Accel Entertainment(ACEL) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, and disclosures on market risk and internal controls ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements for Accel Entertainment, Inc., including the statements of operations and comprehensive income, balance sheets, statements of stockholders' equity, and statements of cash flows, along with detailed notes explaining significant accounting policies, financial instruments, and other relevant disclosures for the periods ended September 30, 2022 and 2021 Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) This statement details Accel Entertainment's revenues, expenses, operating income, and net income for the three and nine months ended September 30, 2022 and 2021, highlighting significant growth in profitability Three Months Ended September 30, 2022 vs. 2021 (in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--------------------------------------- | :----- | :----- | :--------- | :--------- | | Total Net Revenues | $266,967 | $193,351 | $73,616 | 38.1% | | Total Operating Expenses | $243,728 | $174,704 | $69,024 | 39.5% | | Operating Income | $23,239 | $18,647 | $4,592 | 24.6% | | Income Before Income Tax Expense | $27,358 | $14,743 | $12,615 | 85.6% | | Net Income | $22,444 | $10,807 | $11,637 | 107.7% | | Basic EPS | $0.25 | $0.11 | $0.14 | 127.3% | | Diluted EPS | $0.25 | $0.11 | $0.14 | 127.3% | | Comprehensive Income | $28,369 | $10,492 | $17,877 | 170.4% | Nine Months Ended September 30, 2022 vs. 2021 (in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--------------------------------------- | :----- | :----- | :--------- | :--------- | | Total Net Revenues | $691,727 | $542,394 | $149,333 | 27.5% | | Total Operating Expenses | $619,966 | $489,265 | $130,701 | 26.7% | | Operating Income | $71,761 | $53,129 | $18,632 | 35.1% | | Income Before Income Tax Expense | $77,227 | $36,526 | $40,701 | 111.4% | | Net Income | $60,696 | $24,753 | $35,943 | 145.2% | | Basic EPS | $0.66 | $0.26 | $0.40 | 153.8% | | Diluted EPS | $0.66 | $0.26 | $0.40 | 153.8% | | Comprehensive Income | $73,392 | $30,111 | $43,281 | 143.7% | Condensed Consolidated Balance Sheets This statement presents Accel Entertainment's financial position, including assets, liabilities, and stockholders' equity, as of September 30, 2022, compared to December 31, 2021, reflecting growth in total assets and liabilities As of September 30, 2022 vs. December 31, 2021 (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | Change ($) | Change (%) | | :--------------------------------------- | :----------- | :----------- | :--------- | :--------- | | Total Current Assets | $283,707 | $247,995 | $35,712 | 14.4% | | Total Assets | $838,349 | $616,073 | $222,276 | 36.1% | | Total Current Liabilities | $92,680 | $71,835 | $20,845 | 29.0% | | Total Long-Term Liabilities | $564,787 | $385,777 | $179,010 | 46.4% | | Total Stockholders' Equity | $180,882 | $158,461 | $22,421 | 14.1% | Condensed Consolidated Statements of Stockholders' Equity (Unaudited) This statement outlines changes in Accel Entertainment's stockholders' equity from January 1, 2022, to September 30, 2022, detailing impacts from stock repurchases, compensation, and net income Stockholders' Equity Changes (January 1, 2022 to September 30, 2022, in thousands) | Item | Amount | | :--------------------------------------- | :----- | | Balance, January 1, 2022 | $158,461 | | Repurchase of common stock | $(61,918) | | Stock-based compensation | $4,966 | | Exercise of stock-based awards | $407 | | Reissuance of treasury stock in business combination | $5,584 | | Unrealized gain on interest rate caplets | $12,696 | | Net income | $60,696 | | Balance, September 30, 2022 | $180,882 | Condensed Consolidated Statements of Cash Flows (Unaudited) This statement summarizes Accel Entertainment's cash flows from operating, investing, and financing activities for the nine months ended September 30, 2022 and 2021, showing significant investing and financing shifts Nine Months Ended September 30, 2022 vs. 2021 (in thousands) | Cash Flow Activity | 2022 | 2021 | Change ($) | | :--------------------------------------- | :----- | :----- | :--------- | | Net Cash Provided by Operating Activities | $78,250 | $80,262 | $(2,012) | | Net Cash Used in Investing Activities | $(168,871) | $(21,220) | $(147,651) | | Net Cash Provided by (Used in) Financing Activities | $103,898 | $(13,610) | $117,508 | | Net Increase in Cash and Cash Equivalents | $13,277 | $45,432 | $(32,155) | | Cash and Cash Equivalents, End of Period | $212,063 | $179,883 | $32,180 | Notes to the Condensed Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering the company's business, accounting policies, financial instrument valuations, debt, acquisitions, equity, and various commitments and contingencies Note 1. Description of Business Accel Entertainment, Inc. is a leading distributed gaming operator in the U.S., licensed in Illinois, Georgia, Pennsylvania, Iowa, Montana, Nevada, and Nebraska. The company installs and operates gaming terminals, ATMs, and amusement machines in non-casino locations. It also manufactures gaming terminals through its subsidiary, Century Gaming, Inc., acquired in June 2022. The company is an emerging growth company (EGC) and has elected an extended transition period for new accounting standards, expecting to remain an EGC until December 31, 2022 - Accel Entertainment, Inc. is a leading distributed gaming operator in the United States, licensed in multiple states including Illinois, Georgia, Pennsylvania, Iowa, Montana, Nevada, and Nebraska[13] - The company's operations include installing and operating gaming terminals, redemption terminals with ATM functionality, and amusement equipment in licensed video gaming locations[13] - Accel acquired Century Gaming, Inc. on June 1, 2022, expanding its presence into Montana and Nevada gaming markets and adding gaming terminal manufacturing capabilities[13] - The company is an emerging growth company (EGC) and has elected