Accel Entertainment(ACEL) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The financial statements reflect a strong Q3 2020 recovery in revenue and net income, despite a year-to-date net loss due to COVID-19 impacts Condensed Consolidated Statements of Operations The statements of operations show a strong Q3 2020 recovery in revenue and net income, contrasting with a nine-month net loss due to COVID-19 impacts Three Months Ended Sep 30, 2020 vs 2019 | Financial Metric | Three Months Ended Sep 30, 2020 ($) | Three Months Ended Sep 30, 2019 ($) | Nine Months Ended Sep 30, 2020 ($) | Nine Months Ended Sep 30, 2019 ($) | | :--- | :--- | :--- | :--- | :--- | | Total net revenues | $136.3M | $101.3M | $241.9M | $303.0M | | Operating income (loss) | $9.0M | $1.0M | $(12.7)M | $19.0M | | Net income (loss) | $12.1M | $(1.6)M | $(11.1)M | $6.7M | | Diluted EPS | $0.14 | $(0.03) | $(0.14) | $0.11 | - The company experienced a strong recovery in Q3 2020 with a 34.6% YoY increase in revenue, leading to a net income of $12.1 million[4] - However, the nine-month results reflect the severe impact of the COVID-19 shutdown, with revenue down 20.1% YoY and a resulting net loss of $11.1 million[4] Condensed Consolidated Balance Sheets The balance sheets show increased total assets and a significant improvement in stockholders' equity, driven by capital raising activities Balance Sheet Item | Balance Sheet Item | September 30, 2020 (Unaudited) ($) | December 31, 2019 ($) | | :--- | :--- | :--- | | Cash and cash equivalents | $179.1M | $125.4M | | Total current assets | $209.7M | $151.5M | | Total assets | $564.6M | $509.3M | | Total current liabilities | $52.6M | $54.9M | | Total liabilities | $406.6M | $423.8M | | Total stockholders' equity | $158.0M | $85.5M | - The company's cash position improved significantly to $179.1 million by the end of Q3 2020[6] - Total stockholders' equity nearly doubled from year-end 2019, primarily due to capital raising activities[6] Condensed Consolidated Statements of Cash Flows The cash flow statements indicate a significant decrease in operating cash flow year-over-year, offset by substantial cash inflows from financing Cash Flow Activity | Cash Flow Activity | Nine Months Ended Sep 30, 2020 ($) | Nine Months Ended Sep 30, 2019 ($) | | :--- | :--- | :--- | | Net cash provided by operating activities | $4.1M | $45.7M | | Net cash used in investing activities | $(23.1)M | $(126.3)M | | Net cash provided by financing activities | $72.7M | $99.6M | | Net increase in cash and cash equivalents | $53.7M | $19.0M | - Cash from operations for the first nine months of 2020 plummeted to $4.1 million from $45.7 million in the prior year period, reflecting the impact of the COVID-19 shutdown[10] - The company bolstered its cash position through financing activities, including net proceeds of $78.7 million from a common stock issuance and drawing on its credit facility[10] Notes to the Condensed Consolidated Financial Statements The notes detail the material impact of the COVID-19 shutdown, recent acquisitions, capital raising, and changes in accounting estimates - Due to the COVID-19 outbreak, the Illinois Gaming Board (IGB) shut down all video gaming terminals (VGTs) from March 16, 2020, through June 30, 2020, impacting 39% of gaming days in the first nine months of the year, materially affecting revenues, results of operations, and cash flows[17] - On July 22, 2020, the Company acquired Tom's Amusement Company, Inc., a Georgia-based operator, for a total purchase price of $3.6 million, marking its entry into the Georgia market[65] - In September 2020, the Company completed a public offering of 8,000,000 shares of Class A-1 common stock, receiving net proceeds of approximately $78.7 million[92] - The company changed its estimate for the useful lives of its video gaming terminals and equipment from 7 to 10 years, which decreased depreciation expense by $1.9 million in Q3 2020 and $6.4 million for the nine-month period[28][210] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the significant impact of COVID-19 on operations and financial performance, highlighting the Q3 recovery, liquidity, and key business metrics Impact of COVID-19 This section details the operational disruptions caused by the COVID-19 shutdown and the company's mitigating actions to preserve financial flexibility - The Illinois Gaming Board (IGB) mandated a shutdown of all VGTs from March 16, 2020, to June 30, 2020, which impacted 106 of 274 gaming days (39%) in the first nine months of 2020[140] - In response to the shutdown, the company took mitigating actions including furloughing 90% of employees, deferring vendor payments, and drawing $65 million on its delayed draw term loan to preserve financial flexibility[140] - The company incurred non-recurring expenses of $2.1 million for the nine months ended September 30, 2020, to provide benefits for furloughed employees, and spent $1.9 million on capital costs for IGB-mandated VGT spacers to promote social distancing[144] Results of Operations This section analyzes the company's revenue, operating income, and net income performance for both the third quarter and nine-month periods, highlighting COVID-19 impact and recovery Three Months Ended September 30, 2020 vs 2019 | Metric | Q3 2020 ($) | Q3 2019 ($) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $136.3M | $101.3M | +$35.0M | +34.6% | | Operating Income | $9.0M | $1.0M | +$8.0M | +782.5% | | Net Income (Loss) | $12.1M | $(1.6)M | +$13.7M | N/A | Nine Months Ended September 30, 2020 vs 2019 | Metric | YTD 2020 ($) | YTD 2019 ($) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $241.9M | $303.0M | -$61.0M | -20.1% | | Operating (Loss) Income | $(12.7)M | $19.0M | -$31.7M | -166.9% | | Net (Loss) Income | $(11.1)M | $6.7M | -$17.8M | -265.0% | - The Q3 2020 revenue increase was driven by a $31.6 million rise in net video gaming revenue, partly attributable to the acquisition of Grand River Jackpot and organic growth in locations and VGTs[160] - The decrease in nine-month revenue was primarily due to the temporary shutdown of Illinois video gaming, which was partially offset by contributions from the Grand River Jackpot acquisition[171] Key Business Metrics and Non-GAAP Financial Measures This section presents key operational metrics and non-GAAP financial measures like Adjusted EBITDA, illustrating business growth and financial performance Operational Metrics as of September 30 | Metric | 2020 | 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Licensed establishments | 2,363 | 2,290 | +3.2% | | Video gaming terminals | 11,597 | 10,346 | +12.1% | Adjusted EBITDA (Non-GAAP) | Period | 2020 ($) | 2019 ($) | Change (%) | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $23.1M | $18.1M | +27.4% | | Nine Months Ended Sep 30 | $29.2M | $58.8M | -50.4% | Liquidity and Capital Resources This section discusses the company's cash position, debt levels, and credit facility availability, highlighting actions taken to maintain financial flexibility - As of September 30, 2020, the company had $179.1 million in cash and cash equivalents and approximately $95.0 million of availability under its Credit Agreement[190][193] - Total debt outstanding as of September 30, 2020, was $357.1 million under its 2019 Senior Secured Credit Facility[51][272] - To provide financial flexibility during the COVID-19 uncertainty, the company amended its Credit Agreement on August 4, 2020, to provide a waiver of financial covenant breaches for the periods from September 30, 2020, through March 31, 2021[61][203] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on its variable-rate debt, with a 1% increase impacting annual interest expense by $3.6 million - The company is exposed to interest rate risk on its $357.1 million of borrowings under its senior secured credit facility[217] - A hypothetical 1.0% (100 basis points) increase in underlying interest rates would increase annual interest expense by approximately $3.6 million[217] Controls and Procedures Management concluded that disclosure controls and procedures were not effective as of September 30, 2020, due to previously identified material weaknesses - Management concluded that disclosure controls and procedures were not effective as of September 30, 2020[220] - The ineffectiveness is due to material weaknesses previously identified in the Annual Report on Form 10-K for the year ended December 31, 2019, which were still present[220][222] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, notably ongoing litigation with J&J Ventures Gaming, LLC, currently pending before the Illinois Gaming Board - Accel is involved in a series of related litigated matters with J&J Ventures Gaming, LLC ("J&J") over claims that Accel wrongly contracted with 10 licensed establishments in 2012[225] - The Supreme Court of Illinois determined that the Illinois Gaming Board (IGB) has exclusive jurisdiction to decide the validity of the disputed agreements, with petitions from both Accel and J&J remaining pending[121][228][229] - The company is also involved in litigation with a former employee, Jason Rowell, over breaches of a non-compete agreement and alleged entitlement to equity interests[123][231] Risk Factors The company highlights significant risks including the ongoing impact of COVID-19, regulatory complexities, geographic concentration in Illinois, and intense competition - The COVID-19 pandemic has had, and could continue to have, an adverse impact on business, with the possibility of future regional or statewide shutdowns of gaming operations[235][240] - The business is subject to extensive and evolving government regulation, and difficulties or failures in obtaining or maintaining required licenses could adversely affect operations and growth[245][263] - The business is geographically concentrated in Illinois, making it vulnerable to local economic conditions, regulatory changes, and other regional risks[257] - Significant ownership by TPG, Clairvest, and the Rubenstein Family means they may have interests that differ from other stockholders and can exert substantial influence over the company[274][278] Unregistered Sales of Equity Securities and Use of Proceeds In September 2020, the company completed a follow-on public offering of 8,000,000 shares of common stock, raising $78.7 million in net proceeds - In September 2020, the company completed a follow-on public offering of 8,000,000 shares of common stock, raising $78.7 million in net proceeds[283] Defaults Upon Senior Securities The company reports no defaults upon senior securities - The company reports no defaults upon senior securities[284] Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to credit and employment agreements, and officer certifications - Exhibits filed include amendments to credit and employment agreements, as well as Sarbanes-Oxley certifications[286]