Officer) |
Exhibit 31.1
Certification of Principal Executive Officer
of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
I, David Lopez, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of PlayAGS, INC.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 8, 2022
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/s/ DAVID LOPEZ |
|
David Lopez |
Exhibit 31.2
Certification of Principal Financial Officer
of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
I, Kimo Akiona, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of PlayAGS, INC.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 8, 2022
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/s/ KIMO AKIONA |
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Kimo Akiona |
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Chief Financial Officer, Chief Accounting Officer and Treasurer |
Exhibit 32
Certification of Principal Executive Officer and Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350
In connection with the Quarterly Report on Form 10-Q of PlayAGS, INC. (the "Company") for the quarter ended September 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), David Lopez, as President and Chief Executive Officer of the Company, and Kimo Akiona, as Chief Financial Officer, Chief Accounting Officer and Treasurer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 8, 2022
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/s/ DAVID LOPEZ |
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David Lopez President and Chief Executive Officer (Principal Executive Officer) |
Date: November 8, 2022
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/s/ KIMO AKIONA |
|
Kimo Akiona |
|
Chief Financial Officer, Chief Accounting Officer and Treasurer |
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to PlayAGS, Inc. and will be retained by PlayAGS, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Accounts receivable, allowance | $ 2,099 | $ 1,993 |
| Preferred stock, par value (in dollars per share) | $ 0.01 | $ 0.01 |
| Preferred stock, shares authorized (in shares) | 50,000,000 | 50,000,000 |
| Preferred stock, shares issued (in shares) | 0 | 0 |
| Preferred stock, shares outstanding (in shares) | 0 | 0 |
| Common stock, par value (in dollars per share) | $ 0.01 | $ 0.01 |
| Common stock, shares authorized (in shares) | 450,000,000 | 450,000,000 |
| Common stock, shares issued (in shares) | 37,704,806 | 36,943,770 |
| Common stock, shares outstanding (in shares) | 37,704,806 | 36,943,770 |
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) - USD ($) shares in Thousands, $ in Thousands |
3 Months Ended | 9 Months Ended | ||||
|---|---|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|||
| Revenues | ||||||
| Total revenues | $ 78,259 | $ 67,277 | $ 227,700 | $ 189,473 | ||
| Operating expenses | ||||||
| Selling, general and administrative | 16,955 | 15,913 | 50,881 | 44,821 | ||
| Research and development | 9,702 | 9,269 | 29,952 | 26,338 | ||
| Write-downs and other charges | 1,389 | 197 | 1,824 | 985 | ||
| Depreciation and amortization | 18,950 | 18,441 | 56,979 | 55,460 | ||
| Total operating expenses | 69,228 | 60,266 | 203,178 | 171,619 | ||
| Income from operations | 9,031 | 7,011 | 24,522 | 17,854 | ||
| Other expense (income) | ||||||
| Interest expense | 10,291 | 10,700 | 27,851 | 33,198 | ||
| Interest income | (305) | (263) | (728) | (827) | ||
| Loss on extinguishment and modification of debt | 0 | 0 | 8,549 | 0 | ||
| Other expense (income) | 445 | 1,126 | 714 | 1,092 | ||
| Loss before income taxes | (1,400) | (4,552) | (11,864) | (15,609) | ||
| Income tax benefit (expense) | 1,876 | 2,723 | 1,288 | 2,127 | ||
| Net income (loss) | 476 | (1,829) | (10,576) | (13,482) | ||
| Foreign currency translation adjustment | 23 | (1,612) | 466 | (1,588) | ||
| Total comprehensive income (loss) | $ 499 | $ (3,441) | $ (10,110) | $ (15,070) | ||
| Basic and diluted income (loss) per common share: | ||||||
| Basic (in dollars per share) | $ 0.01 | $ (0.05) | $ (0.28) | $ (0.37) | ||
| Diluted (in dollars per share) | $ 0.01 | $ (0.05) | $ (0.28) | $ (0.37) | ||
| Weighted average common shares outstanding: | ||||||
| Basic (in shares) | 37,244 | 36,725 | 37,116 | 36,608 | ||
| Diluted (in shares) | 37,244 | 36,725 | 37,116 | 36,608 | ||
| Gaming Operations [Member] | ||||||
| Revenues | ||||||
| Total revenues | $ 56,592 | $ 53,231 | $ 166,396 | $ 152,686 | ||
| Operating expenses | ||||||
| Cost of goods and services | [1] | 10,375 | 9,641 | 31,512 | 27,994 | |
| Equipment Sales [Member] | ||||||
| Revenues | ||||||
| Total revenues | 21,667 | 14,046 | 61,304 | 36,787 | ||
| Operating expenses | ||||||
| Cost of goods and services | $ 11,857 | $ 6,805 | $ 32,030 | $ 16,021 | ||
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Note 1 - Description of the Business and Summary of Significant Accounting Policies |
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| Business Description and Accounting Policies [Text Block] |
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 Starwall, Orion Curve Premium and Big Red ("Colossal Diamonds") as well as cabinets available for sale or lease notably the Orion Portrait, Orion Slant, Orion Curve, Orion Upright, and ICON cabinets. In addition to providing complete EGM units, we offer conversion kits that allow existing game titles to be converted to other game titles offered within that operating platform.
Table Products
Our Table Products include both internally developed and acquired proprietary table products, side-bets, progressives, and table technology related to blackjack, poker, baccarat, craps and roulette. We have acquired a number of popular proprietary brands, including In Bet Gaming (“In Bet”), Buster Blackjack, Double Draw Poker and Criss Cross Poker that are based on traditional well-known public domain games such as blackjack and poker; however, these proprietary games provide intriguing betting options that offer more excitement and greater volatility to the player, ultimately enhancing our casino customers’ profitability. In addition, we offer a single deck card shuffler for poker tables, Dex S, as well as our new second shuffler, the Pax S single-deck shuffler.
Interactive
We 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.
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):
(1) The Interactive gaming operations revenue includes both Social and Real Money Gaming revenue streams that were previously disclosed separately.
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 to 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.
