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, 2019 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 period ended March 31, 2020, 79% 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 93% of our revenue for three months ended March 31, 2020. 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 (slated to launch in the Spring of 2020), Orion Rise and Big Red. Also, our core cabinets that are available for sale and lease include the Orion Portrait, Orion Curve, Orion Slant, Orion Upright and ICON.
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 all 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 40 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 March 31, 2020, we had an installed base of 3,897 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 B2B online gaming platform for content aggregation that we offer to our real-money gaming (“RMG”) online casino customers. Our B2B platform, the AxSys Games Marketplace, aggregates content from several game suppliers and offers online casino operators the convenience to reduce the number of integrations that are needed to supply the online casino. By integrating with us, online casino operators have access to a significant amount of content from numerous game suppliers. We operate the AxSys Games Marketplace in regulated, legal online gaming jurisdictions such as the UK, parts of Europe, and New Jersey.
We also operate Business-to-Consumer (“B2C”) social casino games that include online versions of our popular EGM titles and are accessible to players worldwide on multiple mobile platforms, which we believe establishes brand recognition. 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 B2C social casino games are available on our mobile app, Lucky Play Casino. The app contains numerous AGS game titles available for consumers to play for free or with virtual currency they purchase in the app.
Key Drivers of Our Business
Our revenues are impacted by the following key factors:
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•
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the amount of money spent by consumers on our domestic revenue share installed base;
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•
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the amount of the daily fee and selling price of our participation electronic gaming machines;
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•
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our revenue share percentage with customers;
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•
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the capital budgets of our customers;
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•
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the level of replacement of existing electronic gaming machines in existing casinos;
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•
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expansion of existing casinos;
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•
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development of new casinos;
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•
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opening or closure of new gaming jurisdictions both in the United States and internationally;
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•
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our ability to obtain and maintain gaming licenses in various jurisdictions;
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•
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the relative competitiveness and popularity of our electronic gaming machines compared to competitive products offered in the same facilities; and
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•
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general macro-economic factors, including levels of and changes to consumer disposable income and personal consumption spending.
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The factors above have been significantly affected by COVID-19 and the related closure of nearly all of our casino customer locations. When our customers are allowed to reopen, the amount of money that will be spent by consumers and other related impacts to our business are unknown at this time.
Our expenses are impacted by the following key factors:
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•
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fluctuations in the cost of labor relating to productivity;
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•
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overtime and training;
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•
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fluctuations in the price of components for gaming equipment;
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•
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fluctuations in energy prices;
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•
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changes in the cost of obtaining and maintaining gaming licenses;
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•
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fluctuations in the level of maintenance expense required on gaming equipment; and
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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
We have made several strategic acquisitions over the past two years.
In Bet Gaming II.
During the quarter ended September 30, 2019, we acquired certain intangible assets related to table game intellectual property from In Bet Gaming, Inc (“In Bet II”). The acquisition was accounted for as an acquisition of a 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 $4.0 million was allocated primarily to tax deductible goodwill for $1.2 million and intangible assets of $2.8 million.
Integrity.
During the quarter ended March 31, 2019, we acquired all of the equity of Integrity Gaming Corp. (“Integrity”), a regional slot route operator with over 2,500 gaming machines in operation across over 33 casinos in Oklahoma and Texas. The acquisition was accounted for as an acquisition of a business and the assets acquired and liabilities assumed were measured based on our estimates of their fair values at the acquisition date. We attribute the goodwill recognized to our ability to utilize Integrity’s installed base to maximize revenue of the combined product portfolio and the synergies we can obtain through the reduction in our combined service and overhead costs.The total consideration for this acquisition was $52.6 million. The consideration was allocated primarily to non-tax deductible goodwill for $11.4 million, property and equipment of $12.7 million and intangible assets of $30.6 million.
