PLAYAGS, INC. In this filing, the following discussion and analysis of financial condition and results of operations should be read in conjunction with our Financial Statements included elsewhere in this Annual Report on Form 10-K and the information included in our other filings with theSEC . This discussion includes forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the disclosure and information contained and referenced in "Cautionary Note Regarding Forward-Looking Statements" and "Item 1A. Risk Factors" included elsewhere in this Annual Report on Form 10-K. For a discussion of the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , please refer to 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 endedDecember 31, 2021 . 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 year endedDecember 31, 2022 , approximately 72% 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.Key Drivers of Our Business
Our revenues are impacted by the following key factors:
• the amount of money spent by consumers on our domestic revenue share installed
base;
• the amount of the daily fee and selling price of our participation EGMs;
• our revenue share percentage with customers; • the capital budgets of our customers; • the level of replacement of existing EGMs in existing casinos; • expansion of existing casinos; • development of new casinos;
• opening or closing of new gaming jurisdictions both in
internationally;
• our ability to obtain and maintain gaming licenses in various jurisdictions;
• the relative competitiveness and popularity of our EGMs 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 have been significantly affected by the COVID-19 pandemic and
the related closure of nearly all of our casino customer locations in fiscal
year 2020. Due to the business disruption caused by the rapid nationwide spread
of the coronavirus and the actions by state and tribal governments and
businesses to contain the virus, almost all of the Company's customers closed
their operations during the months of March and April 2020 and their respective
markets have been significantly and adversely impacted. Beginning in May
2020 , casinos began to reopen at limited capacity. As a result of the temporary
closures of our casino customers, in fiscal year 2020, there was a decrease in
the amount of money spent by consumers on our revenue shared installed base and
the amount of daily fees of our participation EGMs and a slowdown in the
expansion of existing casinos or development of new casinos. Specifically,
gaming operations revenue and equipment sales decreased during the year ended
December 31, 2020 as a result of the temporary closures of our casino customers.
Similarly, our EGM and Table Products segment operating results have been
disrupted because each segment's activities including design, development,
acquisition, manufacturing, marketing, distribution, installation and servicing
of its product's lines have been temporarily halted or significantly reduced. In
addition, each segment's revenue from leasing, licensing and selling products
was adversely impacted due to the temporary closures of our casino customers. As
a result, the Company reduced expenses and capital purchases to adapt to the
severity of the COVID-19 pandemic. From April to September of 2020, the Company
implemented short-term furloughs with retained benefits, company-wide salary
reductions, and reduced its workforce by over 10%. Our non-employee
directors also agreed to reduce their fees by 50% for the first three quarters
of 2020 and to take payment of the fees in stock in lieu of cash. As of
December 31, 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.
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 are primarily due to changes in employment and salaries and related
fringe benefits.
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Acquisitions and Divestitures OnJanuary 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 16. "Acquisitions". Results of Operations
Year Ended
The following tables set forth certain selected audited consolidated financial data for the periods indicated (in thousands):
Year ended December 31, $ %
2022 2021 Change Change
Consolidated Statements of
Operations:
Revenues
Gaming operations $ 223,802 $ 205,627 $ 18,175 8.8 %
Equipment sales 85,634 54,069 31,565 58.4 %
Total revenues 309,436 259,696 49,740 19.2 %
Operating expenses
Cost of gaming operations 42,200 38,945 3,255 8.4 %
Cost of equipment sales 44,472 24,262 20,210 83.3 %
Selling, general and administrative 67,728 63,749 3,979 6.2 %
Research and development 39,628 36,308 3,320 9.1 %
Write-downs and other charges 1,923 2,791 (868 ) (31.1 )%
Depreciation and amortization 75,516 73,938 1,578 2.1 %
Total operating expenses 271,467 239,993 31,474 13.1 %
Income (loss) from operations 37,969 19,703 18,266 92.7 %
Other expense (income)
Interest expense 40,608 44,352 (3,744 ) (8.4 )%
Interest income (1,059 ) (1,064 ) 5 (0.5 )%
Loss on extinguishment and
modification of debt 8,549 - 8,549 100.0 %
Other expense 131 1,185 (1,054 ) (88.9 )%
Loss before income taxes (10,260 ) (24,770 ) 14,510 (58.6 )%
Income tax benefit 2,225 2,198 27 1.2 %
Net loss $ (8,035 ) $ (22,572 ) $ 14,537 (64.4 )%
Revenues
Gaming Operations. Gaming operations revenue increased primarily due to an
increase in our EGM segment. EGM RPD increased 11.7% compared to the prior year
from $21.72 per day to $24.27 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 primarily due
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-19-related challenges facing the market. The increase in
gaming operations revenue is also attributable to a $3.0 million increase in
Table Products revenue related to an increase in our installed base as well as
to our acquisition of Lucky Lucky .