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:
Equipment sales are generated from the sale of gaming machines, table products and licensing rights to the integral game content software that is installed in the related equipment, parts, and other ancillary equipment. Also included within the deliverables are delivery, installation and training, all of which occur within a few days of arriving at the customer location. Equipment sales do not include maintenance beyond a standard warranty period. The recognition of revenue from the sale of gaming devices occurs as the customer obtains control of the product and all other revenue recognition criteria have been satisfied. Our contracts include a fixed transaction price. Amounts are due from customers within 30 to 90 days of the invoice date and to a lesser extent we offer extended payment terms of 12 to 24 months with payments due monthly during the extended payment period.
The Company enters into revenue arrangements that may consist of multiple performance obligations, which are typically multiple distinct products that may be shipped to the customer at different times. For example, sales arrangements may include the sale of gaming machines and table products to be delivered upon the consummation of the contract and additional game content conversion kits that will be delivered at a later date when requested by the customer to replace the game content on the customer’s existing gaming machines. Products are identified as separate performance obligations if they are distinct, which occurs if the customer can benefit from the product on its own and is separately identifiable from other promises in the contract.
Revenue is allocated to the separate performance obligations based on relative standalone selling prices determined at contract inception. Standalone selling prices are primarily determined by prices that we charge for the products when they are sold separately. When a product is not sold separately, we determine the standalone selling price with reference to our standard pricing policies and practices. We elected to exclude from the measurement of the transaction price, sales taxes and all other items of a similar nature, and also elected to account for shipping and handling activities as a fulfillment of our promise to transfer the goods. Accordingly, shipping and handling costs are included in cost of sales.
Revenue allocated to any undelivered performance obligations is recorded as a contract liability. The balance of our contract liabilities was not material as of September 30, 2022 and December 31, 2021.
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 September 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 September 30, 2022 and December 31, 2021, the value of raw material inventory was $30.4 million and $24.1 million, respectively. As of September 30, 2022 and December 31, 2021, the value of finished goods inventory was $5.2 million and $3.4 million, respectively. There was work in process material as of September 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:
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.
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.
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:
The carrying values of the Company’s cash and cash equivalents, restricted cash, receivables and accounts payable approximate fair value because of the short-term maturities of these instruments. The fair value of our long-term debt is based on the quoted market prices for similar issues (Level 2 inputs). The following table presents the estimated fair value of our long-term debt as of September 30, 2022 and December 31, 2021 (in thousands):
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.
On August 16, 2022, the Inflation Reduction Act ("IRA") was signed into law. The IRA, among other things, implements a 15% minimum tax on financial statement income of certain large corporations, a 1% excise tax on stock repurchases and extends, enhances, and creates several tax incentives to promote clean energy. While we continue to evaluate the IRA, at present, we do not believe it will have a material effect on our consolidated financial statements.
Contingencies
The Company assesses its exposures to loss contingencies including claims and legal proceedings and accrues a liability if a potential loss is considered probable and the amount can be estimated. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, if the actual loss from a contingency differs from management’s estimate, there could be a material impact on the results of operations or financial position. Operating expenses, including legal fees, associated with contingencies are expensed when incurred.
Foreign Currency Translation
The financial statements of the Company’s foreign subsidiaries are translated into U.S. dollars at the period end rate of exchange for asset and liability accounts and the weighted average rate of exchange for income statement accounts. The effects of these translations are recorded as a component of other accumulated comprehensive 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.
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| Property, Plant and Equipment Disclosure [Text Block] |
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
Gaming equipment and other property and equipment are depreciated over the respective useful lives of the assets ranging from to years. Depreciation expense was $10.2 million and $9.5 million for the three months ended September 30, 2022 and 2021, respectively. Depreciation expense was $29.5 million and $28.5 million for the nine months ended September 30, 2022 and 2021, respectively.
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Note 3 - Goodwill and Intangibles |
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| Goodwill and Intangible Assets Disclosure [Text Block] |
NOTE 3. GOODWILL AND INTANGIBLES
Changes in the carrying amount of goodwill are as follows (in thousands):
(1) Accumulated goodwill impairment charges for the Interactive segment as of September 30, 2022 were $8.4 million.
Intangible assets consist of the following (in thousands):
Intangible assets are amortized over their respective estimated useful lives ranging from to years. Amortization expense related to intangible assets was $8.8 million and $9.0 million for the three months ended September 30, 2022 and 2021, respectively. Amortization expense related to intangible assets was $27.5 million and $27.0 million for the nine months ended September 30, 2022 and 2021, respectively.
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 nine months ended September 30, 2022. We recorded impairments related to internally developed gaming titles of $0.7 million for the nine months ended September 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. Amounts paid against the placement fee agreements with payment terms greater than ninety days are disclosed in the Financing section of the Condensed Consolidated Statement of Cash Flows. Amounts paid for the placement fee agreements with the agreement terms less than ninety days, are disclosed in the Investing section of the Condensed Consolidated Statement of Cash Flows.
For development agreements in the form of a loan, interest income is recognized on the repayment of the notes based on the stated rate or, if not stated explicitly in the development agreement, on an imputed interest rate. If the stated interest rate is deemed to be other than a market rate or zero, a discount is recorded on the note receivable as a result of the difference between the stated and market rate and a corresponding intangible asset is recorded. The intangible asset is recognized in the 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 for the three months ended September 30, 2022 and 2021. We recorded a reduction of gaming operations revenue from the accretion of contract rights under development agreements and placement fees of $4.8 million and $4.9 million for the nine months ended September 30, 2022 and 2021, respectively.
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Note 4 - Accrued Liabilities |
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| Accounts Payable and Accrued Liabilities Disclosure [Text Block] |
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
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Note 5 - Long-term Debt |
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| Long-Term Debt [Text Block] |
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
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.
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 September 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.
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Note 6 - Stockholders' Equity |
9 Months Ended |
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Sep. 30, 2022 | |
| Notes to Financial Statements | |
| Stockholders' Equity Note Disclosure [Text Block] |
NOTE 6. STOCKHOLDERS’ EQUITY
Our amended and restated articles of incorporation provide that our authorized capital stock will consist of 450,000,000 shares of common stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share. As of September 30, 2022, we have 37,704,806 shares of common stock and zero shares of preferred stock outstanding.
