PLAYAGS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q incorporates “forward-looking statements.”
Forward-looking statements embrace any statements that tackle future outcomes or
occurrences. In some circumstances you possibly can establish forward-looking statements by
terminology similar to “could,” “may,” “will,” “would,” “ought to,” “may” or the
negatives thereof. Generally, the phrases “anticipate,” “imagine,” “proceed,”
“count on,” “intend,” “estimate,” “mission,” “plan” and related expressions
establish forward-looking statements. In explicit, statements about our
expectations, beliefs, plans, goals, assumptions or future occasions or
efficiency contained elsewhere on this Quarterly Report on Form 10-Q in addition to
these mentioned beneath “Item 1. Business” and “Item 1A. Risk Factors” in our
Annual Report on Form 10-Okay for the year-ended December 31, 2020 are
forward-looking statements. These forward-looking statements embrace statements
that aren’t historic details, together with statements regarding our potential or
assumed future actions and enterprise methods. We have based mostly these
forward-looking statements on our present expectations, assumptions, estimates
and projections. While we imagine these expectations, assumptions, estimates and
projections are cheap, such forward-looking statements are solely predictions
and contain identified and unknown dangers, uncertainties and different components, a lot of
that are exterior of our management, which may trigger our precise outcomes,
efficiency or achievements to vary materially from any outcomes, efficiency
or achievements expressed or implied by such forward-looking statements. Given
the dangers and uncertainties, you might be cautioned to not place undue reliance on
such forward-looking statements. These forward-looking statements are made solely
as of the date of this Quarterly Report. We don’t undertake and particularly
decline any obligation to replace any such statements or to publicly announce the
outcomes of any revisions to any such statements to mirror future occasions or
developments except required by federal securities legislation. New components emerge from
time to time, and it isn’t potential for us to foretell all such components.

Unless the context signifies in any other case, or except particularly said in any other case,
references to the “Company”, “PlayAGS”, “AGS”, “we”, “our” and “us” discuss with
PlayAGS, Inc. and its consolidated subsidiaries.

Overview

We are a number one designer and provider of EGMs and different services
for the gaming {industry}. We function our enterprise in three distinct segments:
EGMs, Table Products and Interactive. Each section’s actions embrace the
design, growth, acquisition, manufacturing, advertising, distribution,
set up and servicing of a definite product line. Founded in 2005, we
traditionally centered on supplying EGMs, together with slot machines, video bingo
machines, and different digital gaming units, to the Native American gaming
market. Since 2014, we have now expanded our product line-up to incorporate: (i) Class
III EGMs for industrial and Native American casinos permitted to function Class
III EGMs, (ii) desk sport merchandise and (iii) interactive merchandise, all of which
we imagine present us with development alternatives as we broaden in markets the place we
presently have restricted or no presence. For the 9 months ended September 30,
2021, 80.6% of our whole income was generated by recurring contracted
lease agreements whereby we place EGMs and desk sport merchandise at our clients’
gaming services beneath both a income sharing settlement (we obtain a
proportion of the revenues that these merchandise generate) or fee-per-day
settlement (we obtain a day by day or month-to-month fastened price per EGM or desk sport
product), or recurring income from our Interactive gaming operations.

EGM Segment

EGMs represent our largest section, representing 91% of our income for the
9 months ended September 30, 2021. We have a library of proprietary sport
titles that we ship on a number of state-of-the-art EGM cupboards. These embrace
our premium lease solely cupboards Orion Starwall, Orion Curve Premium, and Big
Red. Also, our core cupboards which can be obtainable on the market and lease embrace the
Orion Portrait, Orion Curve, Orion Slant, Orion Upright and ICON.

We design all of our cupboards with the intention of capturing the eye of
gamers on on line casino flooring whereas aiming to maximise operator income. We supply our
clients the choice of both leasing or buying our EGMs and related
gaming methods. Currently, we derive a considerable portion of our revenues from
EGMs put in beneath income sharing or fee-per-day lease agreements, additionally identified
as “participation” agreements, and we discuss with such income technology as our
“participation mannequin”.

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Table Products

In addition to our current portfolio of EGMs, we additionally supply our clients extra
than 50 distinctive desk product choices, together with dwell felt desk video games, facet
guess choices, progressives, card shufflers, signage, and different ancillary desk
sport tools. Our desk merchandise are designed to reinforce the desk video games
part of the on line casino flooring (generally referred to as “the pit”). Over the previous 10
years, there was a pattern of introducing facet bets on blackjack tables to
enhance the sport’s general maintain. Our desk merchandise section presents a full suite
of facet bets and specialty desk video games that capitalize on this pattern, and we
imagine that this section will function an essential development engine for the
Company, together with by producing additional cross-selling alternatives with our
EGM choices. As of September 30, 2021, we had an put in base of 4,648 desk
merchandise domestically and internationally and we imagine we’re presently a
main provider of desk merchandise to the gaming {industry} based mostly on variety of
merchandise positioned.

Our Table Products section focuses on excessive margin recurring income generated by
leases. Nearly all the income we generate on this section is recurring.

