ACCEL ENTERTAINMENT, INC. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information included in this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as amended (the "Form 10-K"). This discussion and analysis should also be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", set forth in our Form 10-K. Company Overview We believe we are a leading distributed gaming operator inthe United States on an Adjusted EBITDA basis, and a preferred partner for local business owners in theIllinois market. Our business consists of the installation, maintenance and operation of video gaming terminals ("VGTs"), redemption devices that disburse winnings and contain automated teller machine ("ATM") functionality, and other amusement devices in authorized non-casino locations such as restaurants, bars, taverns, convenience stores, liquor stores, truck stops, and grocery stores, which are referred to collectively as "licensed establishments." We also operate stand-alone ATMs in gaming and non-gaming locations. Accel has been licensed by the Illinois Gaming Board ("IGB") since 2012 and holds a license from thePennsylvania Gaming Control Board . InJuly 2020 , theGeorgia Lottery Corporation approved one of our consolidated subsidiaries as a Master Licensee, which allows us to install and operate coin operated amusement machines for commercial use by the public for play throughout theState of Georgia . We operate 13,177 video gaming terminals across 2,527 locations in theState of Illinois as ofJune 30, 2021 . Our gaming-as-a-service platform provides local businesses with a turnkey, capital efficient gaming solution. We own all of our VGT equipment and manage the entire operating process for our licensed establishment partners. We also offer our licensed establishment partners VGT solutions that appeal to players who patronize those businesses. We devote significant resources to licensed establishment partner retention, and seek to provide prompt, personalized player service and support, which we believe is unparalleled among other distributed gaming operators. Dedicated relationship managers assist licensed establishment partners with regulatory applications and compliance onboarding, train licensed establishment partners on how to engage with players and potential players, monitor individual gaming areas for compliance, cleanliness and comfort and recommend potential changes to improve both player gaming experience and overall revenue for each licensed establishment. We also provide weekly gaming revenue payments to our licensed establishment partners and analyze and compare gaming results within individual licensed establishment partners. This information is used to determine an optimal selection of games, layouts and other ideas to generate foot traffic for our licensed establishment partners with the goal of generating increased gaming revenue. Further, our in-house collections and security personnel provide highly secure cash transportation and vault management services. Our best-in-class technicians ensure minimal downtime through proactive service and routine maintenance. In addition to our VGT business, we also install, operate and service redemption devices that have ATM functionality, stand-alone ATMs and amusement devices, including jukeboxes, dartboards, pool tables, pinball machines and other related entertainment equipment. These operations provide a complementary source of lead generation for our VGT business by offering a "one-stop" source of additional equipment for our licensed establishment partners. Impact of COVID-19 The COVID-19 outbreak continues to have a significant impact on global markets as a result of supply chain and production disruptions, workforce restrictions, travel restrictions, reduced consumer spending and sentiment, amongst other factors, which are, individually or in the aggregate, negatively affecting the financial performance, liquidity and cash flow projections of many companies inthe United States and abroad. 24 -------------------------------------------------------------------------------- Table of Contents In response to the initial COVID-19 outbreak in early 2020, the IGB made the decision to shut down all VGTs across theState of Illinois starting at9:00 p.m. onMarch 16, 2020 and ultimately extended the shutdown throughJune 30, 2020 . As a result, we borrowed$65 million on our delayed draw term loan inMarch 2020 to increase our cash position and help preserve our financial flexibility. This temporary shutdown ofIllinois video gaming impacted 106 of the 182 gaming days (or 58% of gaming days) during the six months endedJune 30, 2020 . In light of these events and their effect on our employees and licensed establishment partners, we took action to reduce our monthly cash expenses down to$2-$3 million during the shutdown to position us to help mitigate the effects of the temporary cessation of operations by, among other things, furloughing approximately 90% of our employees and deferring certain payments to major vendors. Additionally, members of our senior management decided to voluntarily forgo their base salaries until the resumption of video gaming operations. Beginning in early June, we started reinstating employees from furlough in order to properly resume operations. As a resurgence of COVID-19 occurred in the fall of 2020, the virus spread exponentially in every geographical region (currently 11 regions) in theState of Illinois . In response, the IGB suspended all video gaming operations across the entire state ofIllinois starting at11:01 PM onThursday November 19, 2020 . Video