Equipment Sales. The increase in equipment sales was primarily due to an
increase of 1,639 EGMs sold year over year. We sold 4,019 EGM units for the year
ended December 31, 2022 , compared to 2,380 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.
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Operating Expenses Cost of Gaming Operations. The increase in the cost of gaming operations was primarily the result of increased field service and support costs of$2.5 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 both years endedDecember 31, 2022 andDecember 31, 2021 . 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 period. We sold 4,019 EGM units during the year endedDecember 31, 2022 , compared to 2,380 EGM units in the prior year period. The cost of equipment sales includes the cost of 429 previously leased, lower yielding units sold to a distributor in the prior year period. As a percentage of equipment sales revenue, costs of equipment sales was 51.9% for the year endedDecember 31, 2022 compared to 44.9% 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$2.4 million increase in salaries and benefits, offset by a$3.1 million decrease in non-cash stock-based compensation. 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$1.3 million increase in salaries and benefits. The increase in research and development expense is also attributable to a$1.2 million increase in consulting fees and outside services costs. 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 year endedDecember 31, 2022 , the Company recognized$1.9 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 effect 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 year endedDecember 31, 2021 , the Company recognized$2.8 million in write-downs and charges,$1.4 million of which is primarily related to the full impairment of long-lived assets related to a discontinued product line (the Company used level 3 fair value inputs based on projected cash flows),$0.8 million of which is primarily related to the full impairment of internally developed gaming titles, as it was determined by management that the gaming titles would no longer be used (the Company used level 3 fair value inputs based on projected cash flows), and$0.6 million of which is primarily related to the disposal of long-lived assets.
Depreciation and Amortization. The increase was predominantly due to an increase
in depreciation expense of
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 year. 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
Other Expense (Income) 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. See Item 15. "Exhibits and Financial Statement Schedules" Note 11. "Income Taxes" for a detailed discussion regarding the write-off of indemnification receivables. To a lesser extent, the decrease is offset 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 year endedDecember 31, 2022 , was a benefit of 21.7%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the year endedDecember 31, 2022 , was primarily due to changes in our valuation allowance on deferred tax assets, various permanent items and lapse in the applicable statute of limitations for certain uncertain tax positions. 33 -------------------------------------------------------------------------------- The Company's effective income tax rate for the year endedDecember 31, 2021 , was a benefit of 8.9%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the year endedDecember 31, 2021 , was primarily due to changes in our valuation allowance on deferred tax assets, various permanent items and lapse in 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 15. "Exhibits and Financial Statement Schedules." 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-K because we believe such measures provide 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, 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 and to deduct certain gains that are included in calculating net income. However, these expenses and gains vary greatly, and are difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, in the case of charges or expenses, these items can represent the reduction of cash that could be used for other corporate purposes. Due to these limitations, we rely primarily on our GAAP 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. 34
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The tables below present each of the Adjusted Expenses and include a reconciliation to the nearest GAAP measure.