Interactive

We function a Business-to-Business (“B2B”) sport aggregation platform for a lot of of
the world’s largest and most distinguished on-line real-money gaming (“RMG”) and
social on line casino gaming operators. Through our highly effective distant gaming server, we
ship a library of greater than 1,000 video games, a lot of that are AGS titles,
developed by our inner game-development studios and confirmed in land-based
real-money retail environments. We additionally companion with a bunch of industry-leading
third-party sport builders to supply the most effective sport content material throughout cellular,
desktop, and social channels – delivering an distinctive participant expertise
wherever and each time gamers wish to have interaction.

We are absolutely licensed by the UK Gambling Commission, Malta Gaming Authority
(MGA), Romanian National Gambling Office (ONJN), New Jersey (DGE), Pennsylvania
Gaming Control Board (PGCB), Michigan Gaming Control Board (MGCB), Alcohol,
Lotto Quebec, the Gaming Commission of Ontario, and the Gibraltar Regulatory
Authority and powered by a world group, with places of work and staff in Gibraltar,
Isle of Man, Las Vegas, and the UK.

AGS additionally presents Business-to-Consumer (“B2C”) free-to-play social on line casino apps
that gamers throughout the globe can get pleasure from anytime on-line or on their cellular
system. Our B2C social on line casino video games function on a free-to-play mannequin, whereby
sport gamers could acquire digital forex or different digital consumable items
(collectively known as “digital items” or “digital forex”) freed from
cost or the participant could buy further digital items. Our social on line casino
library consists of over 600 sport titles in a wide range of completely different video games, together with
video slots, spinning reels, video poker, blackjack, bingo, and tournaments. Our
hottest app, Lucky Play Casino, presents cellular gamers all of the thrills of
Vegas casinos. Players can select from dozens of AGS player-favorite slot video games,
in addition to different on line casino classics like video poker, blackjack, and bingo. Our
apps additionally function thrilling in-app tournaments, rumbles, VIP bonuses, and distinctive
interactive challenges.

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Key Drivers of Our Business

Our revenues are impacted by the next key components:

  • the amount of cash spent by shoppers on our income share put in base;


  • the quantity of the day by day price and promoting value of our participation digital
    gaming machines;


  • our income share proportion with clients;


  • the capital budgets of our clients;


  • the extent of substitute of current digital gaming machines in current
    casinos;


  • growth of current casinos;


  • growth of latest casinos;


  • opening or closure of latest gaming jurisdictions each in the United States and
    internationally;


  • our potential to acquire and keep gaming licenses in numerous jurisdictions;


  • the relative competitiveness and recognition of our digital gaming machines
    in comparison with aggressive merchandise provided in the identical services; and


  • common macro-economic components, together with ranges of and adjustments to shopper
    disposable earnings and private consumption spending.

The components above have been considerably affected by COVID-19 and the associated
closure of practically all of our on line casino buyer areas. Due to the enterprise
disruption brought on by the fast nationwide unfold of the coronavirus and the
actions by state and tribal governments and companies to include the virus,
virtually all the Company’s clients closed their operations through the months
of March and April 2020 and their respective markets have been considerably and
adversely impacted. Beginning in May 2020, casinos started to reopen at restricted
capability. As of September 30, 2021, many of the Company’s clients have
reopened at full capability; there are nonetheless some clients who’ve reopened
at restricted capability, and there are some that also stay closed. As a results of
the non permanent closures of our on line casino clients, there was a lower in fiscal
yr 2020 the amount of cash spent by shoppers on our income shared put in
base and the quantity of day by day charges of our participation EGMs and a slowdown
within the growth of current casinos or growth of latest
casinos. Specifically, gaming operations income and tools gross sales decreased
through the yr ended December 31, 2020 on account of the non permanent closures of
our on line casino clients. Similarly, our EGM and Table Products section working
outcomes have been disrupted as a result of every section’s actions together with design,
growth, acquisition, manufacturing, advertising, distribution, set up
and servicing of its product’s strains have been briefly halted or
considerably diminished. In addition, every section’s income from leasing,
licensing and promoting merchandise was adversely impacted because of the non permanent
closures of our on line casino clients. As a end result, the Company took a number of actions
to adapt to the severity of the COVID-19 disaster, which included discount of
bills and capital purchases. From April to September of 2020, the Company
applied short-term furloughs with retained advantages, company-wide wage
reductions, and diminished its workforce by over 10%. Our non-employee
administrators additionally agreed to cut back their charges by 50% for the primary three quarters
of 2020 and to take cost of the charges in inventory in lieu of money

Our bills are impacted by the next key components:

  • fluctuations in the price of labor regarding productiveness;


  • extra time and coaching;
  • fluctuations within the value of elements for gaming tools;


  • fluctuations in power costs;


  • adjustments in the price of acquiring and sustaining gaming licenses;


  • fluctuations within the stage of upkeep expense required on gaming tools;
    and


  • tariff will increase.

Variations in our promoting, common and administrative bills, and analysis and
growth bills are primarily as a consequence of adjustments in employment and salaries and
associated fringe advantages.

Acquisitions and Divestitures

We haven’t made acquisitions over the previous two years.

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Results of Operations

Three Months Ended September 30, 2021 in comparison with the Three Months
Ended September 30, 2020

The following tables set forth sure chosen condensed consolidated monetary
knowledge for the three months ended September 30, 2021 and 2020 (in 1000’s):

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