Accel Entertainment, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The company operates video gaming terminals and related amusement and ATM services, primarily in Illinois. The prior-year comparative figures are identified as restated.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $147.1 million | $106.5 million |
| Operating income | $9.6 million | $2.1 million |
| Net income | $1.5 million | $48.0 million |
| Adjusted EBITDA (non-GAAP) | $25.8 million | $14.8 million |
| Cash from operating activities | $21.6 million | $(4.3) million |
- Revenue increased 38.1%; net gaming revenue rose 38.3% to $140.5 million. Management attributed gaming growth to more terminals and locations, higher location hold-per-day, higher bet-limit software, a sixth VGT at locations, and stronger demand.
- Operating margin was approximately 6.5%, compared with 2.0%. Cost of revenue grew 39.9%, faster than revenue, reflecting higher gaming revenue and the Illinois gaming tax increase from 33% to 34% effective July 1, 2020.
- Net income and diluted EPS of $0.02 were substantially below the prior-year $48.0 million and $0.60. The comparison was heavily affected by prior-year noncash gains: $17.4 million on contingent earnout shares and $32.6 million on warrants. Q1 2021 recorded a $2.8 million earnout-share fair-value loss and no warrant gain. The 2021 effective tax rate was 56.0%, versus a 0.3% benefit rate in the prior-year quarter.
- Cash and equivalents were $172.7 million at quarter-end, up from $134.5 million at year-end 2020. Gross borrowings were $367.0 million; debt net of issuance costs was $360.1 million, including $18.3 million of current maturities. The company reported approximately $76 million of credit-facility availability and a 3.3% weighted-average borrowing rate.
- Investing activities used $2.5 million. Financing activities provided $19.1 million, including $27.0 million of revolving-credit proceeds and $3.0 million of term-loan repayments. The filing does not provide a free-cash-flow measure.
- At March 31, the company operated 12,720 Illinois VGTs across 2,470 locations, up 13.9% and 5.0%, respectively, year over year. Location hold-per-day was $784, up 37.1%; Q1 2021 included an average of 18 COVID-related non-gaming days.
Material changes and unusual items
- Illinois video gaming resumed in stages in January 2021 after a statewide suspension beginning November 19, 2020. Restrictions on hours and patron capacity remained in some regions. The filing says shutdowns affected an average of 18 of 90 gaming days in Q1 2021, versus 15 of 91 days in Q1 2020.
- Revenue growth and improved operating income occurred despite the shutdown days; comparisons are affected by different closure periods and significant fair-value gains in Q1 2020.
- On March 2, 2021, Accel agreed to acquire Century Gaming for a transaction value of approximately $140 million in cash and stock, subject to customary conditions and gaming-regulatory approvals. The deal was expected to close by year-end 2021; planned funding included cash, credit-facility capacity, and approximately 450,000 Accel shares.
- Q1 2021 included $3.2 million of revenue and $0.2 million of net income from the AVG acquisition. Management also reported $0.5 million of after-tax unrealized gain on its investment in convertible notes in comprehensive income.
- Management said cash, operating cash flow, and available borrowing capacity should meet capital needs for the next 12 months. It expected covenant compliance over that period, while noting uncertainty around COVID-19 and possible future restrictions. No specific revenue or earnings guidance was provided.
Risks, contingencies, and controls
- COVID-19 remains a material risk: future regional or statewide shutdowns or restrictions could reduce revenue and cash flows and potentially lead to material impairment charges. No impairment was recorded at March 31, 2021.
- The credit agreement is secured by substantially all assets of the guarantors. A 1 percentage-point rise in rates on the $367.0 million floating-rate balance would increase annual interest expense by approximately $3.7 million, assuming debt remained unchanged.
- Pending legal and regulatory matters include an Illinois Gaming Board disciplinary complaint seeking a $5 million fine and litigation seeking $10 million. The company denies wrongdoing in the regulatory matter, intends to defend itself, and has not accrued amounts because losses were not considered probable or reasonably estimable. Other litigation includes a dispute over location agreements for which potential damages are not estimable; no reserve was recorded.
- Management concluded disclosure controls and procedures were ineffective at March 31, 2021 because previously identified material weaknesses remained. The filing refers readers to the amended 2020 Form 10-K for restatement details; the supplied filing text does not clearly describe the underlying restatement circumstances.
Key investor verification points
- Review the amended 2020 Form 10-K and the Q1 restatement disclosures to understand the affected accounts, control weaknesses, and remediation progress.
- Track gaming activity, hold-per-day, and any renewed COVID-related closures or operating restrictions.
- Confirm Century Gaming’s regulatory approvals, closing timing, final consideration, and effect on debt and share count.
- Monitor debt levels, floating-rate exposure, covenant compliance, and actual remaining credit availability.
- Follow the $5 million IGB complaint and other material litigation, including any change in the company’s probability or estimate of loss.
- Evaluate GAAP earnings alongside Adjusted EBITDA and the noncash fair-value and tax items affecting period comparisons.