gaming operations resumed in certain regions of the state beginning onJanuary 16, 2021 , and fully resumed in all regions onJanuary 23, 2021 . Even though video gaming operations resumed across all regions, certain regions still had government-imposed restrictions that, among other things, limited hours of operation and restricted the number of patrons allowed within the licensed establishments. Given the staggered reopening by region in January of 2021, the temporary shutdown impacted, on average, 18 of the 181 gaming days (or 10% of gaming days) during the six months endedJune 30, 2021 . During this second shutdown, we furloughed idle staff as appropriate and deferred certain payments to major vendors. As a result of these developments, our revenues, results of operations and cash flows have been materially affected. The situation is changing and additional impacts from COVID-19 and its variant strains on the business and financial results may arise that we are not aware of currently and cannot reasonably anticipate. While the IGB has announced the resumption of all video gaming activities, it is possible that it or theState of Illinois may order a shutdown by region (currently 11 regions), or a complete suspension of video gaming in the state, or institute stay-at-home, closure or other similar orders or measures in the future in response to a resurgence of COVID-19, particularly in light of variant strains of the virus, or other events. Under the guidelines provided by theIllinois Department of Health and Governor's office, the IGB has been closely monitoringIllinois' COVID-19 related statistics including the positivity rate, hospital admissions, and hospital bed availability in each region. We will continue to monitor the situation and its potential impact on our operations. Components of Performance Revenues Net gaming. Net gaming revenue represents net cash received from gaming activities, which is the difference between gaming wins and losses. Net gaming revenue includes the amounts earned by the licensed establishments and is recognized at the time of gaming play. Amusement. Amusement revenue represents amounts collected from amusement devices operated at various licensed establishments and is recognized at the point the amusement device is used. ATM fees and other revenue. ATM fees and other revenue represents fees charged for the withdrawal of funds from Accel's redemption devices and stand-alone ATMs and is recognized at the time of the ATM transaction. Operating Expenses Cost of revenue. Cost of revenue consists of (i) a 34% tax on net video gaming revenue (such tax increased from 33% beginning onJuly 1, 2020 ) that is payable to the IGB, (ii) an administrative fee (0.8513% currently) payable to Scientific Games International, the third-party contracted by IGB to maintain the central system to which all VGTs acrossIllinois are connected, (iii) establishment revenue share, which is defined as 50% of gross gaming revenue after subtracting the tax and 25 -------------------------------------------------------------------------------- Table of Contents administrative fee, (iv) ATM and amusement commissions payable to locations, (v) ATM and amusement fees, and (vi) licenses and permits required for the operation of VGTs and other equipment. General and administrative. General and administrative expenses consist of operating expense and general and administrative ("G&A") expense. Operating expense includes payroll and related expense for service technicians, route technicians, route security, and preventative maintenance personnel. Operating expense also includes vehicle fuel and maintenance, and non-capitalizable parts expenses. Operating expenses are generally proportionate to the number of licensed establishments and VGTs. G&A expense includes payroll and related expense for account managers, business development managers, marketing, and other corporate personnel. In addition, G&A includes marketing, information technology, insurance, rent and professional fees. Depreciation and amortization of property and equipment. Depreciation is computed using the straight-line method over the estimated useful lives of the individual assets. Leasehold improvements are amortized over the shorter of the useful life or the lease. Amortization of route and customer acquisition costs and location contracts acquired. Route and customer acquisition costs consist of fees paid at the inception of contracts entered into with third parties and licensed video gaming establishments throughout theState of Illinois which allow Accel to install and operate video gaming terminals. The route and customer acquisition costs and route and customer acquisition costs payable are recorded at the net present value of the future payments using a discount rate equal to Accel's incremental borrowing rate associated with its long-term debt. Route and customer acquisition costs are amortized on a straight-line basis beginning on the date the location goes live and amortized over the estimated life of the contract, including expected renewals. Location contracts acquired in a business combination are recorded at fair value and then amortized as an intangible asset on a straight-line basis over the expected useful life of 10 years. Interest expense, net Interest expense, net consists of interest on Accel's current and prior credit facilities, amortization of financing fees, and accretion of interest on route and customer acquisition costs payable. Interest on the current credit facility is payable monthly on unpaid balances at the variable per annum LIBOR rate plus an applicable margin, as defined under the terms of the credit facility, ranging from 1.75% to 2.75% depending on the first lien net leverage ratio. Interest expense, net also consists of interest income on convertible promissory notes from another terminal operator that bear interest at the greater of 3% per annum or Accel's borrowing rate on it's credit facility. Income tax expense (benefit) Income tax expense (benefit) consists mainly of taxes (receivable) payable to federal, state and local authorities. Deferred income taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of the assets and liabilities. 