Results of Operations
Three Months Ended March 31, 2020 compared to the Three Months Ended March 31, 2019
The following tables set forth certain selected condensed consolidated financial data for the three months ended March 31, 2020 and 2019 (in thousands):
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Three Months Ended March 31,
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$
|
|
|
%
|
|
|
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2020
|
|
|
2019
|
|
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Change
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|
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Change
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Consolidated Statements of Operations:
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Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
42,685
|
|
|
$
|
52,861
|
|
|
$
|
(10,176
|
)
|
|
|
(19.3
|
)%
|
Equipment sales
|
|
|
11,628
|
|
|
|
20,181
|
|
|
|
(8,553
|
)
|
|
|
(42.4
|
)%
|
Total revenues
|
|
|
54,313
|
|
|
|
73,042
|
|
|
|
(18,729
|
)
|
|
|
(25.6
|
)%
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost of gaming operations
|
|
|
9,993
|
|
|
|
9,619
|
|
|
|
374
|
|
|
|
3.9
|
%
|
Cost of equipment sales
|
|
|
5,208
|
|
|
|
9,524
|
|
|
|
(4,316
|
)
|
|
|
(45.3
|
)%
|
Selling, general and administrative
|
|
|
11,640
|
|
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|
14,877
|
|
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|
(3,237
|
)
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(21.8
|
)%
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Research and development
|
|
|
8,231
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|
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|
8,125
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|
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|
106
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|
|
|
1.3
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%
|
Write-downs and other charges
|
|
|
55
|
|
|
|
1,016
|
|
|
|
(961
|
)
|
|
|
(94.6
|
)%
|
Depreciation and amortization
|
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|
24,369
|
|
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|
21,533
|
|
|
|
2,836
|
|
|
|
13.2
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%
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Total operating expenses
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59,496
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|
64,694
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|
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|
(5,198
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)
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|
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(8.0
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)%
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(Loss) income from operations
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|
(5,183
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)
|
|
|
8,348
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|
|
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(13,531
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)
|
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(162.1
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)%
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Other expense (income)
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Interest expense
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|
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8,342
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|
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8,874
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(532
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)
|
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(6.0
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)%
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Interest income
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(52
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)
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(39
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)
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(13
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)
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33.3
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%
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Other expense
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4,339
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5,260
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(921
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)
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(17.5
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)%
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(Loss) income before income taxes
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(17,812
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)
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(5,747
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)
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(12,065
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)
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209.9
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%
|
Income tax (expense) benefit
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|
|
3,393
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|
|
|
5,758
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|
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(2,365
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)
|
|
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(41.1
|
)%
|
Net (loss) income
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|
|
(14,419
|
)
|
|
|
11
|
|
|
|
(14,430
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)
|
|
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N/A
|
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Less: Net income attributable to non-controlling interests
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|
|
-
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|
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(93
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)
|
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|
93
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|
|
|
(100.0
|
)%
|
Net (loss) income attributable to PlayAGS, Inc.
|
|
$
|
(14,419
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)
|
|
$
|
(82
|
)
|
|
$
|
(14,337
|
)
|
|
|
N/A
|
|
Revenues
Gaming Operations.
Gaming operations revenue decreased $10.2 million primarily due to a decrease in our EGM segment. EGM RPD decreased by 20.0% compared to the prior year due to the temporary casino closures that began in March 2020 caused by COVID-19. Additional decreases in gaming operations revenue are due to a decrease in our EGM installed base year over year due to sales of over 700 previously leased, lower yielding units to distributors (395 of which were sold in the current quarter) and the sale of 150 units of previously leased VLT EGMs. The decrease in our EGM segment was partially offset by an increase in Table Products gaming operations revenue that is attributable to the increase in the Table Products installed base to 3,897 units, and a $0.2 million increase in our Interactive segment primarily related to an increase in our RMG revenues.
Equipment Sales.
The decrease in equipment sales was primarily due to a decrease of 560 EGMs sold year over year. We sold 464 EGM units during the three months ended March 31, 2020, compared to 1,024 EGM units in the prior year period. To a lesser extent the decrease in equipment sales revenue was also due to a 6.3% decrease in the domestic average sales price compared to the prior year period. EGM equipment sales revenue also includes revenue from the sale of 395 previously leased, lower yielding units to a distributor in the current year period, which units are not included in our sold unit count or domestic average sales price.
Operating Expenses
Cost of gaming operations. The increase in costs of gaming operations was the result of an increase of $0.9 million in overhead that was treated as a period cost in the current period as our manufacturing facility was not fully utilized due to COVID-19. Additionally our service costs have increased year over year due to additional headcount. These increases were partially offset by decreases in costs that related to reduced activity in the quarter for repairs and maintenance, royalties and other revenue-related costs. As a percentage of gaming operations revenue, costs of gaming operations was 23.4% for the three months ended March 31, 2020 compared to 18.2% for the prior year period.
Cost of Equipment Sales. The decrease in cost of equipment sales is attributable to the 464 EGM units sold during the three months ended March 31, 2020 compared to 1,024 units sold in prior year period. As a percentage of equipment sales revenue, costs of equipment sales was 44.8% for the three months ended March 31, 2020 compared to 47.2% for the prior year period.
Selling, general and administrative. The decrease in selling, general and administrative expenses is primarily due to a $2.2 million decrease in professional fees. In the prior year, professional fees incurred were primarily related to the purchase of Integrity. Salary and benefit costs also decreased by $0.9 million.
Research and development. The increase in research and development expenses is primarily due to increased professional fees, development costs and stock-based compensation expense.