an extended transition period for complying with new or revised financial accounting standards, expecting to remain an EGC until December 31, 2022[14] Note 2. Summary of Significant Accounting Policies This note outlines the company's accounting policies, including the basis of presentation, use of estimates, and recent changes in accounting estimates. Notably, in Q4 2021, the company extended the useful lives of gaming terminals (from 10 to 13 years), route and customer acquisition costs (from 12.4 to 18 years), and location contracts (from 10 to 15 years), reflecting longer asset utility and strong partner relationships. These changes significantly decreased depreciation and amortization expenses and increased net income and EPS for the current periods - The company extended the useful lives of its gaming terminals and equipment from 10 years to 13 years in Q4 2021, reflecting longer-than-estimated equipment life[21] - The amortization period for route and customer acquisition costs was extended from 12.4 years to 18 years, and for location contracts from 10 years to 15 years, due to strong contract renewal rates[23] Impact of Changes in Accounting Estimates (in thousands, except per share amounts) | Metric | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2022 | | :--------------------------------------- | :------------------------------ | :----------------------------- | | Decrease to depreciation expense | $1,228 | $3,685 | | Decrease to amortization expense | $2,770 | $8,215 | | Increase to net income | $2,859 | $8,511 | | Increase to net income per share | $0.03 | $0.09 | - Revenue is disaggregated by type (gaming terminals, amusements, ATMs, manufacturing) and by primary states of operation (Illinois, Nevada, Montana, Other)[27][31][34] Note 3. Inventories Inventories, consisting of raw materials, manufacturing supplies, and finished products, totaled $6.873 million as of September 30, 2022. No valuation allowance was deemed necessary Inventories as of September 30, 2022 (in thousands) | Category | Amount | | :--------------------------------------- | :----- | | Raw materials and manufacturing supplies | $4,990 | | Finished products | $1,883 | | Total Inventories | $6,873 | - No inventory valuation allowance was determined to be necessary as of September 30, 2022[42] Note 4. Investment in Convertible Notes The company's $32.1 million investment in Gold Rush Amusements, Inc. convertible notes is currently in default, as the Illinois Gaming Board (IGB) denied the transfer of common stock despite Accel's conversion rights. Accel has filed a lawsuit against Gold Rush for breach of contract and is pursuing judicial review of the IGB's decision. Gold Rush has also filed a countersuit. The notes are classified as current assets at fair value, with unrealized gains/losses recognized in other comprehensive income - The company's $32.1 million investment in Gold Rush convertible notes is deemed in default due to the IGB's denial of common stock transfer, despite Accel's conversion rights[47] - Accel has filed a lawsuit against Gold Rush for breach of contract and is seeking judicial review of the IGB's decision; Gold Rush has filed a countersuit[45][46] - The convertible notes are accounted for as available-for-sale debt securities at fair value, with the entire $32.1 million classified as current on the balance sheet[47] - The company recognized an unrealized loss of $0.3 million for the three months ended September 30, 2021, and an unrecognized gain of $5.4 million for the nine months ended September 30, 2021, related to the valuation of these notes[47] Note 5. Property and Equipment Net property and equipment increased to $206.767 million as of September 30, 2022, from $152.251 million at December 31, 2021. This increase is primarily due to acquisitions, partially offset by a change in accounting estimate that extended the useful lives of gaming terminals and equipment, reducing depreciation expense Property and Equipment, Net (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :--------------------------------------- | :----------- | :----------- | | Total Property and Equipment (Cost) | $366,071 | $291,740 | | Less: Accumulated Depreciation and Amortization | $(159,304) | $(139,489) | | Property and Equipment, Net | $206,767 | $152,251 | Depreciation and Amortization of Property and Equipment (in thousands) | Period | 2022 | 2021 | | :--------------------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $8,136 | $6,518 | | Nine Months Ended Sep 30 | $20,575 | $18,820 | - The increase in depreciation expense in 2022 is primarily due to acquisitions, partially offset by the extension of useful lives for gaming terminals and equipment from 10 to 13 years in Q4 2021[50] Note 6. Route and Customer Acquisition Costs Route and customer acquisition costs, net, increased to $17.769 million as of September 30, 2022, from $15.913 million at December 31, 2021. Amortization expense for these costs decreased in 2022 due to the extension of the amortization period from 12.4 years to 18 years, reflecting strong partner relationships Route and Customer Acquisition Costs, Net (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :--------------------------------------- | :----------- | :----------- | | Cost | $31,198 | $28,902 | | Accumulated Amortization | $(13,429) | $(12,989) | | Route and Customer Acquisition Costs, Net | $17,769 | $15,913 | Amortization Expense of Route and Customer Acquisition Costs (in thousands) | Period | 2022 | 2021 | | :--------------------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $0.3 million | $0.5 million | | Nine Months Ended Sep 30 | $0.9 million | $1.4 million | - Amortization expense was lower in 2022 due to the extension of the amortization period from 12.4 years to 18 years in Q4 2021, reflecting high contract renewal rates[52] Note 7. Location Contracts Acquired Location contracts acquired, net, increased to $189.382 million as of September 30, 2022, from $150.672 million at December 31, 2021. Amortization