26 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table summarizes Accel's results of operations on a consolidated basis for the three months endedJune 30, 2021 and 2020: Three Months Ended (in thousands, except %'s)June 30 ,
Increase / (Decrease)
2021 2020 Change ($) Change (%)
Revenues: (As Restated)
Net gaming $ 194,434 $ - $ 194,434 N/A
Amusement 4,279 260 4,019 1,545.8 %
ATM fees and other revenue 3,261 119 3,142 2,640.3 %
Total net revenues 201,974 379
201,595 53,191.3 %
Operating expenses:
Cost of revenue (exclusive of
depreciation and amortization
expense shown below) 135,772 530
135,242 25,517.4 %
General and administrative 26,113 9,921
16,192 163.2 %
Depreciation and amortization
of property and equipment 6,313 5,071 1,242 24.5 %
Amortization of route and
customer acquisition costs and
location contracts acquired 6,162 5,565 597 10.7 % Other expenses, net 2,687 3,132 (445) (14.2) % Total operating expenses 177,047 24,219 152,828 631.0 % Operating income (loss) 24,927 (23,840) 48,767 (204.6) % Interest expense, net 3,376 2,489 887 35.6 %
Loss on change in fair value of
contingent earnout shares 3,182 7,174
(3,992) (55.6) %
Loss on change in fair value of
warrants - 18,320
(18,320) (100.0) %
Income (loss) before income tax
expense (benefit) 18,369 (51,823) 70,192 (135.4) % Income tax expense (benefit) 5,924 (5,055) 10,979 (217.2) % Net income (loss)$ 12,445 $ (46,768) $ 59,213 (126.6) % 27
-------------------------------------------------------------------------------- Table of Contents Revenues Total revenues for the three months endedJune 30, 2021 were$202.0 million , an increase of$201.6 million , compared to the prior-year period. This increase was driven by an increase in net gaming revenue of$194.4 million , an increase in amusement revenue of$4.0 million , and an increase in ATM fees and other revenue of$3.1 million . The significant increase in net gaming revenue was attributable to the prior year IGB-mandated shutdown ofIllinois video gaming due to the COVID-19 outbreak, which resulted in no gaming days for the three months endedJune 30, 2020 . Net gaming revenues for the three months endedJune 30, 2021 also reflected an increase in gaming terminals and locations, as well as, an increase in location hold-per-day which is driven by higher bet limit software, the addition of a 6th VGT and higher demand. Cost of revenue Cost of revenue for the three months endedJune 30, 2021 was$135.8 million , an increase of$135.2 million , compared to the prior-year period due primarily to the previously mentioned IGB-mandated shutdown ofIllinois video gaming in the prior year due to the COVID-19 outbreak. Cost of revenue for the three months endedJune 30, 2021 also reflected an increase in theIllinois gaming tax from 33% to 34% onJuly 1, 2020 . General and administrative General and administrative expenses for the three months endedJune 30, 2021 were$26.1 million , an increase of$16.2 million , or 163.2%, compared to the prior-year period. The increase was attributable to a reduction in our prior year monthly expenses during the IGB-mandated shutdown. General and administrative expenses for the three months endedJune 30, 2021 , also reflected higher non-variable payroll-related costs as we continue to grow our operations and we incurred higher stock-based compensation expenses. Depreciation and amortization of property and equipment Depreciation and amortization of property and equipment for the three months endedJune 30, 2021 was$6.3 million , an increase of$1.2 million , or 24.5%, compared to the prior-year period due to an increased number of licensed establishments and VGTs. Amortization of route and customer acquisition costs and location contracts acquired Amortization of route and customer acquisition costs and location contracts acquired for the three months endedJune 30, 2021 was$6.2 million , an increase of$0.6 million , or 10.7%, compared to the prior-year period. The increase was primarily attributable to our business and asset acquisitions. Other expenses, net Other expenses, net for the three months endedJune 30, 2021 were$2.7 million , a decrease of$0.4 million , or 14.2%, compared to the prior-year period. The decrease was primarily attributable to non-recurring one-time expenses incurred in the prior-year period for costs to provide benefits (e.g. employee portion of health insurance premiums) for furloughed employees during the IGB-mandated shutdown, partially offset by larger fair value adjustments associated with the revaluation of contingent consideration liabilities due to stronger than anticipated performance from the associated business acquisitions. 