Write-downs and other charges. The Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income 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 March 31, 2020, the Company recognized $0.1 million in write-downs and other charges primarily related to the disposal of long-lived assets. During the three months ended March 31, 2019, the Company recognized $1.0 million in write-downs and other charges driven by losses from the disposal of assets of $0.3 million, a fair value adjustment to contingent consideration of $0.4 million (the Company used level 3 observable inputs in conducting the impairment test) and the impairment to intangible assets of $0.4 million related to game titles (the Company used level 3 of observable inputs in conducting the impairment tests).
Due to the changing nature of our write-downs and other charges, we describe the composition of the balances as opposed to providing a year over year comparison.
Depreciation and amortization. The increase was predominantly due to a $0.3 million increase in depreciation expense driven by purchases of property and equipment and an increase in amortization expense of $2.5 million related to intangible assets purchased in the Integrity and In Bet II acquisitions as well as additional software assets placed into service.
Other Expense, net
Interest expense. The decrease in interest expense is predominantly attributable to a decrease in variable interest rate applicable to the loans under the first lien credit facilities year over year, offset by additional interest from financed placement fees and an increase of $30.0 million in debt outstanding on our revolving credit facility.
Other expense. The decrease is predominantly attributed to the write-off of indemnification receivables of $5.5 million in the prior year period compared to $3.2 million in the current year as the related liability for uncertain tax positions was also written-off due to the lapse in the statute of limitations. See Item 1. “Financial Statements” Note 12 for a detailed description of the indemnification receivable. The remaining change was due to the effect of foreign currency fluctuation on trade payables and receivables denominated in foreign currencies.
Income Taxes.
The Company's effective income tax rate for the three months ended March 31, 2020, was a benefit of 19.0%. This effective rate approximates the federal statutory rate of 21.0% due to offsetting changes in our valuation allowance on deferred tax assets and lapse in applicable statute of limitations for certain uncertain tax positions. The Company's effective income tax rate for the three months ended March 31, 2019, was a benefit of 100.2%. The difference between the federal statutory rate of 21.0% and the Company's effective tax rate for the three months ended March 31, 2019, was primarily due to changes in our valuation allowance on deferred tax assets and lapse in 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 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. 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 supplementarily.
The tables below present each of the Adjusted Expenses and include a reconciliation to the nearest GAAP measure.
Electronic Gaming Machines
Three Months Ended March 31, 2020 compared to the Three Months Ended March 31, 2019
|
|
Three Months Ended March 31,
|
|
|
$
|
|
|
%
|
|
(amounts in thousands, except unit data)
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Change
|
|
EGM segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
38,885
|
|
|
$
|
49,500
|
|
|
$
|
(10,615
|
)
|
|
|
(21.4
|
)%
|
Equipment sales
|
|
|
11,470
|
|
|
|
20,155
|
|
|
|
(8,685
|
)
|
|
|
(43.1
|
)%
|
Total EGM revenues
|
|
|
50,355
|
|
|
|
69,655
|
|
|
|
(19,300
|
)
|
|
|
(27.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EGM segment expenses and adjusted expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of gaming operations(1)
|
|
|
9,276
|
|
|
|
8,634
|
|
|
|
642
|
|
|
|
7.4
|
%
|
Less: Adjustments(2)
|
|
|
1,163
|
|
|
|
494
|
|
|
|
669
|
|
|
|
135.4
|
%
|
Adjusted cost of gaming operations
|
|
|
8,113
|
|
|
|
8,140
|
|
|
|
(27
|
)
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment sales
|
|
|
5,132
|
|
|
|
9,506
|
|
|
|
(4,374
|
)
|
|
|
(46.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
10,626
|
|
|
|
13,205
|
|
|
|
(2,579
|
)
|
|
|
(19.5
|
)%
|
Less: Adjustments(3)