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.
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.
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Note 7 - Write-downs and Other Charges |
9 Months Ended |
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Sep. 30, 2022 | |
| Notes to Financial Statements | |
| Asset Impairment Charges [Text Block] |
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 September 30, 2022, the Company identified an error related to the fair value of adjustments to contingent consideration and recorded an adjustment of million, of which approximately million relates to periods prior to January 1, 2022. The Company evaluated the impact of the error and concluded that prior periods were not materially misstated and the adjustment did not have a material impact to the current year financial statements. The adjustment was recorded in other long-term liabilities and had no effect on the Condensed Consolidated Statements of Cash Flows.
During the three months ended September 30, 2022, the Company recognized $1.4 million in write-downs and other charges primarily related to a fair value adjustment to contingent consideration. During the three months ended September 30, 2021, the Company recognized $0.2 million in write-downs and other charges primarily related to the disposal of long-lived assets.
During the nine months ended September 30, 2022, the Company recognized $1.8 million in write-downs and other charges primarily related to a fair value adjustment to contingent consideration. During the nine months ended September 30, 2021, the Company recognized $1.0 million in write-downs and other charges primarily related to the write-off of placement fee intangible assets associated with the sale of previously leased EGMs to distributors in the period.
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Note 8 - Basic and Diluted Income (Loss) Per Share |
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| Earnings Per Share [Text Block] |
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").
There were 2,183,245 participating securities included in the calculation of EPS for the three months ended September 30, 2022. There were no potentially dilutive securities included in the calculation of EPS for the nine months ended September 30, 2022 and the three and nine months ended September 30, 2021 because the Company reported a net loss in each period.
Excluded from the calculation of diluted EPS for the three months ended September 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 nine months ended September 30, 2022 were 2,252,439 restricted shares and 25,596 stock options, as such securities were anti-dilutive.
Excluded from the calculation of diluted EPS for the three months ended September 30, 2021 were 1,648,609 restricted shares and 349,262 stock options, as such securities were anti-dilutive. Excluded from the calculation of diluted EPS for nine months ended September 30, 2021 were 1,714,827 restricted shares and 276,451 stock options, as such securities were anti-dilutive.
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Note 9 - Benefit Plans |
9 Months Ended |
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Sep. 30, 2022 | |
| Notes to Financial Statements | |
| Compensation and Employee Benefit Plans [Text Block] |
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 both the three months ended September 30, 2022 and 2021 was $0.4 million. The expense associated with the 401(k) Plan for the nine months ended September 30, 2022 and 2021 was $1.5 million and $1.2 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 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 September 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”), which was approved by the stockholders on July 1, 2022 at the 2022 Annual Meeting of Stockholders. As a result of the 2022 Plan Amendment, awards that were previously accounted for as liability awards were reclassified to equity as they are expected to be settled with equity. Prior to the 2022 Plan Amendment, there were insufficient shares available to settle the liability awards with equity.
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Note 10 - Stock-based Compensation |
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| Share-Based Payment Arrangement [Text Block] |
NOTE 10. STOCK-BASED COMPENSATION
The Company has granted equity or equity-based awards to eligible participants under its incentive plans. The awards include options to purchase the Company’s common stock, restricted stock or restricted stock units and phantom stock units. These awards include a combination of service and market conditions, as further described below.
We recognize stock-based compensation on a straight-line basis over the vesting period for time-based awards and we recognize the expense for awards with market conditions over the service period derived from the related valuation. As of September 30, 2022, there was no unrecognized compensation expense associated with stock options, $2.4 million was associated with restricted stock and restricted stock units, and $3.2 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 2.0 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 nine months ended September 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 or 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.
A summary of the changes in stock options outstanding during the nine months ended September 30, 2022, is as follows:
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 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 nine months ended September 30, 2022, is as follows:
Phantom Stock Units
Phantom stock awards are typically eligible to vest in equal installments of 25% on each of the first 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 nine months ended September 30, 2022 is as follows:
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Note 11 - Income Taxes |
9 Months Ended |
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Sep. 30, 2022 | |
| Notes to Financial Statements | |
| Income Tax Disclosure [Text Block] |
NOTE 11. INCOME TAXES
The Company's effective income tax rate for the three months ended September 30, 2022, was a benefit of 134.0%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended September 30, 2022, is primarily due to changes in our valuation allowance on deferred tax assets and the expiration of the applicable statute of limitations for certain uncertain tax positions. The Company's effective income tax rate for the three months ended September 30, 2021, was a benefit of 59.8%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended September 30, 2021 was primarily due to changes in our valuation allowance on deferred tax assets and the expiration of the applicable statute of limitations for certain uncertain tax positions.
The Company's effective income tax rate for the nine months ended September 30, 2022, was a benefit of 10.9%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended September 30, 2022, is primarily due to changes in our valuation allowance on deferred tax assets and the expiration of the applicable statute of limitations for certain uncertain tax positions. The Company's effective income tax rate for the nine months ended September 30, 2021, was a benefit of 13.6%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended September 30, 2021 was primarily due to changes in our valuation allowance on deferred tax assets and the expiration of the applicable statute of limitations for certain uncertain tax positions.
As of September 30, 2022, the statute of limitations has expired for all uncertain tax positions covered by the indemnification agreement with the prior owners of Cadillac Jack (acquired in May of 2015), 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 nine months ended September 30, 2022. During the three and nine months ended September 30, 2021, the Company recognized a $0.8 million reduction in the indemnification receivable and related benefits in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) related to the expiration of the applicable statute of limitations on indemnified tax positions. |
Note 12 - Commitments and Contingencies |
9 Months Ended |
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Sep. 30, 2022 | |
| Notes to Financial Statements | |
| Commitments and Contingencies Disclosure [Text Block] |
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 statements the defendants made about, among other things, the Company’s growth, financial performance, and forward-looking financial outlook were materially false or misleading because the Company omitted to state that, according to plaintiffs, its market strength was declining, its growth strategies were unsustainable, and it was experiencing challenges in the Oklahoma market. Plaintiffs claim that the purported class was injured when the common stock price declined after the alleged “truth” was revealed following release of the Company’s financial reports on August 7, 2019, November 7, 2019, and March 4, 2020. Plaintiffs also assert that the Company violated Regulation S-K Items 303 and 105 by failing to disclose these same alleged negative trends and significant risks in the registration materials for the Company’s secondary offerings. Unlike the previous complaints, the Amended Complaint does not allege false or misleading statements concerning the Company’s accounting for the iGaming reporting unit or the adequacy of the Company’s internal controls over financial reporting.