expense for these contracts decreased in 2022 due to the extension of the amortization period from 10 years to 15 years, partially offset by an increase in newly acquired contracts Location Contracts Acquired, Net (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :--------------------------------------- | :----------- | :----------- | | Cost | $278,560 | $229,287 | | Accumulated Amortization | $(89,178) | $(78,615) | | Location Contracts Acquired, Net | $189,382 | $150,672 | Amortization Expense of Location Contracts Acquired (in thousands) | Period | 2022 | 2021 | | :--------------------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $4.0 million | $5.7 million | | Nine Months Ended Sep 30 | $10.6 million | $17.1 million | - Amortization expense was lower in 2022 due to the extension of the amortization period from 10 years to 15 years in Q4 2021, partially offset by an increase in location contracts acquired[57] Note 8. Goodwill and Other intangible assets Goodwill increased significantly to $99.5 million as of September 30, 2022, primarily due to the $53.3 million goodwill recognized from the Century Gaming acquisition on June 1, 2022. Other intangible assets, totaling $23.6 million, also resulted from the Century acquisition and are amortized over 7 to 20 years Goodwill Roll Forward (in thousands) | Item | Amount | | :--------------------------------------- | :----- | | Goodwill balance as of January 1, 2022 | $46,199 | | Addition to goodwill for acquisition of Century | $53,291 | | Goodwill balance as of September 30, 2022 | $99,490 | - The Century acquisition resulted in $53.3 million in goodwill, reflecting the maturity and quality of Century's operations, industry, and workforce[58][83] - Other intangible assets, net, totaled $23.6 million as of September 30, 2022, consisting of definite-lived trade names, customer relationships, and software applications from the Century acquisition, amortized over 7 to 20 years[60] Note 9. Debt Total debt, net of current maturities, increased to $497.976 million as of September 30, 2022, from $324.022 million at December 31, 2021, primarily due to increased borrowings under the Senior Secured Credit Facility to finance acquisitions. The company entered into Amendment No. 2 in October 2021, increasing the revolving credit facility to $150 million and establishing a $400 million delayed draw term loan facility, extending maturity to October 2026. The weighted-average interest rate was approximately 3.7% as of September 30, 2022, and the company was in compliance with all debt covenants Debt, Net of Current Maturities (in thousands) | Category | Sep 30, 2022 | Dec 31, 2021 | | :--------------------------------------- | :----------- | :----------- | | Total debt on credit facility | $525,000 | $350,000 | | Total debt, net of debt issuance costs | $521,439 | $341,522 | | Total debt, net of current maturities | $497,976 | $324,022 | - Amendment No. 2 to the Credit Agreement (October 2021) increased the revolving credit facility to $150 million and added a $400 million delayed draw term loan facility, extending the maturity date to October 22, 2026[65][66] - As of September 30, 2022, approximately $355 million of availability remained under the Credit Agreement[66] - The weighted-average interest rate was approximately 3.7% as of September 30, 2022, and the company was in compliance with all debt covenants[69][74] Note 10. Business and Asset Acquisitions In 2022, Accel completed several acquisitions, including Century Gaming, Inc. ($164.3 million), VVS, Inc. ($12 million), and River City Amusement Company ($2.8 million), significantly expanding its operations in Montana, Nevada, Nebraska, Iowa, and South Dakota. These acquisitions contributed $81.6 million in revenue and $2.1 million in net income for Century alone during the nine months ended September 30, 2022. The company also provided pro forma results reflecting these acquisitions as if they occurred earlier, showing increased revenues and net income - On June 1, 2022, Accel acquired Century Gaming, Inc. for an aggregate purchase consideration of $164.3 million, including cash and stock, expanding into Montana and Nevada and adding manufacturing capabilities[79][80] - The Century acquisition resulted in $53.3 million in goodwill and $24.4 million in other intangible assets[83][84] - Century's acquired assets generated $81.6 million in revenues and $2.1 million in net income for the nine months ended September 30, 2022[85] - Other 2022 acquisitions include VVS, Inc. ($12 million) and River City Amusement Company ($2.8 million), further expanding into Nebraska, Iowa, and South Dakota[77][78] Unaudited Pro Forma Consolidated Financial Information (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenues | $268,131 | $261,002 | $808,125 | $758,794 | | Net income | $22,839 | $12,875 | $63,470 | $36,977 | Note 11. Contingent Earnout Share Liability The company has a contingent earnout share liability related to 5,000,000 shares of Class A-2 Common Stock, convertible to Class A-1 Common Stock upon achieving specific LTM EBITDA or stock price targets across three tranches. The LTM EBITDA thresholds for Tranches II and III were increased in November 2022 by the board of directors to reflect anticipated effects of acquisitions. Tranche I conditions were met in January 2020, leading to the conversion of 1,666,636 shares - 5,000,000 shares of Class A-2 Common Stock are subject to conversion into Class A-1 Common Stock upon meeting LTM EBITDA or stock price targets across three tranches[94] - On November 2, 2022, the LTM EBITDA thresholds for Tranches II and III were increased by the board to account for the anticipated effect of acquisitions[97][160] - Tranche I's market condition was satisfied on January 14, 2020, resulting in the conversion of 1,666,636 shares[98] Note 12. Warrant Liability The company had Private Placement Warrants and Public Warrants, with most Public Warrants redeemed in July 2020 for Class A-1 Common Stock, leading to their