|
|
|
1,128
|
|
|
|
2,715
|
|
|
|
(1,587
|
)
|
|
|
(58.5
|
)%
|
Adjusted cost of selling, general and administrative
|
|
|
9,498
|
|
|
|
10,490
|
|
|
|
(992
|
)
|
|
|
(9.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,918
|
|
|
|
6,605
|
|
|
|
313
|
|
|
|
4.7
|
%
|
Less: Adjustments(4)
|
|
|
819
|
|
|
|
444
|
|
|
|
375
|
|
|
|
84.5
|
%
|
Adjusted cost of research and development
|
|
|
6,099
|
|
|
|
6,161
|
|
|
|
(62
|
)
|
|
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of placement fees
|
|
|
1,859
|
|
|
|
1,271
|
|
|
|
588
|
|
|
|
46.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to non-controlling interest
|
|
|
-
|
|
|
|
93
|
|
|
|
(93
|
)
|
|
|
(100.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EGM adjusted EBITDA
|
|
$
|
23,372
|
|
|
$
|
36,722
|
|
|
$
|
(13,350
|
)
|
|
|
(36.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EGM unit information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VLT
|
|
|
512
|
|
|
|
667
|
|
|
|
(155
|
)
|
|
|
(23.2
|
)%
|
Class II
|
|
|
12,291
|
|
|
|
12,191
|
|
|
|
100
|
|
|
|
0.8
|
%
|
Class III
|
|
|
5,000
|
|
|
|
5,940
|
|
|
|
(940
|
)
|
|
|
(15.8
|
)%
|
Domestic installed base, end of period
|
|
|
17,803
|
|
|
|
18,798
|
|
|
|
(995
|
)
|
|
|
(5.3
|
)%
|
International installed base, end of period
|
|
|
8,286
|
|
|
|
8,510
|
|
|
|
(224
|
)
|
|
|
(2.6
|
)%
|
Total installed base, end of period
|
|
|
26,089
|
|
|
|
27,308
|
|
|
|
(1,219
|
)
|
|
|
(4.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Installed base - Oklahoma
|
|
|
9,745
|
|
|
|
10,193
|
|
|
|
(448
|
)
|
|
|
(4.4
|
)%
|
Installed base - non-Oklahoma
|
|
|
8,058
|
|
|
|
8,605
|
|
|
|
(547
|
)
|
|
|
(6.4
|
)%
|
Domestic installed base, end of period
|
|
|
17,803
|
|
|
|
18,798
|
|
|
|
(995
|
)
|
|
|
(5.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic revenue per day
|
|
$
|
21.08
|
|
|
$
|
26.42
|
|
|
$
|
(5.34
|
)
|
|
|
(20.2
|
)%
|
International revenue per day
|
|
$
|
6.89
|
|
|
$
|
8.68
|
|
|
$
|
(1.79
|
)
|
|
|
(20.6
|
)%
|
Total revenue per day
|
|
$
|
16.57
|
|
|
$
|
20.73
|
|
|
$
|
(4.16
|
)
|
|
|
(20.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic EGM units Sold
|
|
|
426
|
|
|
|
1,024
|
|
|
|
(598
|
)
|
|
|
(58.4
|
)%
|
Total EGM units Sold
|
|
|
464
|
|
|
|
1,024
|
|
|
|
(560
|
)
|
|
|
(54.7
|
)%
|
Domestic average sales price
|
|
$
|
17,564
|
|
|
$
|
18,738
|
|
|
$
|
(1,174
|
)
|
|
|
(6.3
|
)%
|
(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, initial public offering costs and secondary offering costs, legal and litigation expenses including settlement payments and other adjustments.
(4) Adjustments to research and development costs include non-cash stock compensation expense and acquisitions and integration related costs including restructuring and severance.
Gaming Operations Revenue
Gaming operations revenue decreased primarily due to a decrease in RPD of 20.0% compared to the prior year due to the temporary casino closures that began in March 2020 caused by the COVID-19 outbreak. Additional decreases in gaming operations revenue are due to a decrease in our EGM installed base year over year due to sales of over 700 previously leased, lower yielding units to distributors (395 of which were sold in the current period) and the sale of 150 units of previously leased VLT EGMs.
Equipment Sales
The decrease in equipment sales was primarily due to a decrease of 560 EGMs sold compared year over year. We sold 464 EGM units during the three months ended March 31, 2020, compared to 1,024 EGM units in the prior year period. To a lesser extent the decrease in equipment sales revenue was also due to a 6.3% decrease in the domestic average sales price compared to the prior year period. EGM equipment sales revenue also includes revenue from the sale of 395 previously leased, lower yielding units to a distributor in the current year period, which units 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 14 for further explanation of adjustments. The decrease in EGM adjusted EBITDA is attributable to the decrease in revenue described above offset by the related decrease in cost of equipment sales, and to a lesser extent a decrease in selling, general and administrative expenses driven by the decrease in salaries and benefit costs. EGM adjusted EBITDA margin was 46.4% and 52.7% for the three months ended March 31, 2020 and 2019, respectively.