On February 23, 2021 the Court granted the lead plaintiff’s unopposed motion to file a Second Amended Complaint. The Second Amended Complaint was filed on March 25, 2021 and asserts substantially the same claims as the Amended Complaint but extends the beginning of the putative class period back to January 26, 2018. 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. On June 9, 2022, the court stayed the derivative action, pursuant to a stipulation between the parties, pending resolution of the motion to dismiss the consolidated securities class action. 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 on participation revenues and licensing fees that we received from the leasing of EGMs to a Native American tribe in the state of Alabama in the period from May 2016 through August 2019. ADOR claims that such revenues constitute a lease rental payment and are deemed taxable in nature even in situations involving Native American tribe lessees.
We believe that we were not required to collect and remit Alabama state lease/rental tax on our leases of EGMs in the state as those leases are on federally designated Indian reservation land and because federal Indian trading laws and Indian gaming laws, as well as the U.S. Constitution, preempt application of the rental tax to these transactions with the Native American tribe. We have disputed ADOR’s audit findings in accordance with applicable state and local tax procedures and ADOR rules. Our dispute is currently in the discovery phase at the Alabama Tax Tribunal, which is the independent tax court for the state of Alabama. We expect a hearing for this dispute at the Alabama Tax Tribunal will be scheduled in 2023.
We have not accrued the $3.3 million assessed by ADOR, as we do not believe that it is probable that a liability has occurred. However, if we do not prevail in the dispute with ADOR, we may be required to accrue this amount as well as applicable interest. It is also possible that ADOR may similarly audit the participation revenues and licensing fees that we received from the leasing of EGMs to a Native American tribe in the state of Alabama subsequent to August 2019. While we cannot reasonably calculate the amount that ADOR would assess for the revenues from such subsequent periods due to the types of revenues and rates that apply, based solely on the amount assessed for the period from May 2016 through August 2019, we estimate that ADOR’s assessment for taxable lease rental payments for subsequent periods through September 30, 2022 would not exceed $2.0 million, excluding interest. There is no assurance that ADOR will assess our revenues from subsequent periods or that such assessment will not materially differ from our estimate. .
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Note 13 - Operating Segments |
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| Segment Reporting Disclosure [Text Block] |
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:
Revenues in each segment are attributable to third parties and segment operating expenses are directly associated with the product lines included in each segment such as research and development, product approval costs, product-related litigation expenses, sales commissions and other directly-allocable sales expenses. Cost of gaming operations and cost of equipment sales primarily include the cost of products sold, service, manufacturing overhead, shipping and installation.
Segment Adjusted EBITDA excludes other income and expense, income taxes and certain expenses that are managed outside of the operating segments.
The following provides financial information concerning our reportable segments for the three and nine months ended September 30, 2022 and 2021 (amounts in thousands):
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.
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Note 14 - Acquisitions |
9 Months Ended |
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Sep. 30, 2022 | |
| Notes to Financial Statements | |
| Business Combination Disclosure [Text Block] |
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 nine months ended September 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.
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Significant Accounting Policies (Policies) |
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| Basis of Accounting, Policy [Policy Text Block] | 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. |
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| Consolidation, Policy [Policy Text Block] | Principles of Consolidation
The accompanying condensed consolidated financial statements include the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. |
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| Use of Estimates, Policy [Policy Text Block] | Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make decisions based upon estimates, assumptions, and factors considered relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of the estimates and assumptions. Accordingly, actual results could differ materially from those anticipated. |
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| Revenue [Policy Text Block] | 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):
(1) The Interactive gaming operations revenue includes both Social and Real Money Gaming revenue streams that were previously disclosed separately.
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 to 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.
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:
Equipment sales are generated from the sale of gaming machines, table products and licensing rights to the integral game content software that is installed in the related equipment, parts, and other ancillary equipment. Also included within the deliverables are delivery, installation and training, all of which occur within a few days of arriving at the customer location. Equipment sales do not include maintenance beyond a standard warranty period. The recognition of revenue from the sale of gaming devices occurs as the customer obtains control of the product and all other revenue recognition criteria have been satisfied. Our contracts include a fixed transaction price. Amounts are due from customers within 30 to 90 days of the invoice date and to a lesser extent we offer extended payment terms of 12 to 24 months with payments due monthly during the extended payment period.
The Company enters into revenue arrangements that may consist of multiple performance obligations, which are typically multiple distinct products that may be shipped to the customer at different times. For example, sales arrangements may include the sale of gaming machines and table products to be delivered upon the consummation of the contract and additional game content conversion kits that will be delivered at a later date when requested by the customer to replace the game content on the customer’s existing gaming machines. Products are identified as separate performance obligations if they are distinct, which occurs if the customer can benefit from the product on its own and is separately identifiable from other promises in the contract.
Revenue is allocated to the separate performance obligations based on relative standalone selling prices determined at contract inception. Standalone selling prices are primarily determined by prices that we charge for the products when they are sold separately. When a product is not sold separately, we determine the standalone selling price with reference to our standard pricing policies and practices. We elected to exclude from the measurement of the transaction price, sales taxes and all other items of a similar nature, and also elected to account for shipping and handling activities as a fulfillment of our promise to transfer the goods. Accordingly, shipping and handling costs are included in cost of sales.
Revenue allocated to any undelivered performance obligations is recorded as a contract liability. The balance of our contract liabilities was not material as of September 30, 2022 and December 31, 2021.