28 -------------------------------------------------------------------------------- Table of Contents Interest expense, net Interest expense, net for the three months endedJune 30, 2021 was$3.4 million , an increase of$0.9 million , or 35.6%, compared to the prior-year period primarily due to higher interest rates, partially offset by a decrease in average outstanding debt. For the three months endedJune 30, 2021 , the weighted average interest rate was approximately 3.3% compared to a rate of approximately 2.7% for the prior year period. Loss (gain) on change in fair value of contingent earnout shares Loss on the change in fair value of contingent earnout shares for the three months endedJune 30, 2021 was$3.2 million , a decrease of$4.0 million , or 55.6%, compared to the prior year which had a loss of$7.2 million . The decrease was primarily due to the change in the market value of our A-1 common stock which is the primary input to the valuation of the contingent earnout shares. Loss on change in fair value of warrants Loss on change in fair value of warrants for the three months endedJune 30, 2020 was$18.3 million . In the third quarter of 2020, we redeemed substantially all of the warrants which resulted in no change to the fair value of the remaining warrants for the three months endedJune 30, 2021 . Income tax expense (benefit) Income tax expense for the three months endedJune 30, 2021 was$5.9 million , an increase of$11.0 million , or 217.2%, compared to the prior-year period, which had an income tax benefit of$5.1 million . The effective tax rate for the three months endedJune 30, 2021 was 32.2% compared to 9.8% in the prior-year period. Our effective income tax rate can vary from period to period depending on, among other factors, the amount of permanent tax adjustments and discrete items. The lower tax rate for the three months endedJune 30, 2020 was due to projected permanent differences and the nondeductible losses related to the revaluation of our contingent earnout shares and warrants, which are considered discrete items. 29 -------------------------------------------------------------------------------- Table of Contents The following table summarizes Accel's results of operations on a consolidated basis for the six months endedJune 30, 2021 and 2020: (in thousands, except %'s) Six Months EndedJune 30 ,
Increase / (Decrease)
2021 2020 Change ($) Change (%)
Revenues: (As Restated)
Net gaming $ 334,898 $ 101,575 $ 233,323 229.7 %
Amusement 8,328 3,091 5,237 169.4 %
ATM fees and other revenue 5,817 2,177 3,640 167.2 %
Total net revenues 349,043 106,843
242,200 226.7 %
Operating expenses:
Cost of revenue (exclusive
of depreciation and
amortization expense shown
below) 234,663 71,239
163,424 229.4 %
General and administrative 50,588 31,896 18,692 58.6 %
Depreciation and
amortization of property and
equipment 12,302 9,938 2,364 23.8 % Amortization of route and customer acquisition costs and location contracts acquired 12,268 11,130 1,138 10.2 % Other expenses, net 4,740 4,336 404 9.3 % Total operating expenses 314,561 128,539 186,022 144.7 % Operating income (loss) 34,482 (21,696) 56,178 (258.9) % Interest expense, net 6,720 6,738 (18) (0.3) % Loss (gain) on change in fair value of contingent earnout shares 5,979 (10,232) 16,211 (158.4) %
Gain on change in fair value
of warrants - (14,283)
14,283 (100.0) %
Income (loss) before income
tax expense (benefit) 21,783 (3,919)
25,702 (655.8) %
Income tax expense (benefit) 7,837 (5,194) 13,031 (250.9) % Net income$ 13,946 $ 1,275 $ 12,671 993.8 % ` 30
-------------------------------------------------------------------------------- Table of Contents Revenues Total revenues for the six months endedJune 30, 2021 were$349.0 million , an increase of$242.2 million , or 226.7%, compared to the prior-year period. This increase was driven by an increase in net gaming revenue of$233.3 million , or 229.7%, an increase in amusement revenue of$5.2 million , or 169.4%, and an increase in ATM fees and other revenue of$3.6 million , or 167.2%. Increase in net gaming revenue was attributable to the IGB-mandated shutdown ofIllinois video gaming due to the COVID-19 outbreak, which impacted 106 of the 182 gaming days (or 58% of gaming days) in the first half of 2020. The increase in net gaming revenues for the six months endedJune 30, 2021 also reflected an increase in gaming terminals and locations, as well as an increase in location hold-per-day, which was driven by higher bet limit software, the addition of a 6th VGT and higher demand. Cost of revenue Cost of revenue for the six months endedJune 30, 2021 was$234.7 million , an increase of$163.4 million , or 229.4%, compared to the prior-year period due primarily to the previously mentioned IGB-mandated shutdown ofIllinois video gaming due to the COVID-19 outbreak and an increase in theIllinois gaming tax from 33% to 34% onJuly 1, 2020 . General and administrative General and administrative expenses for the six months endedJune 30, 2021 were$50.6 million , an increase of$18.7 million , or 58.6%, compared to the prior-year period. The increase was attributable to a reduction in our prior year monthly expenses during the previously mentioned IGB-mandated shutdown. General and administrative expenses for the six months endedJune 30, 2021 also reflected higher non-variable payroll-related costs as we continued to grow our operations and we incurred higher stock-based compensation expenses. Depreciation and amortization of property and equipment Depreciation and amortization of property and equipment for the six months endedJune 30, 2021 was$12.3 million , an increase of$2.4 million , or 23.8%, compared to the prior-year period due to an increased number of licensed establishments and VGTs. Amortization of route and customer acquisition costs and location contracts acquired Amortization of route and customer acquisition costs and location contracts acquired for the six months