delisting. An exchange offer in August 2020 also converted most Private Placement Warrants. As of September 30, 2022, 5,144 warrants remain outstanding - In July 2020, the company redeemed Public Warrants, exchanging them for 3,784,416 shares of Class A-1 Common Stock, leading to their delisting from the NYSE[102] - An exchange offer in August 2020 resulted in the conversion of 7,189,990 Private Placement Warrants into 1,797,474 shares of Class A-1 Common Stock[106] - As of September 30, 2022, only 5,144 warrants remain outstanding[106] Note 13. Fair Value Measurements The company measures certain assets and liabilities at fair value using a three-level hierarchy. Investment in convertible notes ($32.065 million) and contingent consideration ($11.486 million) are Level 3 measurements due to unobservable inputs. Interest rate caplets ($20.941 million) and contingent earnout shares ($23.334 million) are Level 2 measurements, relying on observable inputs like LIBOR forward curves and the company's stock price, respectively Assets Measured at Fair Value (September 30, 2022, in thousands) | Asset | Total Fair Value | Level 1 | Level 2 | Level 3 | | :--------------------------------------- | :--------------- | :------ | :------ | :------ | | Investment in convertible notes | $32,065 | $— | $— | $32,065 | | Interest rate caplets | $20,941 | $— | $20,941 | $— | | Total | $53,006 | $— | $20,941 | $32,065 | Liabilities Measured at Fair Value (September 30, 2022, in thousands) | Liability | Total Fair Value | Level 1 | Level 2 | Level 3 | | :--------------------------------------- | :--------------- | :------ | :------ | :------ | | Contingent consideration | $11,486 | $— | $— | $11,486 | | Contingent earnout shares | $23,334 | $— | $23,334 | $— | | Warrants | $13 | $— | $13 | $— | | Total | $34,833 | $— | $23,347 | $11,486 | - Investment in convertible notes is a Level 3 measurement, valued at principal plus accrued interest, given the IGB's denial of stock transfer and ongoing legal remedies[114] - Interest rate caplets are Level 2, valued using observable LIBOR forward interest rate curves[115] - Contingent earnout shares are Level 2, valued based on the market price of Class A-1 Common Stock and an estimate of conversion timing[120] Note 14. Stockholders' Equity The company's Class A-1 Common Stock holders have voting rights and are entitled to dividends. A share repurchase program of up to $200 million was approved in November 2021, under which 6,380,815 shares totaling $70.9 million have been repurchased as of September 30, 2022. The Inflation Reduction Act of 2022, imposing a 1% excise tax on stock repurchases from January 1, 2023, may impact this program - The Board of Directors approved a share repurchase program of up to $200 million of Class A-1 Common Stock on November 22, 2021[124] - As of September 30, 2022, the company repurchased 6,380,815 shares at a total cost of $70.9 million, with $61.9 million of repurchases occurring in the nine months ended September 30, 2022[124] - The Inflation Reduction Act of 2022, effective January 1, 2023, imposes a 1% non-deductible excise tax on stock repurchases, which may affect the program[125] Note 15. Stock-based Compensation Stock-based compensation expense for the three and nine months ended September 30, 2022, was $1.1 million and $5.0 million, respectively, an increase from the prior year. The company granted stock options and restricted stock units (RSUs) to officers, employees, and board members, with vesting periods typically over 4 years Stock-based Compensation Expense (in thousands) | Period | 2022 | 2021 | | :--------------------------------------- | :----- | :----- | | Three Months Ended Sep 30 | $1,100 | $1,000 | | Nine Months Ended Sep 30 | $5,000 | $4,700 | - During the first three quarters of 2022, the company granted 275,881 stock options and 507,600 RSUs to eligible officers, employees, and board members, with an estimated grant date fair value of $8.5 million[127][128][129] Note 16. Income Taxes Income tax expense for the three and nine months ended September 30, 2022, was $4.9 million and $16.5 million, respectively, with effective tax rates of 18% and 21%. These rates are lower than the prior year (27% and 32%) primarily due to the non-taxable change in the fair value of contingent earnout shares Income Tax Expense and Effective Tax Rate | Period | Income Tax Expense (in thousands) | Effective Tax Rate | | :--------------------------------------- | :------------------------------ | :----------------- | | Three Months Ended Sep 30, 2022 | $4,914 | 18% | | Three Months Ended Sep 30, 2021 | $3,936 | 27% | | Nine Months Ended Sep 30, 2022 | $16,531 | 21% | | Nine Months Ended Sep 30, 2021 | $11,773 | 32% | - The primary driver for fluctuations in the effective tax rate year over year is the change in the fair value of contingent earnout shares, which does not create tax expense[133] Note 17. Commitments and Contingencies The company is involved in various legal proceedings, including disputes with J&J Ventures Gaming over location contracts, lawsuits with Jason Rowell regarding non-compete agreements and equity interests, and an IGB disciplinary complaint seeking a $5 million fine. Accel also has ongoing litigation with Gold Rush concerning convertible notes and an enforcement action from an Illinois municipality for an alleged tax violation. A legal liability of $1.2 million was recorded for the nine months ended September 30, 2022, with $1.6 million paid in settlements - Accel is involved in ongoing litigation with J&J Ventures Gaming regarding the validity of location agreements, with the IGB largely ruling in Accel's favor, but J&J has filed a new lawsuit[140][141] - The company is litigating with Jason Rowell over breaches of his non-compete agreement and his claims for alleged equity interests[142] - An IGB disciplinary complaint from December 2020 seeks a $5 million fine for alleged violations of the Video Gaming Act[144] - Accel filed a lawsuit against Gold Rush regarding convertible