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 this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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 Annual Report on Form 10-K for the year endedDecember 31, 2019 . Company Overview 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 conditional license from thePennsylvania Gaming Control Board . InJuly 2020 , theGeorgia Lottery Corporation approved one of our consolidated subsidiaries as a Master Licensee. We operate 11,108 video gaming terminals across 2,335 locations in theState of Illinois as ofJune 30, 2020 . 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 reports 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 its licensed establishment partners. Impact of COVID-19 The COVID-19 outbreak is having 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. In response to the COVID19 outbreak, 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 25
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on our delayed draw term loan inMarch 2020 to increase our cash position and help preserve our financial flexibility. The temporary shutdown ofIllinois video gaming impacted 106 of the 182 gaming days (or 58% of gaming days) during the first half of 2020. In light of these events and their effect on Accel's 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 result of these developments, our revenues, results of operations and cash flows have been materially affected. The situation is rapidly changing and additional impacts to the business and financial results may arise that we are not aware of currently. In close consultation with theIllinois Department of Public Health and the governor, the IGB issued resumption protocols to guide casino and terminal operators in their resumption planning. Based on those protocols, we provided a Pandemic Resumption Plan to the IGB to guide our operations upon the resumption of gaming onJuly 1 , at9:00 a.m. Our plan included working with our licensed establishment partners to, among other things: •Follow social distancing requirements within the gaming area by moving the gaming equipment or installing spacers that meet IGB guidelines; •determine how personal protective equipment usage requirements will be observed and enforced; •develop procedures and schedules for cleaning, disinfecting and sanitizing the establishment as well the gaming area, including the VGTs; and •proper signage to remind patrons of social distancing requirements, proper hand washing, use of sanitizers, use of personal protective equipment, and to stay at home if feeling sick. Accel supports these measures to protect the safety of our fellowIllinois citizens, as the health and safety of players and licensed partner establishments is of paramount importance to us. We have been in constant contact with our licensed partner establishments to keep them aware of current developments, and have been working with them through this plan. As a result, by day 3 of the relaunch, more than 90% of Accel's locations were live and less than 3% of Accel's VGTs were down due to resumption protocols. We have incurred non-recurring, one-time expenses of$1.3 million and$1.9 million for the three and six months endedJune 30, 2020 , respectively, for costs to provide benefits (e.g. health insurance) for furloughed employees during the COVID-19 shutdown. These costs are included within other expenses, net. We also spent$1.4 million in capital costs related to the purchase of IGB-mandated spacers for our VGTs to promote social distancing requirements within the gaming area and incurred operating expenses of$0.3 million related to cleaning, disinfecting and sanitizing supplies. While the IGB has announced the resumption of all video gaming activities effectiveJuly 1st , 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 or other events. Components of Performance Revenues Net video gaming. Net video gaming revenue represents net cash received from gaming activities, which is the difference between gaming wins and losses. Net video 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. 26
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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 Video gaming expenses. Gaming expenses consist of (i) a 33% tax on net video gaming revenue (such tax increased from 30% beginning onJuly 1, 2019 and will increase to 34% 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 and (iii) establishment revenue share, which is defined as 50% of gross gaming revenue after subtracting the tax and administrative fee. 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, ATM and amusement commissions and fees, 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 on our prior credit facility was payable monthly on unpaid balances at the variable per annum LIBOR rate plus an applicable margin, as defined under the terms of the prior credit facility, ranging from 1.70% to 2.50% depending on the ratio of total net debt to EBITDA. Interest expense, net also consists of interest income on convertible promissory notes from another terminal operator that bear interest at 3% per annum. Income tax (benefit) expense Income tax (benefit) expense consists mainly of taxes (receivable) payable to national, 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. 27