endedJune 30, 2021 was$12.3 million , an increase of$1.1 million , or 10.2%, compared to the prior-year period. The increase was primarily attributable to our business and asset acquisitions. Other expenses, net Other expenses, net for the six months endedJune 30, 2021 were$4.7 million , an increase of$0.4 million , or 9.3%, compared to the prior-year period due to larger fair value adjustments associated with the revaluation of contingent consideration liabilities due to stronger than anticipated performance from the associated business acquisitions, partially offset by lower non-recurring, one-time expenses attributable to non-capitalizable public offering costs incurred in the first quarter of 2020 and costs incurred in the second quarter of 2020 to provide benefits (e.g. employee portion of health insurance premiums) for furloughed employees during the IGB-mandated shutdown. 31 -------------------------------------------------------------------------------- Table of Contents Interest expense, net Interest expense, net for the six months endedJune 30, 2021 was$6.7 million , which was essentially flat compared to the prior-year period. The weighted average interest rate was approximately 3.3% for both the six months endedJune 30, 2021 and 2020. Loss (gain) on change in fair value of contingent earnout shares Loss on the change in fair value of contingent earnout shares for the six months endedJune 30, 2021 was$6.0 million , an increase of$16.2 million , or 158.4%, compared to the prior-year, which had a gain of$10.2 million . The increase was primarily due to the change in the market value of our A-1 common stock, which was the primary input to the valuation of the contingent earnout shares. Gain on change in fair value of warrants Gain on change in fair value of warrants for the six months endedJune 30, 2020 was$14.3 million . In the third quarter of 2020, we redeemed substantially all of the warrants which resulted in no change to the fair value of the remaining warrants for the six months endedJune 30, 2021 . Income tax expense (benefit) Income tax expense for the six months endedJune 30, 2021 was$7.8 million , an increase of$13.0 million , or 250.9%, compared to the prior-year period, which had an income tax benefit of$5.2 million . The effective tax rate for the six months endedJune 30, 2021 was 36.0% compared to 132.5% in the prior year period. Our effective income tax rate can vary from period to period depending on, among other factors, the amount of permanent tax adjustments and discrete items. The higher tax rate for the six months endedJune 30, 2020 was due to projected permanent differences and the nondeductible gains related to the revaluation of our contingent earnout shares and warrants, which are considered discrete items. Key Business Metrics Accel uses a variety of statistical data and comparative information commonly used in the gaming industry to monitor the performance of the business, none of which are prepared in accordance with GAAP, and therefore should not be viewed as indicators of operational performance. Accel's management uses this information for financial planning, strategic planning and employee compensation decisions. The key indicators include: •Number of licensed establishments; •Number of VGTs; •Average remaining contract term (years); and •Location hold-per-day. Number of licensed establishments The number of licensed establishments is calculated based on data provided by Scientific Games, a contractor of the IGB. Terminal operator portal data is updated at the end of each gaming day and includes licensed establishments that may be temporarily closed but still connected to the central system. Accel utilizes this metric to continually monitor growth from organic openings, purchased licensed establishments, and competitor conversions. Competitor conversions occur when a licensed establishment chooses to change terminal operators. Number of video game terminals (VGTs) The number of VGTs in operation is based on Scientific Games terminal operator portal data which is updated at the end of each gaming day and includes VGTs that may be temporarily shut off but still connected to the central system. Accel utilizes this 32 -------------------------------------------------------------------------------- Table of Contents metric to continually monitor growth from existing licensed establishments, organic openings, purchased licensed establishments, and competitor conversions. Average remaining contract term Average remaining contract term is calculated by determining the average expiration date of all outstanding contracts with Accel's current licensed establishment partners, and then subtracting the applicable measurement date. The IGB limited the length of contracts entered into afterFebruary 2, 2018 to a maximum of eight years with no automatic renewals. Location hold-per-day Location hold-per-day is calculated by dividing the difference between cash deposited in all VGTs at each licensed establishment and tickets issued to players at each licensed establishment by the number of locations in operation each day during the period being measured. Then divide the calculated amount by the number of operating days in such period. The following table sets forth information with respect to Accel's licensed establishments, number of VGTs, and average remaining contract term as ofJune 30 , respectively: As of June 30, Increase / (Decrease) 2021 2020 Change $ Change % Licensed establishments 2,527 2,335 192 8.2 % Video gaming terminals 13,177 11,108 2,069 18.6 % Average remaining contract term (years) 6.8 6.8 - - %