notes, and Gold Rush filed a countersuit alleging tortious interference[145][147] - A legal liability of $1.2 million was recorded for the nine months ended September 30, 2022, with $1.6 million paid in legal settlements[151] Note 18. Related-Party Transactions The company has consideration payable to sellers of acquired businesses (Fair Share Gaming, G3 Gaming, Tom's Amusements, AVG) who subsequently became employees. Payments to these related parties totaled $1.5 million for Fair Share and $1.4 million for Tom's Amusements during the nine months ended September 30, 2022. Legal counsel Much Shelist, P.C., a related party, was paid $0.2 million for services in the same period Consideration Payable to Related Parties (in thousands) | Seller | Sep 30, 2022 | Dec 31, 2021 | | :--------------------------------------- | :----------- | :----------- | | Fair Share Gaming | $1,200 | $2,400 | | G3 Gaming | $400 | $400 | | Tom's Amusements | $100 | $1,500 | | AVG | $400 | $400 | - Payments to Fair Share seller were $1.5 million and to Tom's Amusements seller were $1.4 million during the nine months ended September 30, 2022[153][155] - Accel paid Much Shelist, P.C., a related-party legal counsel, $0.2 million for services during the nine months ended September 30, 2022[157] Note 19. Earnings Per Share Basic and diluted EPS for the three months ended September 30, 2022, were $0.25, up from $0.11 in the prior year. For the nine months, EPS was $0.66, up from $0.26. The increase is driven by higher net income. Anti-dilutive stock-based awards, contingent earnout shares, and warrants were excluded from diluted EPS calculations Earnings Per Share (EPS) (in thousands, except per share amounts) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $22,444 | $10,807 | $60,696 | $24,753 | | Basic EPS | $0.25 | $0.11 | $0.66 | $0.26 | | Diluted EPS | $0.25 | $0.11 | $0.66 | $0.26 | | Basic weighted average shares outstanding | 89,992 | 94,004 | 91,299 | 93,607 | | Diluted weighted average shares outstanding | 90,528 | 94,728 | 91,945 | 94,469 | - Anti-dilutive stock-based awards, contingent earnout shares, and warrants totaling 5,178,908 shares (2022) and 5,007,024 shares (2021) were excluded from diluted EPS calculations[159] Note 20. Subsequent Events Subsequent to the reporting period, on November 2, 2022, a disinterested committee of the Board of Directors approved an increase to the LTM EBITDA thresholds for Tranches II and III of the Class A-2 Common Stock contingent earnout shares, reflecting anticipated effects of acquisitions - On November 2, 2022, the LTM EBITDA thresholds for Tranches II and III of the Class A-2 Common Stock contingent earnout shares were increased by the board, as detailed in Note 11[160] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on Accel Entertainment's financial condition and operational results, highlighting significant revenue growth driven by acquisitions and recovery from COVID-19 impacts. It details the company's business model, the effects of macroeconomic factors, the integration of Century Gaming, key performance drivers, and liquidity management, including debt and share repurchase activities Company Overview Accel Entertainment is a leading distributed gaming operator in the U.S., providing a 'gaming-as-a-service' platform to local businesses. The company installs, maintains, and operates gaming terminals, ATMs, and amusement devices in non-casino locations across multiple states. It emphasizes strong location partner relationships, evidenced by a 99% voluntary contract renewal rate, and seeks accretive acquisitions to expand its core gaming business - Accel is a leading distributed gaming operator, providing a 'gaming-as-a-service' platform including gaming terminals, redemption devices with ATM functionality, and other amusement devices[163][164][165] - The company operates in Illinois, Georgia, Pennsylvania, Iowa, Montana, Nevada, and Nebraska, with recent expansion through acquisitions like Century Gaming, Inc[163] - Accel maintains a high voluntary contract renewal rate of approximately 99% for the three-year period ended December 31, 2021, attributed to strong partner retention and service[164] Impact of COVID-19 and Other Macroeconomic Factors The COVID-19 pandemic significantly impacted the company's operations in 2020 and 2021, particularly due to IGB-mandated shutdowns in Illinois. While operations have resumed, future variants could lead to new restrictions. Additionally, rising interest rates and persistent inflation pose risks of economic recession, potentially affecting consumer disposable income and increasing operating costs, though no material impacts have been observed to date - COVID-19 outbreaks led to IGB-mandated shutdowns of video gaming in Illinois, impacting 18 of 273 gaming days (7%) during the nine months ended September 30, 2021[168] - The company's revenues, results of operations, and cash flows were materially affected for the nine months ended September 30, 2021, due to COVID-19[169] - Ongoing interest rate increases and persistent inflation may increase the risk of an economic recession, potentially impacting location partners, player disposable incomes, and increasing operating costs like fuel[171] Century Acquisition On June 1, 2022, Accel completed the acquisition of Century Gaming, Inc. for $164.3 million, financed through cash and stock. This acquisition significantly expanded Accel's presence in Montana and Nevada and added gaming terminal manufacturing capabilities. Century's results are included in Accel's consolidated financial statements from the acquisition date - Accel acquired Century Gaming, Inc. on June 1, 2022, for an aggregate purchase consideration of $164.3 million[172] - The acquisition was financed by a cash payment of $45.5 million, repayment of $113.2 million of Century's debt, and the issuance of 515,622 shares of Accel's Class A-1 common stock valued at $5.6 million[172] - Century's financial results are included in Accel's consolidated financial statements from