Table Products
Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019
|
|
Three Months Ended March 31,
|
|
|
$
|
|
|
%
|
|
(amounts in thousands, except unit data)
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Change
|
|
Table Products segment revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
2,324
|
|
|
$
|
2,130
|
|
|
$
|
194
|
|
|
|
9.1
|
%
|
Equipment sales
|
|
|
158
|
|
|
|
26
|
|
|
|
132
|
|
|
|
507.7
|
%
|
Total Table Products revenues
|
|
|
2,482
|
|
|
|
2,156
|
|
|
|
326
|
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table Products segment expenses and adjusted expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of gaming operations(1)
|
|
|
292
|
|
|
|
595
|
|
|
|
(303
|
)
|
|
|
(50.9
|
)%
|
Less: Adjustments(2)
|
|
|
167
|
|
|
|
84
|
|
|
|
83
|
|
|
|
98.8
|
%
|
Adjusted cost of gaming operations
|
|
|
125
|
|
|
|
511
|
|
|
|
(386
|
)
|
|
|
(75.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment sales
|
|
|
76
|
|
|
|
18
|
|
|
|
58
|
|
|
|
322.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
564
|
|
|
|
539
|
|
|
|
25
|
|
|
|
4.6
|
%
|
Less: Adjustments(3)
|
|
|
43
|
|
|
|
23
|
|
|
|
20
|
|
|
|
87.0
|
%
|
Adjusted cost of selling, general and administrative
|
|
|
521
|
|
|
|
516
|
|
|
|
5
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
882
|
|
|
|
656
|
|
|
|
226
|
|
|
|
34.5
|
%
|
Less: Adjustments(4)
|
|
|
20
|
|
|
|
23
|
|
|
|
(3
|
)
|
|
|
(13.0
|
)%
|
Adjusted cost of research and development
|
|
|
862
|
|
|
|
633
|
|
|
|
229
|
|
|
|
36.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table Products adjusted EBITDA
|
|
$
|
898
|
|
|
$
|
478
|
|
|
$
|
420
|
|
|
|
87.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table Products unit information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table products installed base, end of period
|
|
|
3,897
|
|
|
|
3,285
|
|
|
|
612
|
|
|
|
18.6
|
%
|
Average monthly lease price
|
|
$
|
197
|
|
|
$
|
217
|
|
|
$
|
(20
|
)
|
|
|
(9.2
|
)%
|
(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, acquisitions and integration related costs including restructuring and severance, initial public offering costs and secondary offering costs, legal and litigation expenses including settlement payments and other adjustments.
(4) Adjustments to research and development costs include non-cash stock compensation expense and acquisitions and integration related costs including restructuring and severance.
Gaming Operations Revenue
The increase in Table Products gaming operations revenue is attributable to the increase in the Table Products installed base to 3,897 units compared to 3,285 units in the prior year period offset by a decrease in average monthly lease price as we suspended billing our customers when they closed due to COVID-19 in the current year period. The success of our progressives such as Super 4, Black Jack Match, Royal 9 as well as the success of the Dex S, are the primary drivers of the increase in the Table Products revenue and installed base compared to the prior year period.
Equipment Sales
The increase in equipment sales is due to the initial sales of our shuffler, Dex S, and sales of our table signage.
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 14 for further explanation of adjustments. The increase in Table Products adjusted EBITDA is attributable to the increases in revenue described above and to decreased adjusted cost of gaming operations primarily due to conversions of progressive games from third party hardware to our new STAX progressive. Research and development costs increased year over year related to development of new products that are expected to be released in the current year.
Interactive
Three Months Ended March 31, 2020 compared to Three Months Ended March 31, 2019
|
|
Three Months Ended March 31,
|
|
|
$
|
|
|
%
|
|
(amounts in thousands)
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Change
|
|
Interactive segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Social gaming revenue
|
|
$
|
822
|
|
|
$
|
958
|
|
|
$
|
(136
|
)
|
|
|
(14.2
|
)%
|
Real-money gaming revenue
|
|
|
654
|
|
|
|
273
|
|
|
$
|
381
|
|
|
|
139.6
|
%
|
Total Interactive revenue
|
|
|
1,476
|
|
|
|
1,231
|
|
|
|
245
|
|
|
|
19.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interactive segment expenses and adjusted expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of gaming operations(1)
|
|
|
425
|
|
|
|
390
|
|
|
|
35
|
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
450
|
|
|
|
1,133
|
|
|
|
(683
|
)
|
|
|
(60.3
|
)%
|
Less: Adjustments(2)
|
|
|
47
|
|
|
|
188
|
|
|
|
(141
|
)
|
|
|
(75.0
|
)%
|
Adjusted cost of selling, general and administrative
|
|
|
403
|
|
|
|
945
|
|
|
|
(542
|
)
|
|
|
(57.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
431
|
|
|
|
864
|
|
|
|
(433
|
)
|
|
|
(50.1
|
)%
|
Less: Adjustments(3)
|
|
|
14
|
|
|
|
33
|
|
|
|
(19
|
)
|
|
|
(57.6
|
)%
|
Adjusted cost of research and development
|
|
|
417
|
|
|
|
831
|
|
|
|
(414
|
)
|
|
|
(49.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interactive adjusted EBITDA
|
|
$
|
231
|
|
|
$
|
(935
|
)
|
|
$
|
1,166
|
|
|
|
(124.7
|
)%
|
(1) Exclusive of depreciation and amortization.