The following table sets forth information with respect to Accel's location
hold-per-day for the three and six months ended
June 30 ,
Increase / (Decrease)
2021 2020 Change $ Change %
Location hold-per-day - for the three
months ended (1)$ 855 $ - $ 855 N/A
Location hold-per-day - for the six
months ended (2)$ 824 $ 572 $ 252 44.1 % (1) There were no gaming days for the three months endedJune 30, 2020 , due to the IGB mandated COVID-19 shutdown. (2) Location hold-per-day for the six months endedJune 30, 2021 is computed based on 163-eligible days of gaming (excludes 18 non-gaming days due to the IGB mandated COVID-19 shutdown). Location hold-per-day for the six months endedJune 30, 2020 is computed based on 76-eligible days of gaming (excludes 106 non-gaming days due to the IGB mandated COVID-19 shutdown) Non-GAAP Financial Measures Adjusted EBITDA and Adjusted net income are non-GAAP financial measures and are key metrics used to monitor ongoing core operations. Management of Accel believes Adjusted EBITDA and Adjusted net income enhance the understanding of Accel's underlying drivers of profitability and trends in Accel's business and facilitate company-to-company and period-to-period comparisons, because these non-GAAP financial measures exclude the effects of certain non-cash items or represent certain nonrecurring items that are unrelated to core performance. Management of Accel also believe that these non-GAAP financial measures are used by investors, analysts and other interested parties as measures of financial performance and to evaluate Accel's ability to fund capital expenditures, service debt obligations and meet working capital requirements. 33 -------------------------------------------------------------------------------- Table of Contents Adjusted net (loss) income and Adjusted EBITDA Three Months Ended Six Months Ended (in thousands) June 30, June 30, 2021 2020 2021 2020 (As Restated) (As Restated) Net income (loss)$ 12,445 $ (46,768) $ 13,946 $ 1,275 Adjustments: Amortization of route and customer acquisition costs and location contracts acquired (1) 6,162 5,565 12,268 11,130 Stock-based compensation (2) 2,148 1,327 3,741 2,387 Loss (gain) on change in fair value of contingent earnout shares (3) 3,182 7,174 5,979 (10,232) Loss (gain) on change in fair value of warrants(4) - 18,320 - (14,283) Other expenses, net (5) 2,687 3,132 4,740 4,336 Tax effect of adjustments (6) (892) (2,343) (3,885) (2,015) Adjusted net income (loss) 25,732 (13,593) 36,789 (7,402) Depreciation and amortization of property and equipment 6,313 5,071 12,302 9,938 Interest expense, net 3,376 2,489 6,720 6,738 Emerging markets (7) 746 - 1,263 - Income tax expense (benefit) 6,816 (2,712) 11,722 (3,179) Adjusted EBITDA$ 42,983 $ (8,745) $ 68,796 $ 6,095 (1) Route and customer acquisition costs consist of upfront cash payments and future cash payments to third-party sales agents to acquire the licensed video gaming establishments that are not connected with a business combination. Accel amortizes the upfront cash payment over the life of the contract, including expected renewals, beginning on the date the location goes live, and recognizes non-cash amortization charges with respect to such items. Future or deferred cash payments, which may occur based on terms of the underlying contract, are generally lower in the aggregate as compared to established practice of providing higher upfront payments, and are also capitalized and amortized over the remaining life of the contract. Future cash payments do not include cash costs associated with renewing customer contracts as Accel does not generally incur significant costs as a result of extension or renewal of an existing contract. Location contracts acquired in a business combination are recorded at fair value as part of the business combination accounting and then amortized as an intangible asset on a straight-line basis over the expected useful life of the contract of 10 years. "Amortization of route and customer acquisition costs and location contracts acquired" aggregates the non-cash amortization charges relating to upfront route and customer acquisition cost payments and location contracts acquired. (2) Stock-based compensation consists of options, restricted stock units and warrants. (3) Loss (gain) on change in fair value of contingent earnout shares represents a non-cash fair value adjustment at each reporting period end related to the value of these contingent shares. Upon achieving such contingency, shares of Class A-2 Common Stock convert to Class A-1 Common Stock resulting in a non-cash settlement of the obligation. (4) Loss (gain) on change in fair value of warrants represents a non-cash fair value adjustment at each reporting period end related to the value of these warrants. (5) Other expenses, net consists of (i) non-cash expenses including the remeasurement of contingent consideration liabilities, (ii) non-recurring expenses relating to lobbying efforts and legal expenses inPennsylvania and lobbying efforts inMissouri , (iii) non-recurring costs associated with COVID-19 and (iv) other non-recurring expenses. (6) Calculated by excluding the impact of the non-GAAP adjustments from the current period tax provision calculations. (7) Emerging markets consist of the results, on an adjusted EBITDA basis, for non-core jurisdictions where our operations are developing. Markets are no longer considered emerging when Accel has installed or acquired at least 500 gaming terminals in the jurisdiction, or when 24 months have elapsed from the date Accel first installs or acquires