the date of acquisition, contributing to the company's expanded operations in Montana and Nevada[173] Components of Performance This section defines the company's revenue streams, including net gaming, amusement, manufacturing, and ATM fees, and outlines its operating expenses such as cost of revenue, general and administrative, depreciation and amortization, and other expenses. It also describes interest expense and income tax expense, providing context for the financial results - Revenue streams include net gaming (difference between gaming wins and losses), amusement (from amusement devices), manufacturing (sales of gaming terminals by Grand Vision Gaming), and ATM fees and other revenue[174][175] - Cost of revenue includes taxes on net video gaming revenue, licenses, location revenue share, ATM/amusement commissions, and costs associated with gaming terminal sales[176] - General and administrative expenses cover payroll for service/route technicians, security, preventative maintenance, vehicle costs, marketing, IT, insurance, rent, and professional fees[177] - Amortization of intangible assets includes route and customer acquisition costs (amortized over 18 years) and location contracts acquired in business combinations (amortized over 15 years), as well as other intangible assets (7-20 years)[178][179] - Interest expense, net, includes interest on credit facilities, amortization of financing fees, accretion of interest on acquisition costs payable, and interest income on convertible notes, partially offset by gains from interest rate caplets[180][181] Results of Operations Accel reported significant financial growth for both the three and nine months ended September 30, 2022, primarily driven by the Century Gaming acquisition and the absence of prior-year COVID-19 related shutdowns. Total net revenues increased by 38.1% and 27.5% for the three and nine-month periods, respectively, while net income surged by 107.7% and 145.2%. Operating expenses also rose due to increased operations, but operating income and income before tax saw substantial gains Three Months Ended September 30, 2022 and 2021 For the three months ended September 30, 2022, total net revenues increased by $73.6 million (38.1%) to $267.0 million, primarily from net gaming revenue and the Century acquisition. Net income more than doubled to $22.4 million, up 107.7%. Operating expenses rose by 39.5%, driven by higher revenue and acquisition costs, while interest expense increased significantly due to higher debt and interest rates Key Financial Highlights (Three Months Ended September 30, in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--------------------------------------- | :----- | :----- | :--------- | :--------- | | Total Net Revenues | $266,967 | $193,351 | $73,616 | 38.1% | | Net Gaming Revenue | $255,606 | $186,017 | $69,589 | 37.4% | | Manufacturing Revenue | $2,489 | $— | $2,489 | N/A | | Total Operating Expenses | $243,728 | $174,704 | $69,024 | 39.5% | | Operating Income | $23,239 | $18,647 | $4,592 | 24.6% | | Interest Expense, Net | $6,239 | $3,016 | $3,223 | 106.9% | | Net Income | $22,444 | $10,807 | $11,637 | 107.7% | Net Revenues by State (Three Months Ended September 30, in thousands) | State | 2022 | 2021 | | :--------------------------------------- | :----- | :----- | | Illinois | $200,914 | $192,205 | | Nevada | $28,439 | $— | | Montana | $33,456 | $— | | Other | $4,158 | $1,146 | | Total Net Revenues | $266,967 | $193,351 | - General and administrative expenses increased by $11.7 million (41.9%) due to Century acquisition operating costs, higher payroll, fleet-related costs, and marketing expenses[188] - Amortization of intangible assets decreased by $1.1 million (17.1%) due to extended useful lives of route and customer acquisition costs and location contracts, partially offset by new intangible assets from Century[189] - A gain of $10.4 million on contingent earnout shares was recognized, compared to a $0.9 million loss in the prior year, driven by changes in Class A-1 common stock market value[193] Nine Months Ended September 30, 2022 and 2021 For the nine months ended September 30, 2022, total net revenues grew by $149.3 million (27.5%) to $691.7 million, primarily from increased gaming terminals and locations due to the Century acquisition and the absence of prior-year COVID-19 shutdowns. Net income surged by 145.2% to $60.7 million. Operating expenses increased by 26.7%, while interest expense rose by 44.1% due to higher debt and interest rates Key Financial Highlights (Nine Months Ended September 30, in thousands) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--------------------------------------- | :----- | :----- | :--------- | :--------- | | Total Net Revenues | $691,727 | $542,394 | $149,333 | 27.5% | | Net Gaming Revenue | $662,491 | $520,915 | $141,576 | 27.2% | | Manufacturing Revenue | $3,408 | $— | $3,408 | N/A | | Total Operating Expenses | $619,966 | $489,265 | $130,701 | 26.7% | | Operating Income | $71,761 | $53,129 | $18,632 | 35.1% | | Interest Expense, Net | $14,031 | $9,736 | $4,295 | 44.1% | | Net Income | $60,696 | $24,753 | $35,943 | 145.2% | Net Revenues by State (Nine Months Ended September 30, in thousands) | State | 2022 | 2021 | | :--------------------------------------- | :----- | :----- | | Illinois | $601,735 | $539,211 | | Nevada | $37,359 | $— | | Montana | $44,282 | $— | | All other | $8,351 | $3,183 | | Total Net Revenues | $691,727 | $542,394 | - General and administrative expenses increased by $25.0 million (31.8%) due to additional operating costs from Century, higher payroll, fleet-related costs, and marketing expenses, and a reduction in prior-year expenses during the IGB-mandated shutdown[199] - Amortization of intangible assets decreased by $6.2 million (33.6%) due to extended useful lives of route and customer acquisition costs and location contracts, partially offset by new intangible assets from Century[200] - A gain of $19.5 million on contingent earnout shares was recognized, compared to a $6.9 million loss in the prior year, driven by changes in Class A-1 common stock market value[203] Key Business Metrics The company monitors performance using key metrics such as the number of locations and gaming terminals. As of September 30, 2022, total locations increased to 3,517 (from 2,549 in 2021) and total gaming terminals to 22,429 (from 13,384 in 2021), primarily due to the Century acquisition. The IGB's 72-hour rule for equipment removal impacted reported numbers but not materially gaming revenue Number of Primary Locations | State | Sep 30, 2022 | Sep 30, 2021 | Change ($) | Change (%) | | :--------------------------------------- | :----------- | :----------- | :--------- | :--------- | | Illinois | 2,596 | 2,549 | 47 | 1.8% | | Montana | 586 | — | N/A | N/A | | Nevada | 335 | — | N/A | N/A | | Total Locations | 3,517 | 2,549 | 968 | 37.9% | Number of Gaming Terminals | State | Sep 30, 2022 | Sep 30, 2021 | Change ($) | Change (%) | | :--------------------------------------- | :----------- | :----------- | :--------- | :--------- | | Illinois | 14,033 | 13,384 | 649 | 4.8% | | Montana | 5,782 | — | N/A | N/A | | Nevada | 2,614 | — | N/A | N/A | | Total Gaming Terminals | 22,429 | 13,384 | 9,045 | 67.6% | - The increase in locations and gaming terminals is primarily due to the Century acquisition[205][209] - The IGB's 72-hour rule, enforced in January 2022, accelerated equipment removals from inactive locations, reducing reported numbers but not materially impacting gaming revenue[206][210] Non-GAAP Financial Measures Adjusted EBITDA and Adjusted net income are non-GAAP financial measures used by management to monitor core operations, evaluate profitability, and assess the ability to fund capital expenditures and service debt. For the three months ended September 30, 2022, Adjusted EBITDA increased by 9% to $41.1 million, and for the nine months, it increased by 12% to $119.1 million, driven by acquisitions and the absence of prior-year COVID-19 shutdowns - Adjusted EBITDA and Adjusted net income are key non-GAAP metrics used to monitor core operations, profitability, and financial capacity[211] Adjusted EBITDA and Adjusted Net Income (in thousands) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $22,444 | $10,807 | $60,696 | $24,753 | | Adjusted net income | $18,932 | $17,317 | $59,053 | $54,106 | | Adjusted EBITDA | $41,125 | $37,631 | $119,083 | $106,427 | - Adjusted EBITDA increased by 9% for the three months and 12% for the nine months ended September 30, 2022, primarily due to the Century acquisition and the absence of prior-year COVID-19 shutdowns[214] Liquidity and Capital Resources The company maintains sufficient liquidity through cash, cash flows from operations, and its senior secured credit facility, which was amended in October 2021 to increase borrowing capacity and extend maturity. Net cash provided by operating activities decreased slightly, while net cash used in investing activities significantly increased due to acquisitions. Net cash provided by financing activities also increased due to borrowings for acquisitions, partially offset by share repurchases. The company uses interest rate caplets to manage interest rate risk and expects to meet its capital requirements and debt covenants for the next twelve months - The company believes its cash and cash equivalents ($212.1 million as of September 30, 2022), cash flows from operations, and borrowing availability under its senior secured credit facility are sufficient for the next twelve months[216] - The Senior Secured Credit Facility was amended in October 2021, increasing the revolving credit facility to $150 million and adding a $400 million delayed draw term loan facility, extending maturity to October 2026[220][221][222] - As of September 30, 2022, approximately $355 million of availability remained under the Credit Agreement, and the company was in compliance with all debt covenants[222][230] - The company uses interest rate caplets to hedge against LIBOR interest rate variability on $300 million of its term loan, realizing a $0.2 million gain in Q3 2022 as LIBOR exceeded 2%[231] Cash Flow Summary (Nine Months Ended September 30, in thousands) | Activity | 2022 | 2021 | | :--------------------------------------- | :----- | :----- | | Net cash provided by operating activities | $78,250 | $80,262 | | Net cash used in investing activities | $(168,871) | $(21,220) | | Net cash provided by (used in) financing activities | $103,898 | $(13,610) | - Net cash used in investing activities increased significantly by $147.7 million due to higher business and asset acquisitions and property and equipment purchases[235] - Net cash provided by financing activities increased by $117.5 million due to increased borrowings for acquisitions, partially offset by $61.9 million in common stock repurchases[236] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Accel's primary market risk exposure is to interest rate fluctuations, particularly on its $525.0 million floating-rate debt under the senior secured credit facility. A 1.0% increase in interest rates would negatively impact annual earnings and cash flows by approximately $2.3 million. This risk is partially mitigated by interest rate caplets hedging the first $300 million of the term loan - Accel's primary market risk is interest rate risk, with $525.0 million in floating-rate debt under its senior secured credit facility as of September 30, 2022[241] - A 1.0% increase in interest rates would negatively impact annual earnings and cash flows by approximately $2.3 million[241] - Interest rate caplets hedge the variability of the 1-month LIBOR interest rate on the first $300 million of the term loan, partially mitigating exposure to higher interest rates[241] ITEM 4. CONTROLS AND PROCEDURES As of September 30, 2022, the company's CEO and CFO concluded that disclosure controls and procedures were not effective due to previously identified material weaknesses in internal control over financial reporting. Despite these