Electronic Gaming Machines
Year Ended
Year Ended December 31, $ %
(amounts in thousands except unit data) 2022 2021 Change Change
EGM segment revenues:
Gaming operations $ 199,274 $ 184,050 $ 15,224 8.3 %
Equipment sales 85,057 53,759 31,298 58.2 %
Total EGM revenues $ 284,331 $ 237,809 $ 46,522 19.6 %
EGM segment expenses and adjusted
expenses:
Cost of gaming operations(1) $ 39,078 $ 36,165 $ 2,913 8.1 %
Less: Adjustments(2) 2,785 2,956 (171 ) (5.8 )%
Adjusted cost of gaming operations 36,293 33,209 3,084 9.3 %
Cost of equipment sales 44,301 24,168 20,133 83.3 %
Selling, general and administrative 61,554 58,436 3,118 5.3 %
Less: Adjustments(3) 10,084 13,428 (3,344 ) (24.9 )%
Adjusted cost of selling, general and
administrative 51,470 45,008 6,462 14.4 %
Research and development 34,116 31,553 2,563 8.1 %
Less: Adjustments(4) 3,006 2,430 576 23.7 %
Adjusted cost of research and
development 31,110 29,123 1,987 6.8 %
Accretion of placement fees 6,345 6,516 (171 ) (2.6 )%
EGM Adjusted EBITDA $ 127,502 $ 112,817 $ 14,685 13.0 %
EGM Business Segment Key Performance
Indicators ("KPI's"):
EGM gaming operations:
EGM installed base:
Class II 11,251 11,256 (5 ) (0.0 )%
Class III 5,075 4,683 392 8.4 %
Domestic installed base, end of period 16,326 15,939 387 2.4 %
International installed base, end of
period 6,244 7,643 (1,399 ) (18.3 )%
Total installed base, end of period 22,570 23,582 (1,012 ) (4.3 )%
EGM revenue per day ("RPD"):
Domestic revenue per day $ 31.48 $ 30.35 $ 1.13 3.7 %
International revenue per day $ 6.92 $ 4.52 $ 2.40 53.1 %
Total revenue per day $ 24.27 $ 21.72 $ 2.55 11.7 %
EGM equipment sales
EGM units sold 4,019 2,380 1,639 68.9 %
Average sales price ("ASP") $ 19,372 $ 18,369 $ 1,003 5.5 %
(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, 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, acquisitions and integration-related costs including restructuring and severance.
35
--------------------------------------------------------------------------------Gaming Operations Revenue Gaming operations revenue increased primarily due to an increase in our EGM segment. EGM RPD increased 11.7% compared to the prior year from$21.72 per day to$24.27 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 primarily due 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 modestPhilippines operation given the ongoing COVID-related challenges facing the market. Equipment Sales The increase in equipment sales was primarily due to an increase of 1,639 EGMs sold year over year. We sold 4,019 EGM units for the year endedDecember 31, 2022 , compared to 2,380 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 15. "Exhibits and Financial Statement Schedules" 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 related increase in cost of gaming operations, cost of equipment sales, as well as operating expenses. EGM Adjusted EBITDA margin was 44.8% for the year endedDecember 31, 2022 compared to 47.4% for the year endedDecember 31, 2021 . Table Products
Year Ended
Year Ended December 31, $ %
(amounts in thousands except unit data) 2022 2021 Change Change
Table Products segment revenues:
Gaming operations $ 14,343 $ 11,569 $ 2,774 24.0 %
Equipment sales 577 310 267 86.1 %
Total Table Products revenues $ 14,920 $ 11,879 $ 3,041 25.6 %
Table Products segment expenses and
adjusted expenses:
Cost of gaming operations(1) $ 1,321 $ 687 $ 634 92.3 %
Less: Adjustments(2) 363 321 42 13.1 %
Adjusted cost of gaming operations 958 366 592 161.7 %
Cost of equipment sales 171 94 77 81.9 %
Selling, general and administrative 3,326 2,879 447 15.5 %
Less: Adjustments(3) 272 257 15 5.8 %
Adjusted cost of selling, general and
administrative 3,054 2,622 432 16.5 %
Research and development 2,030 2,410 (380 ) (15.8 )%
Less: Adjustments(4) 74 51 23 45.1 %
Adjusted cost of research and
development 1,956 2,359 (403 ) (17.1 )%
Table Products Adjusted EBITDA$ 8,781 $ 6,438
Table Products unit information: Table products installed base, end of period (5) 5,051 3,801 1,250 32.9 % Average monthly lease price (5)$ 243 $ 258 $ (15 ) (5.8 )%
(1) Exclusive of depreciation and amortization.