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Results of Operations The following table summarizes Accel's results of operations on a consolidated basis for the three months endedJune 30, 2020 and 2019: Three Months Ended (in thousands, except %'s) June 30, Increase / (Decrease) 2020 2019 Change ($) Change (%) Revenues: Net video gaming $ -$ 100,994 $ (100,994 ) (100.0 )% Amusement 260 1,348 (1,088 ) (80.7 )% ATM fees and other revenue 119 1,925 (1,806 ) (93.8 )% Total revenues 379 104,267 (103,888 ) (99.6 )% Operating expenses: Video gaming expenses - 66,082 (66,082 ) (100.0 )% General and administrative 10,451 17,476 (7,025 ) (40.2 )% Depreciation and amortization of property and equipment 5,071 6,100 (1,029 ) (16.9 )% Amortization of route and customer acquisition costs and location contracts acquired 5,565 4,624 941 20.4 % Other expenses, net 3,132 730 2,402 329.0 % Total operating expenses 24,219 95,012 (70,793 ) (74.5 )% Operating (loss) income (23,840 ) 9,255 (33,095 ) (357.6 )% Interest expense, net 2,489 3,156 (667 ) (21.1 )% (Loss) income before income tax (benefit) expense (26,329 ) 6,099 (32,428 ) (531.7 )% Income tax (benefit) expense (5,055 ) 1,771 (6,826 ) (385.4 )% Net (loss) income$ (21,274 ) $ 4,328 $ (25,602 ) (591.5 )% 28
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Revenues
Total revenues for the three months endedJune 30, 2020 were$0.4 million , a decrease of$103.9 million , or 99.6%, compared to the prior year period. This decline was driven by a decrease in net video gaming revenue of$101.0 million , or 100.0%, a decrease in amusement revenue of$1.1 million , or 80.7% and a decrease in ATM fees and other revenue of$1.8 million , or 93.8%. The decrease in revenue is attributable to the shutdown ofIllinois video gaming due to the COVID-19 outbreak which resulted in no gaming days for the three months endedJune 30, 2020 . Video gaming expenses Total video gaming expenses for the three months endedJune 30, 2020 decreased$66.1 million , or 100.0%, compared to the prior year period attributable to the shutdown ofIllinois video gaming due to the COVID-19 outbreak. General and administrative Total general and administrative expenses for the three months endedJune 30, 2020 were$10.5 million , a decrease of$7.0 million , or 40.2%, compared to the prior year period. The decrease was attributable to a reduction to our monthly cash expenses during the IGB mandated shutdown which included furloughing approximately 90% of our employees. Depreciation and amortization of property and equipment Depreciation and amortization of property and equipment for the three months endedJune 30, 2020 was$5.1 million , a decrease of$1.0 million , or 16.9%, compared to the prior year period. The decrease in depreciation and amortization is the result of a change in estimate in which we extended the useful lives of our video gaming terminals and equipment from 7 to 10 years. The impact of this change in estimate for the second quarter of 2020 was a net decrease in depreciation expense of$1.9 million . Partially offsetting this decrease was 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, 2020 was$5.6 million , an increase of$0.9 million , or 20.4%, compared to the prior year period. The increase is primarily attributable to our business and asset acquisitions and their related performance, partially offset by the favorable impact from the adoption of Topic 606 which increased the period over which route and customer acquisition costs are amortized to include expected renewals. Other expenses, net Other expenses, net for the three months endedJune 30, 2020 were$3.1 million , an increase of$2.4 million , or 329.0%, compared to the prior year period. Included in Other expenses, net for the three months endedJune 30, 2020 were non-recurring, one-time expenses of$1.3 million for costs to provide benefits (e.g. health insurance) for furloughed employees during the COVID-19 shutdown. Interest expense, net Interest expense, net for the three months endedJune 30, 2020 was$2.5 million , a decrease of$0.7 million , or 21.1%, compared to the prior year period primarily due to lower rates and interest income on the convertible notes, partially offset by an increase in borrowings. For the three months endedJune 30, 2020 , the weighted average interest rate was approximately 2.7% compared to a rate of approximately 4.6% for the prior year period. Income tax (benefit) expense Income tax benefit for the three months endedJune 30, 2020 was$5.1 million , a decrease of$6.8 million , or 385.4%, compared to the prior year period which had income tax expense of$1.8 million . The effective tax rate for the three months endedJune 30, 2020 was 19.2% compared to 29.0% in the prior year period. The lower tax rate in the second quarter of 2020 was due to permanent differences related to stock options, transaction costs and executive compensation. 29