gaming terminals in the jurisdiction, whichever occurs first. Adjusted EBITDA for the three months endedJune 30, 2021 , was$43.0 million , an increase of$51.7 million , when compared to the loss of$8.7 million in the prior-year period. Adjusted EBITDA for the six months endedJune 30, 2021 , was$68.8 million , an increase of$62.7 million , or 1,028.7%, compared to the prior-year period. The increase in performance for both periods was attributable to an increase in the number of licensed establishments, VGTs, and location hold-per-day, and the absence of the previously mentioned IGB-mandated shutdown ofIllinois video gaming due to the COVID-19 outbreak that had a significant impact on our performance in the prior-year periods. Liquidity and Capital Resources Accel believes that its cash and cash equivalents, cash flows from operations and borrowing availability under its senior secured credit facility will be sufficient to meet its capital requirements for the next twelve months. Accel's primary short-term cash needs are paying operating expenses, servicing outstanding indebtedness and funding near term acquisitions. As ofJune 30, 2021 , Accel had$178.5 million in cash and cash equivalents. 34 -------------------------------------------------------------------------------- Table of Contents In response to the decision by the IGB to shut down all VGTs across theState of Illinois due to the COVID-19 outbreak, we took action in the first quarter of 2020 to reduce our projected monthly cash expenses down to$2-$3 million during the shutdown to position us to help mitigate the effects of the temporary cessation of operations. The actions taken include furloughing approximately 90% our employees and deferring certain payments to major vendors. Additionally, members of our management team decided to voluntarily forgo their salaries until the resumption of video gaming operations. We also borrowed$65 million on our delayed draw term loan inMarch 2020 to increase our cash position and help preserve our financial flexibility. 2019 Senior Secured Credit Facility OnNovember 13, 2019 , we entered into a credit agreement (the "Credit Agreement") as borrower, with Accel and our wholly-owned domestic subsidiaries, as guarantors, the banks, financial institutions and other lending institutions from time to time party thereto, as lenders, the other parties from time to time party thereto andCapital One, National Association , as administrative agent (in such capacity, the "Agent"), collateral agent, issuing bank and swingline lender, providing for a: •$100.0 million revolving credit facility, including a letter of credit facility with a$10.0 million sublimit and a swing line facility with a$10.0 million sublimit, •$240.0 million initial term loan facility and •$125.0 million additional term loan facility. As ofJune 30, 2021 , there remained approximately$87.0 million of availability under the Credit Agreement. The obligations under the Credit Agreement are guaranteed by Accel and our wholly-owned domestic subsidiaries, subject to certain exceptions (collectively, the "Guarantors"). The obligations under the Credit Agreement are secured by substantially all of assets of the Guarantors, subject to certain exceptions. Certain future-formed or acquired wholly-owned domestic subsidiaries by us will also be required to guarantee the Credit Agreement and grant a security interest in substantially all of our assets (subject to certain exceptions) to secure the obligations under the Credit Agreement. Borrowings under the Credit Agreement bear interest, at Accel's option, at a rate per annum equal to either (a) the adjusted LIBOR rate ("LIBOR") (which cannot be less than 0.5%) for interest periods of 1, 2, 3 or 6 months (or if consented to by (i) each applicable Lender, 12 months or any period shorter than 1 month or (ii) the Agent, a shorter period necessary to ensure that the end of the relevant interest period would coincide with any required amortization payment ) plus the applicable LIBOR margin or (b) the alternative base rate ("ABR") plus the applicable ABR margin. ABR is a fluctuating rate per annum equal to the highest of (i) the Federal Funds Effective Rate plus 1/2 of 1.0%, (ii) the prime rate announced from time to time byCapital One, National Association and (iii) LIBOR for a 1-month Interest Period on such day plus 1.0%. The Credit Agreement also includes provisions for determining a replacement rate when LIBOR is no longer available. As ofJune 30, 2021 , the weighted-average interest rate was approximately 3.3%. Interest is payable quarterly in arrears for ABR loans, at the end of the applicable interest period for LIBOR loans (but not less frequently than quarterly) and upon the prepayment or maturity of the underlying loans. Accel is required to pay a commitment fee quarterly in arrears in respect of unused commitments under the revolving credit facility and the additional term loan facility. The applicable LIBOR and ABR margins and the commitment fee rate are calculated based upon the first lien net leverage ratio of Accel and its restricted subsidiaries on a consolidated basis, as defined in the Credit Agreement. The revolving loans and term loans bear interest at either (a) ABR (150 bps floor) plus a margin of 1.75% or (b) LIBOR (50bps floor) plus a margin of 2.75%, at our option. The additional term loan facility was available for borrowing untilNovember 13, 2020 . Each of the revolving loans and the term loans mature onNovember 13, 2024 . The term loans and, once drawn, the additional term loans will amortize at an annual rate