(2) Adjustments to cost of gaming operation include non-cash stock compensation expense and 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. The review resulted in no changes to revenues or Adjusted EBITDA
36--------------------------------------------------------------------------------
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 16. "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 15. "Exhibits and Financial Statement Schedules" Note 13. "Operating Segments" for further explanation of adjustments. The increase in Table Products Adjusted EBITDA is attributable to the increases in gaming operations revenue, partially offset by an increase in cost of gaming operations. Interactive
Year Ended
Year Ended December 31, $ %
(amounts in thousands) 2022 2021 Change Change
Interactive segment revenue:
Gaming Operations $ 10,185 $ 10,008 177 1.8 %
Total Interactive revenue $ 10,185 $ 10,008 177 1.8 %
Interactive segment expenses and
adjusted expenses:
Cost of gaming operations(1) $ 1,801 $ 2,093 Selling, general and administrative 2,848 2,434 414 17.0 % Less: Adjustments(2) 258 157 101 64.3 % Adjusted cost of selling, general and administrative 2,590 2,277 313 13.7 % Research and development 3,482 2,345 1,137 48.5 % Less: Adjustments(3) 48 39 9 23.1 % Adjusted cost of research and development 3,434 2,306 1,128 48.9 % Interactive Adjusted EBITDA$ 2,360 $ 3,332 (972 ) (29.2 )%
(1) Exclusive of depreciation and amortization.
(2) Adjustments to selling, general and administrative expense include non-cash stock compensation expense, restructuring and severance, legal and litigation expenses including settlement payments and other adjustments.
(3) Adjustments to research and development costs include non-cash stock compensation expense.
Total Interactive 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 15. "Exhibits and Financial
Statement Schedules" 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.
37--------------------------------------------------------------------------------
TOTAL ADJUSTED EBITDA RECONCILIATION TO NET LOSS
We have provided total Adjusted EBITDA in this Form 10-K 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. 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 and to deduct certain gains that are included in calculating net income. However, these expenses and gains vary greatly, and are difficult to predict. They can represent the effect of long-term strategies as opposed to short-term results. In addition, in the case of charges or expenses, these items can represent the reduction of cash that could be used for other corporate purposes.
Due to these limitations, we rely primarily on our GAAP results, such as net 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 loss attributable to
Year Ended
Year Ended December 31, $ %
2022 2021 Change Change
Net loss $ (8,035 ) $ (22,572 ) 14,537 (64.4 )%
Income tax benefit (2,225 ) (2,198 ) (27 ) 1.2 %
Depreciation and
amortization 75,516 73,938 1,578 2.1 %
Interest expense, net
of interest income
and other 39,680 44,473 (4,793 ) (10.8 )%
Loss on
extinguishment and
modification of
debt(1) 8,549 - 8,549 100.0 %
Write-downs and
other(2) 1,923 2,791 (868 ) (31.1 )%
Other adjustments(3) 2,225 3,119 (894 ) (28.7 )%
Other non-cash
charges(4) 9,117 8,393 724 8.6 %
Non-cash stock-based
compensation(5) 11,893 14,643 (2,750 ) (18.8 )%
Total Adjusted EBITDA $ 138,643 $ 122,587 16,056 13.1 %
(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.
38
--------------------------------------------------------------------------------Contractual Obligations
As of
For a description of contractual obligations related to long-term debt that include mandatory quarterly principal and interest payments, see Item 15. "Exhibits and Financial Statement Schedules" Note 5. "Long-Term Debt".
For a description of contractual obligations related to our operating lease liability, see Item 15. "Exhibits and Financial Statement Schedules" Note 14. "Leases".
As ofDecember 31, 2022 , we have a total contractual obligation to make future cash payments for placement fees of$15.8 million ,$6.3 million of which is due in the next twelve months, and the remaining balance of$9.5 million is due thereafter until the end of the contractually required payments in 2025. Based on the cash and cash equivalents on hand as ofDecember 31, 2022 , our expected cash flows from operating activities, as well as availability in our undrawn revolving credit facility, 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
Finance Leases
The Company has entered into leases for vehicles that are accounted for as finance leases, as described in Item 15. "Exhibits and Financial Statement Schedules" Note 5. "Long-Term Debt".
Liquidity and Capital Resources
We expect that primary ongoing liquidity requirements for the next twelve months
after the 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,
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.