(2) 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.
(3) Adjustments to research and development costs include non-cash stock compensation expense and acquisitions and integration related costs including restructuring and severance.
Gaming Operations Revenue
These increase in gaming operations revenue is attributable to an increase of $0.4 million in RMG revenue in the current period primarily due to our land-based content on the AGS iGaming platform launched in late 2019. This increase was offset by a decrease in B2C Social revenues, which is consistent with our decreased investment in B2C Social.
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 14 for further explanation of adjustments. The increase in Interactive adjusted EBITDA is primarily attributable to a decrease in operating costs including salary and benefit related expenses and professional fees as well as the increase in revenues described above.
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. 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, 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 PlayAGS, Inc. to total adjusted EBITDA (amounts in thousands):
Three Months Ended March 31, 2020 compared to the Three Months Ended March 31, 2019
|
|
Three Months Ended March 31,
|
|
|
$
|
|
|
%
|
|
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
|
Change
|
|
Net (loss) income attributable to PlayAGS, Inc.
|
|
$
|
(14,419
|
)
|
|
$
|
(82
|
)
|
|
$
|
(14,337
|
)
|
|
|
N/A
|
|
Income tax (benefit) expense
|
|
|
(3,393
|
)
|
|
|
(5,758
|
)
|
|
|
2,365
|
|
|
|
(41.1
|
)%
|
Depreciation and amortization
|
|
|
24,369
|
|
|
|
21,533
|
|
|
|
2,836
|
|
|
|
13.2
|
%
|
Other expense
|
|
|
4,339
|
|
|
|
5,260
|
|
|
|
(921
|
)
|
|
|
(17.5
|
)%
|
Interest income
|
|
|
(52
|
)
|
|
|
(39
|
)
|
|
|
(13
|
)
|
|
|
33.3
|
%
|
Interest expense
|
|
|
8,342
|
|
|
|
8,874
|
|
|
|
(532
|
)
|
|
|
(6.0
|
)%
|
Write-downs and other(1)
|
|
|
55
|
|
|
|
1,016
|
|
|
|
(961
|
)
|
|
|
(94.6
|
)%
|
Other adjustments(2)
|
|
|
702
|
|
|
|
277
|
|
|
|
425
|
|
|
|
153.4
|
%
|
Other non-cash charges(3)
|
|
|
2,555
|
|
|
|
1,919
|
|
|
|
636
|
|
|
|
33.1
|
%
|
Acquisitions and integration related costs including restructuring and severance(4)
|
|
|
452
|
|
|
|
2,069
|
|
|
|
(1,617
|
)
|
|
|
(78.2
|
)%
|
Non-cash stock-based compensation
|
|
|
1,551
|
|
|
|
1,196
|
|
|
|
355
|
|
|
|
29.7
|
%
|
Total Adjusted EBITDA
|
|
$
|
24,501
|
|
|
$
|
36,265
|
|
|
$
|
(11,764
|
)
|
|
|
(32.4
|
)%
|
(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 professional fees incurred for projects, corporate and public filing compliance, contract cancellation fees and other transaction costs deemed to be non-operating in nature as well as costs incurred related to initial public offering, net of costs capitalized to equity and the cost of related secondary offerings.
(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) Acquisitions and integration related costs primarily relate to costs incurred after the purchase of businesses, such as the purchase of Integrity, to integrate operations and obtain costs synergies. Restructuring and severance costs primarily relate to costs incurred through the restructuring of the Company’s operations from time to time and other employee severance costs recognized in the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
We expect that primary ongoing liquidity requirements for the three months ended March 31, 2020 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.
Due to the business disruption caused by the rapid nationwide spread of the novel coronavirus and the actions by state and tribal governments and businesses to contain the virus, the Company’s customers have closed their operations and their respective markets have been significantly adversely impacted. As a result of the temporary closures of our casino customers, there has been 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 no expansion of existing casinos or development of new casinos. Specifically, gaming operations revenue and equipment sales have decreased compared to the prior year period as a result of the temporary closures of our casino customers. Similarly, our EGM and Table Product segment operating results have been disrupted because each segment’s activities including design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of its products lines have been temporarily halted or significantly reduced. In addition, each segment’s revenue from leasing, licensing and selling products has been adversely impacted due to the temporary closures of our casino customers. As a result, the Company has taken several actions to adapt to the severity of the crisis. Among other things, the Company implemented short-term furloughs with retained benefits, company-wide salary reductions, and an approximate 10% reduction of the workforce. Our non-employee directors have also agreed to reduce their fees by 50%. In addition to these actions, the Company is considering further reductions to payroll and related expenses through additional employee furloughs and may pursue one or more of these alternatives depending on the length of the casino closures in markets and jurisdictions where we earn our revenue in order to conserve liquidity.