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The following table summarizes Accel's results of operations on a consolidated
basis for the six months ended
Six Months Ended
(in thousands, except %'s) June 30, Increase / (Decrease)
2020 2019 Change ($) Change (%)
Revenues:
Net video gaming $ 101,575 $ 195,169 $ (93,594 ) (48.0 )%
Amusement 1,952 2,786 (834 ) (29.9 )%
ATM fees and other revenue 2,080 3,737 (1,657 ) (44.3 )%
Total revenues 105,607 201,692 (96,085 ) (47.6 )%
Operating expenses:
Video gaming expenses 67,980 127,703 (59,723 ) (46.8 )%
General and administrative 33,919 33,600 319 0.9 %
Depreciation and amortization of property
and equipment 9,938 12,141 (2,203 ) (18.1 )%
Amortization of route and customer
acquisition costs and location contracts
acquired 11,130 8,927 2,203 24.7 %
Other expenses, net 4,336 1,346 2,990 222.1 %
Total operating expenses 127,303 183,717 (56,414 ) (30.7 )%
Operating (loss) income (21,696 ) 17,975 (39,671 ) (220.7 )%
Interest expense, net 6,738 6,203 535 8.6 %
(Loss) income before income tax (benefit)
expense (28,434 ) 11,772 (40,206 ) (341.5 )%
Income tax (benefit) expense (5,194 ) 3,449 (8,643 ) (250.6 )%
Net (loss) income $ (23,240 ) $ 8,323 $ (31,563 ) (379.2 )%
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Revenues
Total revenues for the six months endedJune 30, 2020 were$105.6 million , a decrease of$96.1 million , or 47.6%, compared to the prior year period. This decline was driven by a decrease in net video gaming revenue of$93.6 million , or 48.0%, a decrease in amusement revenue of$0.8 million , or 29.9% and a decrease in ATM fees and other revenue of$1.7 million , or 44.3%. The decrease in net video gaming revenue is largely attributable to the temporary shutdown ofIllinois video gaming sinceMarch 16, 2020 , 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, partially offset by the acquisition ofGrand River Jackpot onSeptember 16, 2019 , which collectively contributed$12.3 million in net video gaming revenue. ExcludingGrand River Jackpot , net video gaming revenue decreased in the first half of 2020 by$105.9 million , or 54.3%, compared to the prior period, largely attributable to the previously mentioned temporary shutdown ofIllinois video gaming due to the COVID-19 outbreak, partially offset by an increase in the number of licensed establishments and VGTs. Video gaming expenses Total video gaming expenses for the six months endedJune 30, 2020 were$68.0 million , a decrease of$59.7 million , or 46.8%, compared to the prior year period. The components of video gaming expenses as a percentage of revenue of 64.4% for the six months endedJune 30, 2020 was slightly higher than the 63.3% for the six months endedJune 30, 2019 due to the increase in the gaming tax from 30% to 33% onJuly 1, 2019 . The decrease of$59.7 million was the result of the previously mentioned temporary shutdown ofIllinois video gaming due to the COVID-19 outbreak. General and administrative Total general and administrative expenses for the six months endedJune 30, 2020 were$33.9 million , an increase of$0.3 million , or 0.9%, compared to the prior year period. We experienced higher costs related to professional fees and stock-based compensation, partially offset by a reduction in our monthly cash expenses during the IGB mandated shutdown which included furloughing approximately 90% of our employees. Depreciation and amortization of property and equipment Depreciation and amortization of property and equipment for the six months endedJune 30, 2020 was$9.9 million , a decrease of$2.2 million , or 18.1%, compared to the prior year period. The decrease in depreciation and amortization is the result of a change in estimate in which we extended the useful lives of our video gaming terminals and equipment from 7 to 10 years. The impact of this change in estimate for the first half of 2020 was a net decrease in depreciation expense of$4.5 million . Partially offsetting this decrease was an increased number of licensed establishments and VGTs. Depreciation and amortization as a percentage of revenue was 9.4% for the six months endedJune 30, 2020 compared to 6.0% for the prior year period. 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, 2020 was$11.1 million , an increase of$2.2 million , or 24.7%, compared to the prior year period. The increase is primarily attributable to our business and asset acquisitions and their related performance, partially offset by the favorable impact from the adoption of Topic 606 which increased the period over which route and customer acquisition costs are amortized to include expected renewals. Amortization of route and customer acquisition costs and location contracts acquired as a percentage of revenue was 10.5% for the six months endedJune 30, 2020 compared to 4.4% for the prior year period. Other expenses, net Other expenses, net for the six months endedJune 30, 2020 were$4.3 million , an increase of$3.0 million , or 222.1%, compared to the prior year period. Included in Other expenses, net for the six months endedJune 30, 2020 were non-recurring, one-time expenses of$1.9 million for costs to provide benefits (e.g. health insurance) for furloughed employees during the COVID-19 shutdown as well as additional non-recurring costs related to public company registration statements, partially offset by a favorable revaluation of consideration payable in connection with gaming acquisitions. 31