39--------------------------------------------------------------------------------
As of
The following table summarizes our historical cash flows (in thousands):
Year ended December 31, $
2022 2021 Change
Cash Flow Information:
Net cash provided by operating activities
(623 )
Net cash (used in) investing activities (72,088 ) (50,137 ) (21,951 )
Net cash (used in) provided by financing
activities (62,720 ) (14,905 ) (47,815 )
Effect of exchange rates on cash and cash
equivalents 13 (2 ) 15
(Decrease) increase in cash and cash
equivalents $ (57,086 ) $ 13,288 (70,374 )
Operating activities
The decrease in cash provided by operating activities is attributable to a $13.1
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 $12.5 million .
Investing activities
The increase in cash used in investing activities was primarily due to a
$12.0 million increase in purchases of property plant and equipment and a $5.7
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
16. "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 Credit Agreement as
described in Item 1. "Financial Statements" Note 5. "Long-Term Debt".
Significant Accounting Policies and Critical Estimates
Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity with generally
accepted accounting principles ("GAAP") generally accepted in the United States
of America . Accordingly, we are required to make estimates incorporating
judgments and assumptions we believe are reasonable based on our historical
experience, contract terms, trends in our company and the industry as a whole,
as well as information available from other outside sources. Our estimates
affect amounts recorded in our consolidated financial statements and there can
be no assurance that actual results will not differ from initial estimates.
Changes in future economic conditions or other business circumstances may affect
the outcomes of our estimates and assumptions. Our accounting policies are more
fully described in Item 15. "Exhibits and Financial Statement Schedules" Note 1.
"Description of the Business and Summary of Significant Accounting Policies".
We consider the following accounting policies to be the most important to understanding and evaluating our financial results. These policies require management to make subjective and complex judgments that are inherently uncertain or variable.
Management considers an accounting estimate to be critical if:
• It requires assumptions to be made that were uncertain at the time the
estimate was made, and
• Changes in the estimate or different estimates that could have been selected
could have a material impact on our consolidated results of operation or
financial condition.
40--------------------------------------------------------------------------------
Business Combinations
We apply the provisions of ASC 805, "Business Combinations" (ASC 805), in the
accounting for business acquisitions. We recognize separately from goodwill the
assets acquired and the liabilities assumed, at their acquisition date fair
values and goodwill is defined 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. The valuations related to
acquisitions include significant estimates in the valuation of intangible assets
that include trade names, brand names, customer relationships, and gaming
software and technology platforms. These estimates are inherently uncertain and
subject to refinement and typically include the calculation of an appropriate
discount rate (Assumption #1) and projection of the cash flows (Assumption #2)
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. In addition, deferred tax assets, deferred tax liabilities, uncertain
tax positions and tax related valuation allowances assumed in connection with a
business combination are initially estimated as of the acquisition date. We
reevaluate these items quarterly based upon facts and circumstances that existed
as of the acquisition date and any adjustments to its preliminary estimates are
recorded to goodwill if identified within the measurement period. Upon the
conclusion of the measurement period or final determination of the values of
assets acquired or liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to the consolidated statements of operations.
Assumptions/Approach used for Assumption #1: Fair value of identifiable tangible
and intangible assets is based upon forecasted revenues and cash flows as well
as the selected discount rate. In determining the appropriate discount rate, we
incorporate assumptions regarding capital structure and return on equity and
debt capital consistent with peer and industry companies.
Effect if Different Assumptions used for Assumption #1: Valuation of
identifiable tangible and intangible assets requires judgment, including the
selection of an appropriate discount rate. While we believe our estimates used
to select an appropriate discount rate are reasonable, different assumptions
could materially affect the measurement of fair value. The historical
acquisitions of the Company have contained significant amounts of intangible
assets and goodwill and a change in the discount rates used in the valuations of
intangible assets in these acquisitions could have resulted in a change to
intangible assets with an offsetting impact to goodwill.
Assumptions/Approach used for Assumption #2: Fair value of identifiable tangible
and intangible assets is based upon forecasted revenues and cash flows. In
developing estimated cash flows, we incorporate assumptions regarding future
performance, including estimations of revenues, costs, and capital expenditures.
Effect if Different Assumptions used for Assumption #2: Valuation of
identifiable tangible and intangible assets requires judgment, including
estimations of cash flows, and determinations of fair value. In the Company's
valuation of intangible assets, we allocated the estimated cash flows of each
business acquisition to the several individual intangible assets. While we
believe our estimates of future cash flows are reasonable, different assumptions
could materially affect the measurement of fair value. A change in the total
estimated cash flows as well as the allocation of those cash flows to each
intangible asset could have resulted in a change to the value assigned to
intangible assets with an offsetting impact to goodwill.