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| Cash and Cash Equivalents, Policy [Policy Text Block] | Cash and Cash Equivalents
Cash and cash equivalents consist primarily of deposits held at major banks and other marketable securities with original maturities of 90 days or less. |
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| Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, Policy [Policy Text Block] | Restricted Cash
Restricted cash amounts represent funds held in escrow as collateral for the Company’s surety bonds for various gaming authorities. |
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| Receivables, Trade and Other Accounts Receivable, Allowance for Doubtful Accounts, Policy [Policy Text Block] | 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 September 30, 2022, there was no material activity in allowance for credit losses. |
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| Inventory, Policy [Policy Text Block] | Inventories
Inventories consist primarily of parts and supplies that are used to repair and maintain machinery and equipment as well as EGMs in production and finished goods held for sale. Inventories are stated at net realizable value. Cost of inventories is determined using the first-in, first-out (“FIFO”) method for all components of inventory. The Company regularly reviews inventory quantities and updates estimates for the net realizable value of inventories. This process includes examining the carrying values of parts and ancillary equipment in comparison to the current fair market values for such equipment (less costs to sell or dispose). Some of the factors involved in this analysis include the overall levels of the inventories, the current and projected sales levels for such products, the projected markets for such products and the costs required to sell the products, including refurbishment costs. Changes in the assumptions or estimates could materially affect the inventory carrying value. As of September 30, 2022 and December 31, 2021, the value of raw material inventory was $30.4 million and $24.1 million, respectively. As of September 30, 2022 and December 31, 2021, the value of finished goods inventory was $5.2 million and $3.4 million, respectively. There was work in process material as of September 30, 2022 and December 31, 2021. |
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| Property, Plant and Equipment, Policy [Policy Text Block] | 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:
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.
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| Goodwill and Intangible Assets, Intangible Assets, Policy [Policy Text Block] | Intangible Assets
The Company reviews its identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses are recognized for identifiable intangibles, other than goodwill, when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets’ carrying amount.
When the estimated undiscounted cash flows are not sufficient to recover the intangible asset’s carrying amount, an impairment loss is measured to the extent the fair value of the asset is less than its carrying amount.
Certain trade names have an indefinite useful life and the Company tests these trade names for possible impairment at least annually, on October 1, or whenever events or changes in circumstances indicate that the carrying value may be impaired. We perform a qualitative assessment to determine if it is more likely than not that the fair value of the asset is less than its carrying amount. If we believe, as a result of our qualitative assessment, that it is more likely than not that the fair value of the asset is less than its carrying amount, the quantitative impairment test is required. |
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| Software to be Sold, Leased, or Otherwise Marketed, Policy [Policy Text Block] | 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. |
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| Goodwill and Intangible Assets, Goodwill, Policy [Policy Text Block] | Goodwill
The excess of the purchase price of an acquired business over the estimated fair value of the assets acquired and the liabilities assumed is recorded as goodwill. The Company tests for possible impairment of goodwill at least annually, on October 1, or when circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company has the option to begin with a qualitative assessment, commonly referred to as “Step 0”, to determine whether it is more likely than not that the reporting unit’s fair value of goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as the general economic environment, industry and market conditions, changes in key assumptions used since the most recently performed valuation and overall financial performance of the reporting units. If the Company determines that it is more likely than not that a reporting unit’s fair value is less than its carrying value, the Company performs a quantitative goodwill impairment analysis, and depending upon the results of that measurement, the recorded goodwill may be written down and charged to income from operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit. |
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| Business Combinations Policy [Policy Text Block] | 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. |
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| Fair Value of Financial Instruments, Policy [Policy Text Block] | 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:
The carrying values of the Company’s cash and cash equivalents, restricted cash, receivables and accounts payable approximate fair value because of the short-term maturities of these instruments. The fair value of our long-term debt is based on the quoted market prices for similar issues (Level 2 inputs). The following table presents the estimated fair value of our long-term debt as of September 30, 2022 and December 31, 2021 (in thousands):
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| Income Tax, Policy [Policy Text Block] | 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.
On August 16, 2022, the Inflation Reduction Act ("IRA") was signed into law. The IRA, among other things, implements a 15% minimum tax on financial statement income of certain large corporations, a 1% excise tax on stock repurchases and extends, enhances, and creates several tax incentives to promote clean energy. While we continue to evaluate the IRA, at present, we do not believe it will have a material effect on our consolidated financial statements.