As of March 31, 2020, we had $43.6. million in cash and cash equivalents. As of March 31, 2020, we were in compliance with the required covenants of our debt instruments, including the maximum net first lien leverage ratio, which was 3.9 to 1.0 out of a maximum of 6.0 to 1.0. On May 1, 2020, the Company entered into an amendment to the First Lien Credit Agreement (the "Amendment No. 4") that implemented a financial covenant relief period (the “Financial Covenant Relief Period”) through December 31, 2020 and implemented a revised calculation of EBITDA commencing on the first day after the expiration of the Financial Covenant Relief Period and ending on the first day of the fourth fiscal quarter after the expiration of the Financial Covenant Relief Period. As a result of this Amendment No. 4, and based on the Company's projected operating results for the next twelve months, the Company expects that it will be in compliance with its debt covenants under the First Lien Credit Agreement for at least the next twelve months. Amendment No. 4 also provided for additional financing of $95.0 million, of which the Company received $83.5 million after original issue discount and related fees, which is described in Item 1. "Financial Statements" Note 6. The incremental term loans are subject to an interest rate of LIBOR plus 13% and the agreement also provides that any refinancing of the term loans through the issuance of certain debt or any repricing amendment resulting in a lower yield occurring at any time during the first two years after May 1, 2020 will be accompanied by a Make-Whole Premium as defined in the agreement that includes a premium or fee as well as the required payment of any unpaid interest that would have been paid through May 1, 2022. For six months following this two year period a prepayment of the loans will be accompanied by a 1.00% payment premium or fee. Other than described above, the incremental term loans continue to have the same terms as provided under the existing credit agreement. As a result of the additional financing along with the $43.6 million of cash and cash equivalents on hand as of March 31, 2020, 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.
Indebtedness
First Lien Credit Facilities
On June 6, 2017 (the “Closing Date”), AP Gaming I, LLC (the “Borrower”), a wholly owned indirect subsidiary of the Company, entered into a first lien credit agreement (“the First Lien Credit Agreement”), providing for $450.0 million in term loans and a $30.0 million revolving credit facility. The proceeds of the term loans were used primarily to repay the Company's then existing term loans, other indebtedness, to pay for the fees and expenses incurred in connection with the foregoing and otherwise for general corporate purposes.The full amount of the revolving credit facility was drawn on March 19, 2020 as a precautionary measure in order to increase the Company’s cash position and facilitate financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. The proceeds from the borrowings under the revolving credit facility are currently being held on the Company’s consolidated balance sheet. The term loans will mature on February 15, 2024, and the revolving credit facility will mature on June 6, 2022. The term loans require scheduled quarterly payments in amounts equal to 0.25% of the original aggregate principal amount of the term loans, with the balance due at maturity. Borrowings under the term loans and revolving credit facility bear interest at a rate equal to, at the Borrower’s option, either LIBOR or the base rate, subject to an interest rate floor plus an applicable margin rate. In addition, on a quarterly basis, the Borrower is required to pay each lender under the revolving credit facility a commitment fee in respect of any unused commitments thereunder at a rate of 0.50% per annum.
On December 6, 2017, the Borrower entered into incremental facilities for $65.0 million in term loans (the “December Incremental Term Loans”). The net proceeds of the December Incremental Term Loans were used to finance the acquisition of electronic gaming machines and related assets operated by Rocket Gaming Systems (“Rocket”) and to pay fees and expenses in connection therewith and for general corporate purposes.
An additional $1.0 million in loan costs were incurred related to the issuance of the December Incremental Term Loans. Given the composition of the lender group, the transaction was accounted for as a debt modification and, as such, $0.9 million in third-party costs were expensed and included in the loss on extinguishment and modification of debt. The remaining amount was capitalized and will be amortized over the term of the agreement.
On February 8, 2018, the Borrower completed the repricing of its existing $513.0 million term loans under its First Lien Credit Agreement (the “Term Loans”). The Term Loans were repriced from 550 basis points to 425 basis points over LIBOR. The LIBOR floor remained at 100 basis points.
On February 8, 2018, in connection with the repricing of the Term Loans, third-party costs of $1.2 million were expensed and included in the loss and modification of debt. Existing debt issuance costs of $0.4 million were written-off and also included in the loss on extinguishment and modification of debt.