weaknesses, management believes the condensed consolidated financial statements fairly present the company's financial position, results of operations, and cash flows - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2022, due to previously identified material weaknesses[243] - No material changes occurred in internal control over financial reporting during the quarter ended September 30, 2022, other than the previously disclosed material weaknesses[245] - Management believes that the condensed consolidated financial statements fairly present the company's financial condition, results of operations, and cash flows, notwithstanding the identified material weaknesses[244] PART II. OTHER INFORMATION This section details legal proceedings, risk factors, equity security sales, and other required disclosures ITEM 1. LEGAL PROCEEDINGS Accel is involved in various legal proceedings, including disputes over location contracts with J&J Ventures Gaming, lawsuits with Jason Rowell concerning non-compete agreements and equity interests, and an IGB disciplinary complaint seeking a $5 million fine. The company also has ongoing litigation with Gold Rush regarding convertible notes and an enforcement action from an Illinois municipality for an alleged tax violation. A legal liability of $1.2 million was recorded for the nine months ended September 30, 2022, with $1.6 million paid in settlements - Accel is involved in ongoing litigation with J&J Ventures Gaming over the validity of location agreements, with the IGB largely ruling in Accel's favor, but J&J has filed a new lawsuit[251][252] - The company is litigating with Jason Rowell over breaches of his non-compete agreement and his claims for alleged equity interests[254] - An IGB disciplinary complaint from December 2020 seeks a $5 million fine for alleged violations of the Video Gaming Act[256] - Accel filed a lawsuit against Gold Rush regarding convertible notes, and Gold Rush filed a countersuit alleging tortious interference[257] - A legal liability of $1.2 million was recorded for the nine months ended September 30, 2022, with $1.6 million paid in legal settlements[261] ITEM 1A. RISK FACTORS Accel faces various risks, including challenges in obtaining and maintaining gaming licenses across multiple jurisdictions, potential adverse effects from unfavorable economic conditions or decreased discretionary spending, and difficulties in expanding into new markets. The company's geographic concentration in Illinois and other newer markets exposes it to local regulatory and economic changes. Furthermore, the successful integration of the Century Acquisition is crucial, and failure to do so could materially impact business. Holders of common stock are also subject to gaming regulations, with potential unsuitability findings impacting ownership - Accel's ability to operate and expand is highly dependent on obtaining and maintaining required gaming licenses and approvals, which are subject to extensive governmental regulation and suitability reviews[264][265][266] - Unfavorable economic conditions, such as recession, inflation, rising interest rates, or decreased discretionary spending (e.g., due to COVID-19 variants), could adversely affect Accel's business by reducing player activity and impacting location partners[270][271][272] - The company's revenue growth depends on successful expansion into new markets (e.g., Pennsylvania, Georgia, Iowa, Montana, Nevada, Nebraska), where it faces entrenched competitors and unproven market appeal[273][276] - Accel's business is geographically concentrated, primarily in Illinois, making it vulnerable to local economic, regulatory, and competitive changes[277][278] - Failure to successfully integrate the Century Gaming acquisition could materially adversely affect Accel's business due to operational, technological, and personnel-related challenges[279][280][283] - Holders of common stock are subject to gaming regulations, and a finding of unsuitability by a gaming authority could prevent them from beneficially owning common stock[291][293] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company's Board of Directors approved a share repurchase program of up to $200 million of Class A-1 common stock in November 2021. As of September 30, 2022, 6,380,815 shares have been repurchased for $70.9 million. The Inflation Reduction Act of 2022, imposing a 1% excise tax on stock repurchases from January 1, 2023, may affect this program - The Board of Directors approved a share repurchase program of up to $200 million of Class A-1 common stock on November 22, 2021[294] Share Repurchase Program (Third Quarter 2022) | Period | Total Shares Purchased | Average Price Paid Per Share | Cumulative Shares Purchased | Maximum Approximate Dollar Value Remaining (in millions) | | :--------------------------------------- | :--------------------- | :--------------------------- | :-------------------------- | :------------------------------------------------------- | | July 2022 | 679,329 | $11.19 | 4,795,037 | $144.0 | | August 2022 | 744,778 | $10.06 | 5,539,815 | $136.5 | | September 2022 | 841,000 | $8.79 | 6,380,815 | $129.1 | | Total (Q3 2022) | 2,265,107 | | | | - The Inflation Reduction Act of 2022, effective January 1, 2023, imposes a 1% non-deductible excise tax on stock repurchases, which may affect the program[295] ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities during the reporting period ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including a separation agreement, certifications of the Principal Executive and Financial Officers, XBRL instance documents, and the cover page in Inline XBRL format - Exhibits include a separation agreement, certifications (31.1, 31.2, 32.1, 32.2), and various XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[298] SIGNATURES The report is duly signed on behalf of Accel Entertainment, Inc. by Mathew Ellis, Chief Financial Officer, on November 8, 2022 - The report was signed by Mathew Ellis, Chief Financial Officer, on November 8, 2022[300]