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| Commitments and Contingencies, Policy [Policy Text Block] | Contingencies
The Company assesses its exposures to loss contingencies including claims and legal proceedings and accrues a liability if a potential loss is considered probable and the amount can be estimated. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, if the actual loss from a contingency differs from management’s estimate, there could be a material impact on the results of operations or financial position. Operating expenses, including legal fees, associated with contingencies are expensed when incurred. |
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| Foreign Currency Transactions and Translations Policy [Policy Text Block] | Foreign Currency Translation
The financial statements of the Company’s foreign subsidiaries are translated into U.S. dollars at the period end rate of exchange for asset and liability accounts and the weighted average rate of exchange for income statement accounts. The effects of these translations are recorded as a component of other accumulated comprehensive income (loss) in stockholders’ equity. |
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| New Accounting Pronouncements, Policy [Policy Text Block] | 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. |
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Note 1 - Description of the Business and Summary of Significant Accounting Policies (Tables) |
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| Disaggregation of Revenue [Table Text Block] |
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| Property, Plant and Equipment, Useful Life [Table Text Block] |
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| Fair Value, Liabilities Measured on Recurring and Nonrecurring Basis [Table Text Block] |
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Note 2 - Property and Equipment (Tables) |
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| Property, Plant and Equipment [Table Text Block] |
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Note 3 - Goodwill and Intangibles (Tables) |
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| Schedule of Goodwill [Table Text Block] |
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| Schedule of Intangible Assets and Goodwill [Table Text Block] |
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Note 4 - Accrued Liabilities (Tables) |
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| Schedule of Accounts Payable and Accrued Liabilities [Table Text Block] |
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Note 5 - Long-term Debt (Tables) |
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| Schedule of Long-Term Debt Instruments [Table Text Block] |
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Note 8 - Basic and Diluted Income (Loss) Per Share (Tables) |
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| Schedule of Earnings Per Share, Basic and Diluted [Table Text Block] |
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Note 10 - Stock-based Compensation (Tables) |
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| Share-Based Payment Arrangement, Option, Activity [Table Text Block] |
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| Nonvested Restricted Stock Shares Activity [Table Text Block] |
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| Schedule of Nonvested Share Activity [Table Text Block] |
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Note 13 - Operating Segments (Tables) |
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| Schedule of Segment Reporting Information, by Segment [Table Text Block] |
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Note 1 - Description of the Business and Summary of Significant Accounting Policies (Details Textual) - USD ($) $ in Thousands |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Inventory, Raw Materials, Gross | $ 30,400 | $ 24,100 |
| Inventory, Finished Goods, Gross | 5,200 | 3,400 |
| Inventory, Work in Process, Gross | $ 0 | $ 0 |
| Gaming Operations [Member] | Minimum [Member] | ||
| Lessor, Operating Lease, Term of Contract (Year) | 1 year | |
| Gaming Operations [Member] | Maximum [Member] | ||
| Lessor, Operating Lease, Term of Contract (Year) | 3 years |
Note 1 - Description of the Business and Summary of Significant Accounting Policies - Disaggregation of Revenues (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||||
|---|---|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|||
| Total revenues | $ 78,259 | $ 67,277 | $ 227,700 | $ 189,473 | ||
| Gaming Operations [Member] | ||||||
| Total revenues | 56,592 | 53,231 | 166,396 | 152,686 | ||
| Equipment Sales [Member] | ||||||
| Total revenues | 21,667 | 14,046 | 61,304 | 36,787 | ||
| EGM [Member] | ||||||
| Total revenues | 71,620 | 61,600 | 208,993 | 173,311 | ||
| EGM [Member] | Gaming Operations [Member] | ||||||
| Total revenues | 50,233 | 47,705 | 148,067 | 136,741 | ||
| EGM [Member] | Equipment Sales [Member] | ||||||
| Total revenues | 21,387 | 13,895 | 60,926 | 36,570 | ||
| Table Products [Member] | ||||||
| Total revenues | 4,036 | 3,104 | 11,030 | 8,690 | ||
| Table Products [Member] | Gaming Operations [Member] | ||||||
| Total revenues | 3,756 | 2,953 | 10,652 | 8,473 | ||
| Table Products [Member] | Equipment Sales [Member] | ||||||
| Total revenues | 280 | 151 | 378 | 217 | ||
| Interactive (Gaming Operations) [Member] | ||||||
| Total revenues | [1] | $ 2,603 | $ 2,573 | $ 7,677 | $ 7,472 | |
| ||||||
Note 1 - Description of the Business and Summary of Significant Accounting Policies - Property and Equipment Useful Life (Details) |
9 Months Ended | 18 Months Ended |
|---|---|---|
Sep. 30, 2022 |
Jun. 30, 2022 |
|
| Minimum [Member] | ||
| Gaming equipment (in years) (Year) | 1 year | |
| Maximum [Member] | ||
| Gaming equipment (in years) (Year) | 6 years | |
| Gaming Equipment [Member] | Minimum [Member] | ||
| Gaming equipment (in years) (Year) | 1 year | |
| Gaming Equipment [Member] | Maximum [Member] | ||
| Gaming equipment (in years) (Year) | 5 years | |
| Property, Plant and Equipment, Other Types [Member] | Minimum [Member] | ||
