Accel Entertainment, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Accel operates video gaming terminals and related equipment primarily in Illinois. The Illinois Gaming Board suspended video gaming from March 16 through June 30 because of COVID-19; therefore, the quarter had no gaming days. Gaming resumed July 1.
Financial results and liquidity
| Metric | Q2 2020 | Six months 2020 | Comparable 2019 period |
|---|---|---|---|
| Revenue | $0.4 million | $105.6 million | $104.3 million; $201.7 million |
| Operating income (loss) | $(23.8) million | $(21.7) million | $9.3 million; $18.0 million |
| Net income (loss) | $(21.3) million | $(23.2) million | $4.3 million; $8.3 million |
| Adjusted EBITDA | $(8.7) million | $6.1 million | $20.9 million; $40.7 million |
| Operating cash flow | Not stated separately | $(17.3) million | $26.1 million |
Q2 revenue fell 99.6% year over year; first-half revenue declined 47.6%. First-half video gaming revenue was $101.6 million, down 48.0%. Gaming expenses were 64.4% of revenue in the first half, versus 63.3% in 2019; the filing attributes the increase partly to the Illinois gaming tax rising from 30% to 33% in July 2019. Q2 had no gaming revenue or gaming expense.
At June 30, cash and cash equivalents were $148.8 million, versus $125.4 million at year-end 2019. Current assets were $179.8 million and current liabilities $50.5 million. Debt was $407.2 million gross, or $399.0 million net of issuance costs; approximately $49.5 million of credit-agreement availability remained. The weighted-average debt rate was approximately 3.3%. Stockholders’ equity was $65.0 million, down from $85.5 million at year-end.
Material changes and unusual items
- The shutdown affected 106 of 182 first-half gaming days. Management reduced monthly cash expenses to approximately $2–$3 million, furloughed about 90% of employees, deferred some vendor payments, and senior management voluntarily forgone base salaries.
- Cash from financing was $44.7 million in the first half, including $65 million borrowed under the delayed-draw term loan in March to preserve liquidity. Investing cash outflow was $4.0 million.
- Management extended estimated useful lives of video gaming terminals and equipment from seven to ten years. This reduced depreciation expense by $4.5 million and net loss by $3.7 million for the first half.
- Q2 included $1.3 million of one-time furloughed-employee benefit costs; first-half one-time costs were $1.9 million. The company also spent $1.4 million on mandated terminal spacers and incurred $0.3 million for cleaning and sanitation supplies.
- Accel operated 11,108 terminals at 2,335 Illinois locations, up 37.4% and 32.5%, respectively, year over year. First-half hold-per-day was $124 versus $137 in 2019; Q2 hold-per-day was zero because there were no gaming days.
Outlook, risks and contingencies
Management stated that cash, operating cash flows and borrowing availability were expected to cover capital needs for the next 12 months. This outlook is subject to uncertainty about COVID-19, consumer demand, partner-establishment reopenings and possible renewed state or regional shutdowns. By the third day after reopening, more than 90% of Accel’s locations were live and fewer than 3% of its terminals were down due to resumption protocols.
Accel reported compliance with its debt covenants at June 30. On August 4, 2020, it amended its credit agreement to waive financial-covenant breach for the periods ending September 30, 2020 through March 31, 2021. The filing notes that future results could differ materially from management’s assumptions. A 1 percentage-point increase in floating interest rates would increase annual interest expense by approximately $4.1 million, assuming debt remains at the June 30 balance.
Pending legal matters include a dispute concerning rights to ten establishments, with potential damages not estimable by the company; a separate lawsuit seeking $10 million over alleged solicitation of locations, for which no loss was accrued because it was not considered probable or reasonably estimable; and other disputes involving a former business associate. The company also disclosed that its disclosure controls and procedures remained ineffective because of previously identified material weaknesses.
Subsequent events included a July exchange of public warrants for 3,784,416 Class A-1 shares; the July acquisition of Tom’s Amusement Company for approximately $3.6 million, including contingent consideration; and a July 30 extension to December 31, 2020 of specified convertible-note payment dates. The company reported no impairment losses at June 30, but warned that renewed shutdowns could result in material impairment charges.
Important facts for investors to verify
- Whether reopened gaming activity and partner locations sustained recovery after the July 1 restart, and whether renewed restrictions affected operations.
- Liquidity, cash burn, borrowing availability and compliance with amended covenant terms during the waiver period.
- The effect of the useful-life estimate change on reported earnings and future depreciation.
- Outcomes and potential financial exposure from the pending litigation and regulatory petitions.
- Progress in remediating the disclosed material weaknesses in disclosure controls.
- Effects of warrant-related share issuance, contingent acquisition payments and the convertible-note amendments on dilution and cash obligations.