On October 5, 2018, the Borrower entered into an Incremental Assumption and Amendment Agreement No. 2 (the “Incremental Agreement No. 2”) with certain of the Borrower’s subsidiaries, the lenders party thereto from time to time and the Administrative Agent. The Incremental Agreement No. 2 amended and restated that certain First Lien Credit Agreement, dated as of June 6, 2017, as amended on December 6, 2017 and as amended and restated on February 8, 2018 (the “Existing Credit Agreement”), among the Borrower, the lenders party thereto, the Administrative Agent and other parties named therein (the “Amended and Restated Credit Agreement”), to (a) reduce the applicable interest rate margin for the Term B Loans (as repriced, the “Repriced Term B Loans”) under the Credit Agreement by 0.75% (which shall increase by an additional 0.25% if at any time the Borrower receives a corporate credit rating of at least B1 from Moody’s, regardless of any future rating) and (b) provide for the incurrence by the Borrower of incremental term loans in an aggregate principal amount of $30.0 million (the “Incremental Term Loans” and together with the Repriced Term B Loans, the “Term B Loans”).
On October 5, 2018, in connection with the repricing of the Term Loans, third-party costs of $1.5 million were expensed and included in the loss on extinguishment and modification of debt.
On August 30, 2019, the Borrower entered into Amendment No. 3 (the "Repricing Amendment") to the credit agreement. The Repricing Amendment reduced the interest rate margin on the revolving credit facility to the same interest rate margin as the term loans issued under the credit agreement.
On May 1, 2020, the Borrower entered into Amendment No. 4 to the First Lien Credit Agreement that provided for covenant relief (as described in Note 1) as well as $95.0 million in incremental term loans of which the net proceeds received by the Company were $83.5 million after original issue discount and related fees. The incremental term loans are subject to an interest rate of LIBOR plus 13% and the agreement also provides that any refinancing of the term loans through the issuance of certain debt or any repricing amendment resulting in a lower yield occurring at any time during the first two years after May 1, 2020 will be accompanied by a Make-Whole Premium as defined in the agreement that includes a premium or fee as well as the required payment of any unpaid interest that would have been paid through May 1, 2022. For six months following this two year period, a prepayment of the loans will be accompanied by a 1.00% payment premium or fee. Other than described above, the incremental term loans continue to have the same terms as provided under the Existing Credit Agreement.
As of March 31, 2020, we were in compliance with the required covenants of our debt instruments. See Item 1. “Notes to Condensed Consolidated Financial Statements”, Note 1 “Liquidity and Financing” for a description of a change to our financial covenants for future periods.
Equipment Long Term Note Payable and Finance Leases
The Company has entered into a financing agreement to purchase certain gaming devices, systems and related equipment and has entered into leases for vehicles and equipment that are accounted for as finance leases.
The following table summarizes our historical cash flows (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash Flow Information:
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
18,809
|
|
|
$
|
11,655
|
|
Net cash used in investing activities
|
|
|
(12,879
|
)
|
|
|
(69,675
|
)
|
Net cash provided by (used in) financing activities
|
|
|
24,485
|
|
|
|
(2,393
|
)
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(13
|
)
|
|
|
(2
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
30,402
|
|
|
$
|
(60,415
|
)
|
Operating activities
Net cash provided by operating activities for the three months ended March 31, 2020, was $18.8 million compared to net cash provided by operating activities of $11.7 million in the prior year period, representing an increase of $7.2 million. This increase is primarily due to collection of accounts receivables in the current period, offset by a decrease in net income.
Investing activities
Net cash used in investing activities for the three months ended March 31, 2020, was $12.9 million compared to $69.7 million used in investing activities in the prior year period, representing a decrease in cash used of $56.8 million. The decrease was primarily due to the acquisition of Integrity, net of cash acquired, of $50.8 million in the prior year period and an $8.9 million decrease in purchases of property and equipment compared to the prior year period, offset by a $2.3 million increase in customer note receivable and a $1.1 million increase in software development and other compared to the prior year period.
Financing activities
Net cash provided by financing activities for the three months ended March 31, 2020, was $24.5 million compared to net cash used of $2.4 million for the three months ended March 31, 2019, representing an increase in cash of $26.9 primarily attributable to the borrowing on revolver of $30.0 million, offset by a $2.5 million increase in payments of placement fees compared to the prior year period.
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, 2019. There were no material changes to our policies during the three months ended March 31, 2020.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See related disclosure at Item 1. “Notes to Condensed Consolidated Financial Statements”, Note 1 “Description of the Business and Summary of Significant Accounting Policies.”