| Gaming equipment (in years) (Year) | 3 years | |
| Property, Plant and Equipment, Other Types [Member] | Maximum [Member] | ||
| Gaming equipment (in years) (Year) | 6 years |
Note 1 - Description of the Business and Summary of Significant Accounting Policies - Estimated Fair Value of Long-term Debt (Details) - Fair Value, Inputs, Level 2 [Member] - USD ($) $ in Thousands |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Reported Value Measurement [Member] | ||
| Long-term Debt, carrying amount | $ 572,818 | $ 615,743 |
| Estimate of Fair Value Measurement [Member] | ||
| Long-term Debt, fair value | $ 536,316 | $ 613,706 |
Note 2 - Property and Equipment (Details Textual) - USD ($) $ in Millions |
3 Months Ended | 9 Months Ended | 18 Months Ended | ||
|---|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
Jun. 30, 2022 |
|
| Depreciation, Total | $ 10.2 | $ 9.5 | $ 29.5 | $ 28.5 | |
| Minimum [Member] | |||||
| Property, Plant and Equipment, Useful Life (Year) | 1 year | ||||
| Maximum [Member] | |||||
| Property, Plant and Equipment, Useful Life (Year) | 6 years | ||||
Note 2 - Property and Equipment - Property and Equipment (Details) - USD ($) $ in Thousands |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Less: Accumulated depreciation | $ (169,680) | $ (145,805) |
| Property and equipment, net | 79,386 | 74,916 |
| Gaming Equipment [Member] | ||
| Property and equipment, gross | 226,385 | 196,748 |
| Property, Plant and Equipment, Other Types [Member] | ||
| Property and equipment, gross | $ 22,681 | $ 23,973 |
Note 3 - Goodwill and Intangibles (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Amortization of Intangible Assets | $ 8,800 | $ 9,000 | $ 27,500 | $ 27,000 |
| Impairment of Intangible Assets, Indefinite-lived (Excluding Goodwill) | 0 | |||
| Accretion of Contract Rights Under Development Agreements and Customer Agreements | 1,600 | $ 1,600 | $ 4,790 | 4,916 |
| RMG Technology Platform [Member] | ||||
| Impairment of Intangible Assets, Indefinite-lived (Excluding Goodwill) | $ 700 | |||
| Minimum [Member] | ||||
| Finite-Lived Intangible Asset, Useful Life (Year) | 1 year | |||
| Maximum [Member] | ||||
| Finite-Lived Intangible Asset, Useful Life (Year) | 12 years | |||
| Interactive (Gaming Operations) [Member] | ||||
| Goodwill, Impaired, Accumulated Impairment Loss | $ 8,400 | $ 8,400 | ||
Note 3 - Goodwill and Intangibles - Changes in Goodwill (Details) $ in Thousands |
9 Months Ended | |||
|---|---|---|---|---|
|
Sep. 30, 2022
USD ($)
| ||||
| Balance | $ 285,546 | |||
| Foreign currency adjustments | 330 | |||
| Acquisition | 1,230 | |||
| Balance | 287,106 | |||
| EGM [Member] | ||||
| Balance | 277,725 | |||
| Foreign currency adjustments | 330 | |||
| Acquisition | 0 | |||
| Balance | 278,055 | |||
| Table Products [Member] | ||||
| Balance | 7,821 | |||
| Foreign currency adjustments | 0 | |||
| Acquisition | 1,230 | |||
| Balance | 9,051 | |||
| Interactive (Gaming Operations) [Member] | ||||
| Balance | 0 | [1] | ||
| Foreign currency adjustments | 0 | [1] | ||
| Acquisition | 0 | [1] | ||
| Balance | $ 0 | [1] | ||
| ||||
Note 4 - Accrued Liabilities - Accrued Liabilities (Details) - USD ($) $ in Thousands |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Total accrued liabilities | $ 35,667 | $ 39,165 |
| Accrued Liabilities [Member] | ||
| Salary and payroll tax accrual | 12,990 | 16,994 |
| Taxes payable | 3,973 | 4,016 |
| Current portion of operating lease liability | 2,231 | 2,137 |
| License fee obligation | 1,000 | 1,000 |
| Placement fees payable | 6,314 | 6,314 |
| Accrued other | $ 9,159 | $ 8,704 |
Note 5 - Long-term Debt - Schedule of Long-term Debt (Details) - USD ($) $ in Thousands |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Long-term debt | $ 557,035 | $ 606,158 |
| Less: Current portion | (6,090) | (6,877) |
| Long-term debt | 550,945 | 599,281 |
| First Lien Credit Facilities [Member] | Term Loan [Member] | ||
| Long-term debt | 556,342 | 0 |
| First Lien Credit Facilities [Member] | Term Loan [Member] | London Interbank Offered Rate (LIBOR) [Member] | ||
| Long-term debt | 0 | 517,247 |
| First Lien Credit Facilities [Member] | Incremental Term Loans [Member] | ||
| Long-term debt | 0 | 87,958 |
| Equipment Long-term Note Payable and Finance Leases [Member] | ||
| Long-term debt | $ 693 | $ 953 |
Note 5 - Long-term Debt - Schedule of Long-term Debt (Details) (Parentheticals) - First Lien Credit Facilities [Member] - USD ($) $ in Millions |
9 Months Ended | 12 Months Ended |
|---|---|---|
Sep. 30, 2022 |
Dec. 31, 2021 |
|
| Term Loan [Member] | ||
| Floor rate | 0.75% | |
| Spread on variable rate | 6.20% | 4.00% |
| Unamortized discount and costs | $ 15.8 | |
| Term Loan [Member] | London Interbank Offered Rate (LIBOR) [Member] | ||
| Spread on variable rate | 3.50% | 4.50% |
| Unamortized discount and costs | $ 4.0 | |
| Incremental Term Loans [Member] | ||
| Spread on variable rate | 13.00% | 14.00% |
| Unamortized discount and costs | $ 5.6 |
Note 6 - Stockholders' Equity (Details Textual) - USD ($) $ / shares in Units, $ in Millions |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Common Stock, Shares Authorized (in shares) | 450,000,000 | 450,000,000 |
| Common Stock, Par or Stated Value Per Share (in dollars per share) | $ 0.01 | $ 0.01 |
| Preferred Stock, Shares Authorized (in shares) | 50,000,000 | 50,000,000 |
| Preferred Stock, Par or Stated Value Per Share (in dollars per share) | $ 0.01 | $ 0.01 |
| Common Stock, Shares, Outstanding, Ending Balance (in shares) | 37,704,806 | 36,943,770 |
| Preferred Stock, Shares Outstanding, Ending Balance (in shares) | 0 | 0 |
| Stock Repurchase Program, Authorized Amount | $ 50 | |
| Stock Repurchase Program, Remaining Authorized Repurchase Amount | $ 47 |
Note 7 - Write-downs and Other Charges (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Business Combination, Contingent Consideration Arrangements, Change in Amount of Contingent Consideration, Liability | $ 1,466 | $ 0 | $ 1,466 | $ (56) |
| Other Cost and Expense, Operating | 1,389 | $ 197 | $ 1,824 | $ 985 |
| Error Related to the Fair Value of Adjustments to Contingent Consideration [Member] | ||||