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. Refer to Item 15. "Exhibits and Financial
Statement Schedules" Note 1. "Description of the Business and Summary of
Significant Accounting Policies", which contains a detailed description of our
revenue recognition policy for our revenue streams.
For the sale of gaming machines recorded in equipment sales revenue, judgment is
often required to determine whether an arrangement consists of multiple
performance obligations, which are typically multiple distinct products that may
be shipped to the customer at different times. For example, gaming equipment
arrangements may include the sale of gaming machines to be delivered upon the
consummation of the contract and additional game content conversion kits 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.
Judgment is also required to determine whether there is sufficient history to
prove when it is probable that we will collect substantially all of the
contracted amount. Factors that we consider include the nature of our customers,
our historical collection experience with the specific customer, the terms of
the arrangement and the nature of the product being sold. Our product sales
contracts do not include specific performance, cancellation, termination or
refund-type provisions.
41--------------------------------------------------------------------------------
Definite-lived Asset Impairment
The Company reviews its definite-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These indicators can include the loss of a key customer or jurisdiction or cancellation of a specific product line where there is no alternative future use for the asset. When the estimated undiscounted cash flows (Assumption #1) 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. We also make judgments about the remaining useful lives of intangible assets and other long-lived assets that have finite lives (Assumption #2). Our policy is to impair, when necessary, excess or obsolete gaming terminals on hand that we do not expect to be used. Impairment is based upon several factors, including estimated forecast of gaming terminal demand for placement into casinos. Assumptions/Approach used for Assumption #1: When we identify a triggering event, we estimate cash flows directly associated with the use of the asset to test recoverability and remaining useful lives based upon forecasted revenues and cash flows. In developing estimated cash flows, we incorporate assumptions regarding future performance, including estimations of win per day and estimated installed units on lease. When the carrying amount exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the asset, we then compare the carrying amount to its current fair value. We recognize an impairment loss if the carrying amount of the asset exceeds its fair value. Effect if Different Assumptions used for Assumption #1: Impairment testing requires judgment, including estimates of cash flows, and determinations of fair value. While we believe our estimates of future revenues and cash flows are reasonable, different assumptions such as projected win per day and projected installed units on lease could materially affect the measurement of the recoverability and fair value of long-lived assets. If actual cash flows fall below initial forecasts, we may need to record additional amortization and/or impairment charges.
Assumptions/Approach used for Assumption #2: The carrying value of the asset is determined based upon management's assumptions as to the useful life of the asset, where the assets are depreciated over the estimated life on a straight-line basis.
Effect if different assumptions used for Assumption #2: While we believe the useful lives that we use are reasonable, different assumptions could materially affect the carrying value of long-lived assets, as well as the depreciation and amortization expense.
The excess of the purchase price of entities that are considered to be purchases of businesses over the estimated fair value of the assets acquired and the liabilities assumed is recorded as goodwill. The "American Gaming Systems" trade name (and related derivations such as "AGS" and "PlayAGS") asset acquired in a previous acquisition has an indefinite useful life. We do not amortize indefinite-lived assets or goodwill, but instead test for possible impairment at least annually onOctober 1 or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable (Assumption #1). 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 asset's fair value 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 each reporting unit and the Company as a whole. If the Company determines the asset is not at risk of failing the qualitative assessment no quantitative impairment testing is required. If the Company determines that it is at risk of failing the qualitative assessment, the Company is required to perform an annual quantitative impairment test, and depending upon the results of that measurement, the recorded asset value may be written down and charged to results from operations when its carrying amount exceeds its estimated fair value. Assumptions/Approach used for Assumption #1: In the first step of the impairment test, we estimate the fair value of our goodwill at the reporting unit level and indefinite-lived assets and compare that to the carrying value. Fair value is based upon forecasted product revenues and cash flows. In developing estimated cash flows, we incorporate assumptions regarding future performance, including estimations of revenues, costs, and capital expenditures. When the carrying amount exceeds fair value, we recognize an impairment charge for the amount by which the carrying amount exceeds the asset's fair value. 