equal to approximately 5.00% per annum. Upon the consummation of certain non-ordinary course asset sales, we may be required to apply the net cash proceeds 35 -------------------------------------------------------------------------------- Table of Contents thereof to prepay outstanding term loans and additional term loans. The loans under the Credit Agreement may be prepaid without premium or penalty, subject to customary LIBOR "breakage" costs. The Credit Agreement contains certain customary affirmative and negative covenants and events of default, and requires Accel and certain of its affiliates obligated under the Credit Agreement to make customary representations and warranties in connection with credit extensions thereunder. In addition, the Credit Agreement requires Accel to maintain (a) a ratio of consolidated first lien net debt to consolidated EBITDA no greater than 4.50 to 1.00 and (b) a ratio of consolidated EBITDA to consolidated fixed charges no less than 1.20 to 1.00, in each case, tested as of the last day of each full fiscal quarter ending after the Closing Date and determined on the basis of the four most recently ended fiscal quarters of Accel for which financial statements have been delivered pursuant to the Credit Agreement, subject to customary "equity cure" rights. If an event of default (as such term is defined in the Credit Agreement) occurs, the lenders would be entitled to take various actions, including the acceleration of amounts due under the Credit Agreement, termination of the lenders' commitments thereunder, foreclosure on collateral, and all other remedial actions available to a secured creditor. The failure to pay certain amounts owing under the Credit Agreement may result in an increase in the interest rate applicable thereto. Given the uncertainty of COVID-19 and the resulting potential impact to the gaming industry, as well as to provide additional financial flexibility, we and the other parties thereto amended the Credit Agreement onAugust 4, 2020 to provide a waiver of financial covenant breach for the periods endedSeptember 30, 2020 throughMarch 31, 2021 of the First Lien Net Leverage Ratio and Fixed Charge Coverage Ratio (each as defined under the Credit Agreement). The amendment also raised the floor for the adjusted LIBOR rate to 0.5% and the floor for the Base Rate to 1.50%. We were in compliance with all debt covenants as ofJune 30, 2021 . Given our assumptions about the future impact of COVID-19 and its variant strains on the gaming industry, which could be materially different due to the inherent uncertainties of future restrictions on the industry, we expect to meet our cash obligations as well as remain in compliance with the debt covenants in our credit facility for the next 12 months. Cash Flows The following table summarizes Accel's net cash provided by or used in operating activities, investing activities and financing activities for the periods indicated and should be read in conjunction with our condensed consolidated financial statements and the notes thereto included in this filing: Six Months Ended (in thousands) June 30, 2021 2020 (As Restated)
Net cash provided by (used in) operating activities$ 54,158 $ (17,284) Net cash used in investing activities (13,758) (4,002) Net cash provided by financing activities 3,657 44,717 Net cash provided by (used in) operating activities For the six months endedJune 30, 2021 , net cash provided by (used in) operating activities was$54.2 million , an increase of$71.4 million over the comparable period. In addition to our increase in net income, we had favorable fair value adjustments on our contingent earnout shares and warrants, favorable remeasurements on contingent consideration and experienced an increase in working capital adjustments. Net cash used in investing activities For the six months endedJune 30, 2021 , net cash used in investing activities was$13.8 million , an increase of$9.8 million over the comparable period and was primarily attributable to more cash used for the purchases of property and equipment as our 36 -------------------------------------------------------------------------------- Table of Contents prior year purchases were impacted by the the previously mentioned IGB-mandated shutdown ofIllinois video gaming due to the COVID-19 outbreak. The six months endedJune 30, 2021 was also impacted by cash payments of$3.2 million for acquisitions. Net cash provided by financing activities For the six months endedJune 30, 2021 , net cash provided by financing activities was$3.7 million , a decrease of$41.1 million over the comparable period. The decrease was primarily due to a decrease in net borrowings on our credit facility and lower payments on consideration payable. Critical Accounting Policies and Estimates In preparing our condensed consolidated financial statements, we applied the same critical accounting policies as described in our Form 10-K that affect judgments and estimates of amounts recorded for certain assets, liabilities, revenues, and expenses. Seasonality Accel's results of operations can fluctuate due to seasonal trends and other factors. For example, the gross revenue per machine per day is typically lower in the summer when players will typically spend less time indoors at licensed establishment partners, and higher in cold weather between February and April, when players will typically spend more time indoors at licensed establishment partners. Holidays, vacation seasons, and sporting events may also cause Accel's results to fluctuate. 37
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