| Business Combination, Contingent Consideration Arrangements, Change in Amount of Contingent Consideration, Liability | $ 1,200 | |||
Note 8 - Basic and Diluted Income (Loss) Per Share (Details Textual) - shares |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Weighted Average Number of Shares Outstanding, Diluted, Adjustment, Total (in shares) | 2,183,245 | 0 | 0 | 0 |
| Underwater Stock Option [Member] | ||||
| Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount (in shares) | 1,162,088 | |||
| Restricted Stock [Member] | ||||
| Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount (in shares) | 1,796,053 | 1,648,609 | 2,252,439 | 1,714,827 |
| Share-Based Payment Arrangement, Option [Member] | ||||
| Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount (in shares) | 349,262 | 25,596 | 276,451 | |
Note 8 - Basic and Diluted Income (Loss) Per Share - Schedule of Earnings (Details) - USD ($) shares in Thousands, $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Net loss | $ 476 | $ (1,829) | $ (10,576) | $ (13,482) |
| Net income attributable to participating securities | 26 | |||
| Net income attributable to common stock | $ 450 | |||
| Weighted average of common shares outstanding (in shares) | 37,244 | 36,725 | 37,116 | 36,608 |
| Potential dilutive effect of stock options (in shares) | 0 | |||
| Weighted average of common shares outstanding (in shares) | 37,244 | 36,725 | 37,116 | 36,608 |
Note 10 - Stock-based Compensation - Restricted Stock Activity (Details) - Restricted Stock [Member] |
9 Months Ended |
|---|---|
|
Sep. 30, 2022
$ / shares
shares
| |
| Outstanding, shares (in shares) | shares | 1,934,876 |
| Outstanding, grant date fair value (in dollars per share) | $ / shares | $ 8.25 |
| Granted, shares (in shares) | shares | 240,658 |
| Granted, grant date fair value (in dollars per share) | $ / shares | $ 5.99 |
| Vested, shares (in shares) | shares | (435,746) |
| Vested, grant date fair value (in dollars per share) | $ / shares | $ 10.70 |
| Canceled or forfeited, shares (in shares) | shares | (40,617) |
| Canceled or forfeited, grant date fair value (in dollars per share) | $ / shares | $ 9.14 |
| Outstanding, shares (in shares) | shares | 1,699,171 |
| Outstanding, grant date fair value (in dollars per share) | $ / shares | $ 7.23 |
Note 10 - Stock-based Compensation - Phantom Stock Units (Details) - Phantom Share Units (PSUs) [Member] |
9 Months Ended |
|---|---|
|
Sep. 30, 2022
$ / shares
shares
| |
| Outstanding, shares (in shares) | shares | 2,253,400 |
| Outstanding, grant date fair value (in dollars per share) | $ / shares | $ 6.47 |
| Granted, shares (in shares) | shares | 2,669 |
| Granted, grant date fair value (in dollars per share) | $ / shares | $ 7.87 |
| Vested, shares (in shares) | shares | (404,460) |
| Vested, grant date fair value (in dollars per share) | $ / shares | $ 6.24 |
| Canceled or forfeited, shares (in shares) | shares | (73,739) |
| Canceled or forfeited, grant date fair value (in dollars per share) | $ / shares | $ 6.28 |
| Outstanding, shares (in shares) | shares | 1,777,870 |
| Outstanding, grant date fair value (in dollars per share) | $ / shares | $ 6.54 |
Note 11 - Income Taxes (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|
| Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent | 21.00% | 21.00% | 21.00% | 21.00% |
| Effective Income Tax Rate Reconciliation, Percent, Total | 59.80% | 10.90% | 13.60% | |
| Cadillac Jack [Member] | ||||
| Business Combination, Indemnification Assets, Change in Amount | $ 0 | $ 800 | $ 0 | $ 800 |
Note 12 - Commitments and Contingencies (Details Textual) - USD ($) $ in Millions |
1 Months Ended | 3 Months Ended | 36 Months Ended |
|---|---|---|---|
Jan. 31, 2021 |
Sep. 30, 2019 |
Sep. 30, 2022 |
|
| Insurance Claims [Member] | |||
| Loss Contingency Accrual, Provision | $ 1.6 | ||
| Audit Conducted by Alabama Department of Revenue [Member] | |||
| Loss Contingency, Damages Sought, Value | $ 3.3 | ||
| Loss Contingency, Estimate of Maximum Taxable Lease Rental Payments | $ 2.0 |
Note 13 - Operating Segments (Details Textual) |
9 Months Ended |
|---|---|
Sep. 30, 2022 | |
| Number of Reportable Segments | 3 |
Note 13 - Operating Segments - Financial Information by Segment (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||||
|---|---|---|---|---|---|---|
Sep. 30, 2022 |
Sep. 30, 2021 |
Sep. 30, 2022 |
Sep. 30, 2021 |
|||
| Total revenues | $ 78,259 | $ 67,277 | $ 227,700 | $ 189,473 | ||
| Adjusted EBITDA | 34,467 | 31,908 | 101,363 | 90,333 | ||
| Disposal of long-lived assets | (79) | 197 | 337 | 388 | ||
| Impairment of long-lived assets | 2 | 0 | 21 | 653 | ||
| Fair value adjustment of contingent consideration | 1,466 | 0 | 1,466 | (56) | ||
| Depreciation and amortization | 18,950 | 18,441 | 56,979 | 55,460 | ||
| Interest expense, net of interest income and other | 10,431 | 11,563 | 27,837 | 33,463 | ||
| Loss on extinguishment and modification of debt | 0 | 0 | 8,549 | 0 | ||
| Other adjustments | 585 | 235 | 997 | 914 | ||
| Other non-cash charges | 2,171 | 2,030 | 6,469 | 6,264 | ||
| Non-cash stock-based compensation | 2,341 | 3,994 | 10,572 | 8,856 | ||
| Loss before income taxes | (1,400) | (4,552) | (11,864) | (15,609) | ||
| Electronic Gaming Machines, EGM [Member] | ||||||
| Total revenues | 71,620 | 61,600 | 208,993 | 173,311 | ||
| Adjusted EBITDA | 31,331 | 29,474 | 93,090 | 83,330 | ||
| Table Products [Member] | ||||||
| Total revenues | 4,036 | 3,104 | 11,030 | 8,690 | ||
| Adjusted EBITDA | 2,561 | 1,628 | 6,411 | 4,487 | ||
| Interactive (Gaming Operations) [Member] | ||||||
| Total revenues | [1] | 2,603 | 2,573 | 7,677 | 7,472 | |
| Adjusted EBITDA | $ 575 | $ 806 | $ 1,862 | $ 2,516 | ||
| ||||||
Note 14 - Acquisitions (Details Textual) - USD ($) $ in Thousands |
Jan. 03, 2022 |
Sep. 30, 2022 |
Dec. 31, 2021 |
|---|---|---|---|
| Goodwill, Ending Balance | $ 287,106 | $ 285,546 | |
| Table Game-related Intangible Assets Under Lucky Lucky Trade Name [Member] | |||
| Business Combination, Consideration Transferred, Total | $ 4,800 | ||
| Goodwill, Ending Balance | 1,200 | ||
| Finite-Lived Intangible Assets Acquired | $ 3,500 | ||
| Acquired Finite-Lived Intangible Assets, Weighted Average Useful Life (Year) | 9 years 1 month 6 days |