PLAYAGS, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains “forward-looking statements”. Forward-looking statements include all statements that address future results or events. In some cases, you can identify forward-looking statements by words such as “may”, “could”, “will”, “would”, “should”, “might” or their negative forms. Generally, the words “anticipate”, “believe”, “continue”, “expect”, “intend”, “estimate”, “project”, “plan” and similar expressions identify forward-looking statements . In particular, statements regarding 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. Activity” and “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year December 31, 2021 are forward-looking statements. These forward-looking statements include statements that are not historical facts, including statements regarding our possible or suspected future actions and business strategies. We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. Although we believe these expectations, assumptions, estimates and projections to be reasonable, these forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, which could cause our actual results, performance or achievements to differ materially from the 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 these forward-looking statements. These forward-looking statements speak only as of the date of this quarterly report. We do not undertake and specifically disclaim any obligation to update these statements or to publicly announce the results of any revisions to these statements to reflect future events or developments, except as required by federal securities law. . New factors appear from time to time and it is impossible for us to predict all of them.

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

Overview

We are a leading developer and supplier of EGMs and other products and services to the gaming industry. We operate in three distinct segments: EGM, Table Products and Interactive. The activities of each segment include the design, development, acquisition, manufacture, marketing, distribution, installation and maintenance of a distinct line of products. Founded in 2005, we have historically focused on providing 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 to include: (i) Class III EGMs for commercial and Native American casinos licensed to operate Class III EGMs, (ii) table gaming products, and (iii) interactive products, which we believe provide us with growth opportunities as we expand into markets where we currently have a limited or no presence. For the three months ended March 31, 2022approximately 73% of our total revenue was generated through recurring rental agreements where we place EGMs and tabletop gaming products in our customers’ gaming facilities under a revenue sharing agreement (we receive a percentage of the revenue generated by these products) or per-day fee-agreement (we receive a fixed daily or monthly fee per EGM or table game product), or recurring revenue from our interactive gaming operations.

EGM Segment

EGM is our largest segment, accounting for 91.8% of our revenue for the three months ended March 31, 2022. We have a library of exclusive game titles that we deliver on multiple state-of-the-art EGM cabinets. These include our premium rental-only enclosures Orion Starwall, Orion Curve Premium, Orion’s Ascension, and Big Red (“Colossal Diamonds”). Additionally, our main cabinets available for sale and rental include the Orion Portrait, Orion Slant, Curve of Orion, Amount of Orion and ICON. In addition to providing complete EGM units, we offer Conversion Kits, which are essentially software containing new games to convert existing game titles into other game titles offered on this operating platform.

We design all of our cabinets with the intention of capturing the attention of players in casinos while aiming to maximize operator profits. We offer our customers the option of renting or purchasing our EGMs and associated gaming systems. Currently, we derive a substantial portion of our revenue from installed EGMs under revenue-sharing or daily rental agreements, also known as “participation” agreements, and we refer to this revenue generation as our “participation model.” .

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Table Products

In addition to our existing portfolio of EGMs, we also offer our customers over 60 unique tabletop product offerings, including live felt table games, side betting offerings, progressive games, cards, signboards and other ancillary table game equipment. Our tabletop products are designed to enhance the table games section of the casino (commonly referred to as “the pit”). Over the past 10 years, there has been a trend to introduce side bets at blackjack tables to increase the overall grip of the game. Our table products segment offers a full range of side bets and specialty table games that are capitalizing on this trend, and we believe this segment will serve as an important growth engine for the company, including generating new cross-selling opportunities with our EGM offerings. . From March 31, 2022we had an installed base of 5,384 tabletop products domestically and internationally and we believe that we are currently a leading supplier of tabletop products to the gaming industry based on the number of products placed.

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

Interactive

We operate a business-to-business (“B2B”) gaming aggregation platform for real money online gaming (“RMG”) operators. Through our remote game server, we provide a library of over 1,000 games, many of which are AGS titles, developed by our in-house game development studios. We also partner with a host of third-party game developers to deliver gaming content across mobile, desktop and social channels – where and when gamers want to engage.

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

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Key Drivers of Our Business

Our revenues are impacted by the following key factors:

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


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


  • our revenue share percentage with customers;


  • the capital budgets of our customers;


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


  • expansion of existing casinos;


  • development of new casinos;


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


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


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


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

The above factors were significantly impacted by the COVID-19 pandemic in fiscal 2021. Specifically, gaming operations revenue and equipment sales decreased in the period ended March 31, 2021, due to customers operating at limited capacity and other restrictions. Operating results in our EGM and Tableware segment were disrupted due to customers operating at limited capacity and other restrictions in the prior year. From March 31, 2022, all of the Company’s customers have reopened? there are still 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 our research and development expenses are mainly attributable to changes in employment, salaries and related employee benefits.

Acquisitions and Divestitures

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

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Results of Operations

Three months completed March 31, 2022 compared to the three months ended March 31, 2021

The following tables present selected condensed consolidated financial data for the three months ended March 31, 2022 and 2021 (in thousands):

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