42 -------------------------------------------------------------------------------- Effect if Different Assumptions used for Assumption #1: Impairment testing requires judgment, including estimations of cash flows, and determinations of fair value. While we believe our estimates of future cash flows are reasonable, different assumptions could materially affect the measurement of fair value. If actual cash flows fall below initial forecasts, we may need to record additional impairment charges. The Company tests for possible impairment of indefinite lived intangible assets at least annually, onOctober 1 . The Company performed a qualitative assessment as ofOctober 1, 2022 on the EGM and Table Products reporting units as well as the AGS tradename and determined that it was not more likely than not that the fair value of the EGM and Table Products reporting units and AGS tradename were less than their carrying amounts as of the assessment date ofOctober 1, 2022 . In this assessment, we relied on several qualitative factors such as industry and macroeconomic conditions, as well as current projected cash flows and the prior year quantitative analysis, that concluded the excess fair value was over carrying value for the EGM and Table Products reporting units were$113.4 million and$8.9 million , respectively and the AGS tradename excess fair value over carrying value was$85.0 million . There is no balance of goodwill in the Company's other reporting unit. The Company performed a quantitative assessment as ofOctober 1, 2020 on the EGM and Table Products reporting units, in which both reporting units passed the assessment with 17% and 32% cushion between the fair value and carrying value of the reporting unit, respectively. As ofOctober 1, 2020 , none of the Company's remaining reporting units had a recorded balance of goodwill. The discount rates utilized in the discounted cash flow projections were 12.0% and 15.5% for the EGM and Table Products reporting units, respectively. During the first quarter of 2020, our EGM and Table Products reporting units' operating results were significantly lower than expectations, driven by the rapid nationwide spread of the coronavirus and the actions taken by state and tribal governments and businesses, including the closure of casinos, in an attempt to contain the virus. Many of our customers temporarily closed their operations and the markets that we served were significantly and adversely impacted, which was considered to be a triggering event. These closures resulted in a reduction of gaming operations revenues particularly related to our leased EGMs and Table Products as we ceased to bill our customers from the date that they closed. The closures also impacted equipment sales revenue due to a decline in our customer demand to purchase our EGMs and other products during the closures. Accordingly, we performed a quantitative assessment, or "Step 1" analysis, as ofMarch 31, 2020 to analyze whether this triggering event resulted in an impairment of associated goodwill in those two reporting units. As ofMarch 31, 2020 , none of the Company's remaining reporting units had a recorded balance of goodwill. Based on our quantitative analysis, the fair value was 34% greater than the carrying value for the EGM reporting unit and 21% greater for the Table Products reporting unit. We estimated the fair value of both reporting units using the discounted cash flow method. The most significant factor in the assessment was the projected cash flows adjusted for the estimated adverse impact of the COVID-19 pandemic on the Company's operations. Our projected cash flows were dependent on our assumptions for when our casino customers would have reopened. The projected cash flows and those for future years were also impacted by our estimate of when the operations of our casino customers would return to pre-COVID-19 levels. Given the impacts of the COVID-19 pandemic across our business, the long-range cash flow projections that were used to assess the fair value of our businesses and assets for purposes of impairment testing were subject to greater uncertainty than normal. Other factors included in the discounted cash flow calculation were the discount rate of 10% for EGM and 14% for Table Products and the long-term growth rate of 3% for both reporting units. During the second and third quarters of 2020, based on the performance of our re-opened customers and our related revenue share including our projections for future periods, we concluded that there were no triggering events that would more likely than not reduce the fair value of a reporting unit below their carrying value. Income Taxes We conduct business globally and are subject to income taxes inUnited States 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. 43
-------------------------------------------------------------------------------- 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. Contingencies We assess our exposures to loss contingencies, including claims and legal proceedings, and accrue 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 our estimate, there could be a material impact on our results of operations or financial position. Operating expenses, including legal fees, associated with contingencies are expensed when incurred.
Recently adopted accounting pronouncements
For a description of recently adopted accounting pronouncements, see Item 15. "Exhibits and Financial Statement Schedules" Note 1. "Description of the Business and Summary of Significant Accounting Policies".
Recently issued accounting pronouncements not yet adopted
For a description of recently issued accounting pronouncements not yet adopted, see Item 15. "Exhibits and Financial Statement Schedules" Note 1. "Description of the Business and Summary of Significant Accounting Policies".
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