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Interest expense, net Interest expense, net for the six months endedJune 30, 2020 was$6.7 million , an increase of$0.5 million , or 8.6%, compared to the prior year period primarily due to an increase in borrowings, partially offset by lower rates and interest income on the convertible notes. For the six months endedJune 30, 2020 , the weighted average interest rate was approximately 3.3% compared to a rate of approximately 4.6% for the prior year period. Income tax (benefit) expense Income tax benefit for the six months endedJune 30, 2020 was$5.2 million , a decrease of$8.6 million , or 250.6%, compared to the prior year period which had income tax expense of$3.4 million . The effective tax rate for the six months endedJune 30, 2020 was 18.3% compared to 29.3% in the prior year period. The lower tax rate in the first half of 2020 was due to permanent differences related to stock options, transaction costs and executive compensation. 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 •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 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. Hold-per-day Hold-per-day is calculated by dividing the difference between cash deposited in all VGTs and tickets issued to players by the average number of VGTs in operation during the period being measured, and then dividing the calculated amount by the number of operating days in such period. 32
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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) 2020 2019 Change $ Change % Licensed establishments 2,335 1,762 573 32.5 % Video gaming terminals 11,108 8,082 3,026 37.4 % Average remaining contract term (years) (1) 6.8 7.4
(0.6 ) (8.1 )%
(1) Excluding the
June 30 Increase
/ (Decrease)
2020 2019 Change $ Change %
Hold-per-day - for the three months ended(1) $ - $ 139 $ (139 ) (100.0 )%
Hold-per-day - for the six months ended (2) $ 124 $ 137 $ (13 ) (9.5 )%
(1) There were no gaming days for the three months endedJune 30, 2020 , due to the IGB mandated COVID-19 shutdown. (2) Excluding theGrand River Jackpot acquisition, Hold-per-day was$132 for the six months endedJune 30, 2020 . Hold per day for the six months endedJune 30, 2020 is computed based on 76-eligible days of gaming (excludes 106 non-gaming days due to the IGB mandated COVID-19 shutdown). Non-GAAP Financial Measures Adjusted EBITDA and Adjusted net income are non-GAAP financial measures and are key metrics used to monitor ongoing core operations. Management of Accel believes Adjusted EBITDA and Adjusted net income enhance the understanding of Accel's underlying drivers of profitability and trends in Accel's business and facilitate company-to-company and period-to-period comparisons, because these non-GAAP financial measures exclude the effects of certain non-cash items or represent certain nonrecurring items that are unrelated to core performance. Management of Accel also believe that these non-GAAP financial measures are used by investors, analysts and other interested parties as measures of financial performance and to evaluate Accel's ability to fund capital expenditures, service debt obligations and meet working capital requirements. Adjusted net (loss) income and Adjusted EBITDA Three Months Ended Six Months Ended (in thousands) June 30, June 30, 2020 2019 2020 2019 Net (loss) income$ (21,274 ) $ 4,328 $ (23,240 ) $ 8,323 Adjustments: Amortization of route and customer acquisition costs and location contracts acquired(1) 5,565 4,624 11,130 8,927 Stock-based compensation(2) 1,327 128 2,387 256 Other expenses, net(3) 3,132 754 4,336 1,370 Tax effect of adjustments(4) (2,343 ) (2,311 ) (2,015 ) (3,805 ) Adjusted net (loss) income$ (13,593 ) $ 7,523 $ (7,402 ) $ 15,071 Depreciation and amortization of property and equipment 5,071 6,100 9,938 12,141 Interest expense, net 2,489 3,156 6,738 6,203 Income tax (benefit) expense (2,712 ) 4,082 (3,179 ) 7,254 Adjusted EBITDA$ (8,745 ) $ 20,861 $ 6,095 $ 40,669
(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,
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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) Other expenses, net consists of (i) non-cash expenses including the
remeasurement of contingent consideration liabilities,
(ii) non-recurring expenses including expenses relating to lobbying efforts
and legal expenses in
non-recurring expenses and (iv) non-recurring costs associated with COVID-19.
(4) Calculated by excluding the impact of the non-GAAP adjustments from the
current period tax provision calculations.
Adjusted EBITDA for the three months endedJune 30 , 2020,was a loss of$8.7 million , a decrease of$29.6 million , or 141.9%, compared to the prior year period. Adjusted EBITDA for the six months endedJune 30, 2020 , was$6.1 million , a decrease of$34.6 million , or 85.0%, compared to prior year period. Both the three and six month periods endedJune 30, 2020 , were lower primarily due to the impact of the previously mentioned temporary shutdown of video gaming in the state ofIllinois due to the COVID-19 outbreak. 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, 2020 , Accel had$148.8 million in cash and cash equivalents. 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 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 , in order to refinance its prior credit facility, for working capital and other general purposes, we entered into a credit agreement (the "Credit Agreement") as borrower, Accel and our wholly-owned domestic subsidiaries, as a guarantor, 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
•
•
As ofJune 30, 2020 , there remained approximately$49.5 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 of the Company will also be required to guarantee the Credit Agreement and grant a security interest in substantially all of its 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 zero) for interest periods of 1, 2, 3 or 6 months (or if consented to by (i) each 34
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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 by Capital 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 of June 30, 2020 , the weighted-average interest rate was
approximately 3.33%.
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. Additionally, we are required to pay an upfront fee with respect to
any funded additional term loans.
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. Until
the delivery of the initial financial statements under the Credit Agreement, the
revolving loans and term loans bear interest, at the option of Accel, at either
(a) ABR plus a margin of 1.25% or (b) LIBOR plus a margin of 2.25%.
The additional term loan facility is available for borrowings until the first
anniversary of November 13, 2019 ("the Closing Date"). Each of the revolving
loans and the term loans mature on November 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 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.
Accel was in compliance with all debt covenants as of June 30, 2020 . Given our
assumptions about the future impact of COVID-19 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. However, given the uncertainty of COVID-19 and the resulting
potential impact to the gaming industry and our future assumptions, as well as
to provide additional financial flexibility, we and the other parties thereto
amended the Credit Agreement on August 4, 2020 to provide a waiver of financial
covenant breach for the periods ended September 30, 2020 through March 31, 2021
of the First Lien Net Leverage Ratio and Fixed Charge Coverage Ratio (each as
defined under the Credit Agreement).
Prior Credit Facility
Accel's Prior Credit Facility was a senior secured first lien credit facility,
as amended, that consisted of a $125.0 million term loan, a contract draw loan
facility of $170.0 million and a revolving credit facility of $85.0 million .
Accel's prior credit facility was
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with a syndicated group of banks withCIBC Bank USA , as administrative agent for the lenders. Included in the revolving credit facility and contract draw loan were swing line sub-facilities of$5.0 million each. The Prior Credit Facility was paid off with the proceeds from the 2019 Senior Secured Credit Facility. 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, 2020 2019
Net cash (used in) provided by operating activities
(4,002 ) (10,548 )
Net cash provided by (used in) financing activities 44,717 (8,257 )
Net cash (used in) provided by operating activities For the six months endedJune 30, 2020 , net cash used in operating activities was$17.3 million , a decrease of$43.4 million over the comparable period. In addition to our decrease in net income, we had$1.5 million in payments on contingent consideration and experienced a decrease in working capital adjustments. Net cash used in investing activities For the six months endedJune 30, 2020 , net cash used in investing activities was$4.0 million , a decrease of$6.5 million over the comparable period and was primarily attributable to less cash used to purchase property and equipment. Net cash provided by (used in) financing activities Cash from financing activities is primarily used to fund acquisitions, purchases of property and equipment, and for working capital requirements. For the six months endedJune 30, 2020 , net cash provided by financing activities was$44.7 million , an increase of$53.0 million over the comparable period. The increase was primarily due to an increase in net borrowings on Accel's credit facility, partially offset by higher 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 Annual Report on Form 10-K for the year endedDecember 31, 2019 that affect judgments and estimates of amounts recorded for certain assets, liabilities, revenues, and expenses. Change in Estimate During the first quarter of 2020, we conducted a review of our estimates of depreciable lives for our video gaming terminals and equipment. As a result of this review, we extended the useful lives of our video gaming terminals and equipment from 7 to 10 as the equipment is lasting longer than originally estimated. We have many video gaming terminals and equipment that were purchased when we started operations that are still being used today. The impact of this change in estimate for the three and six months endedJune 30, 2020 , was a net decrease in depreciation expense of$1.9 million and$4.5 million , and$1.5 million and$3.7 million net of tax, respectively. 36
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Off-Balance Sheet Arrangements We do not have any off balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Contractual Obligations The following table sets forth Accel's obligations and commitments to make future payments under contracts and contingent commitments as ofJune 30, 2020 (in thousands): Less than 1 Due in 1 to 3 Due in 3 to 5 Due in over 5 Year years years years Total Credit facility principal payments(1)$ 18,250 $ 36,500 $ 352,438 $ -$ 407,188 Interest payments on credit facility(2) 10,110 18,873 11,612 - 40,595 Operating lease obligations(3) 273 246 65 - 584
Total contractual obligations
$ - $ 448,367
(1) Term Loans require quarterly principal payments of 1.25% of the outstanding
loan amounts on the Closing Date.
(2) Interest payable monthly on unpaid balances at variable per annum LIBOR
rate plus applicable margin.
(3) Represents leased office space under agreements expiring between January
2020 through December 2023 .
Route acquisition costs payable
Accel enters into contracts with third parties and licensed establishments
throughout the State of Illinois which allow Accel to install and operate VGTs.
Payments are due over varying terms of the individual agreements and are
discounted at Accel's incremental borrowing cost at the time the contract is
acquired. As of June 30, 2020 and December 31, 2019 , route acquisition costs
payable was $6.4 million and $6.5 million , respectively. The cost payable is
included on Accel's balance sheets as a liability as its deemed to be both
probable and estimable based on all available information; however, contractual
payments are contingent upon continued future operations of the licensed
establishments including ongoing compliance with licensing requirements.
Consideration payable
Consideration payable consists of amounts payable related to certain business
acquisitions as well as contingent consideration for future licensed
establishment performance related to certain business acquisitions. The
contingent consideration is measured at fair value on a recurring basis. Accel
uses a discounted cash flow analysis to determine the value of contingent
consideration upon acquisition and updates this estimate on a recurring basis.
The significant assumptions in the cash flow analysis include the probability
adjusted projected revenues after state taxes, a discount rate as applicable to
each acquisition, and the estimated number of licensed establishments at which
Accel commences operations during the contingent consideration period. The
changes in the fair value of contingent consideration are recognized within
Accel's condensed consolidated statements of operations in other expenses, net.
As of June 30, 2020 and December 31, 2019 , the consideration payable balance was
$19.8 million and $26.7 million , respectively.
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.
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