The following discussion provides information that management believes is relevant to an understanding and assessment of our consolidated financial condition and results of operations. You should read this discussion in conjunction with our consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. This discussion and analysis of our financial condition and results of operations also contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A. "Risk Factors." A discussion of Accel's results of operations on a consolidated basis for the years endedDecember 31, 2022 and 2021 are presented below. For the discussion of Accel's results of operations on a consolidated basis for the years endedDecember 31, 2021 and 2020 please see our Annual Report on Form 10-K for the year endedDecember 31, 2021 that was filed onMarch 11, 2022 .
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 the markets we serve. Our business consists of the installation, maintenance and operation of gaming terminals, 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. We also operate stand-alone ATMs in gaming and non-gaming locations. We currently operate as a distributed gaming operator in the following states:
•Illinois - we are a licensed terminal operator by the Illinois Gaming Board ("IGB") since 2012,
•Montana - we were granted a manufacturer, distributor and route operator
license in
•Nevada - we were granted a two-year terminal operator license in
•Georgia - we received approval from the
•Iowa - we are registered with the
•Nebraska - we became a licensed distributor of mechanical amusement devices
("MADs") in
•Pennsylvania - we have held a license from the
Century is also a manufacturer of gaming terminals in the
We are also subject to various other federal, state and local laws and regulations in addition to gaming regulations.
Century Acquisition
OnJune 1, 2022 , we completed our previously announced acquisition of all of the outstanding equity interests ofCentury Gaming, Inc. , aMontana corporation. The aggregate purchase consideration was$164.3 million , which included: (i) a cash payment made at closing of$45.5 million to the equity holders of Century; (ii) repayment of$113.2 million of Century's indebtedness; and (iii) 515,622 shares of our Class A-1 common stock issued to certain members of Century's management with a fair value of$5.6 million on the acquisition date. The cash payments were financed using cash from a draw of approximately$160 million from our revolving credit facility and delayed draw term loan facility under our senior secured credit facility. Our financial results for the year endedDecember 31, 2022 includes the results of Century from the date of acquisition. 39 --------------------------------------------------------------------------------
Macroeconomic Factors
Ongoing interest rate increases and persistent inflation may increase the risk of an economic recession and volatility and dislocation in the capital or credit markets inthe United States and other markets globally. Our location partners may be adversely impacted by changes in overall economic and financial conditions, and certain location partners may cease operations in the event of a recession or inability to access financing. Furthermore, our revenue is largely driven by players' disposable incomes and level of gaming activity, and economic conditions that adversely impact players' ability and desire to spend disposable income at our locations partners may adversely affect our results of operations and cash flows. To date, we have not observed material impacts in our business or outlook, but there can be no assurance that, in the event of a recession, levels of gaming activity would not be adversely affected. Further, as described in more detail below, we have observed certain increases in our costs, particularly higher wages and increased fuel costs, as well as increased interest expense on our debt. In addition, during 2022, we accelerated certain of our capital expenditures related to gaming machine components to manage our supply chain. We intend to continue to monitor macroeconomic conditions closely and may determine to take certain financial or operational actions in response to such conditions to the extent our business begins to be adversely impacted.
Impact of COVID-19
Following the initial outbreak in early 2020, COVID-19 began a resurgence in the fall of 2020 with the virus spreading exponentially in every geographical region (currently 11 regions) in theState of Illinois . In response, the IGB suspended all video gaming operations until further notice 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. This temporary shutdown ofIllinois video gaming impacted 18 of the 365 gaming days (or 5% of gaming days) during the year endedDecember 31, 2021 . In light of this event and its effect on our employees and licensed establishment partners, we took action to position the Company to help mitigate the effects of the temporary cessation of operations. During the shutdown, the Company furloughed idle staff as appropriate and deferred certain payments to major vendors. As a result of these developments, our 2021 revenues, results of operations and cash flows were materially affected. The COVID-19 situation is rapidly changing as new variant strains continue to pose a threat to public health and additional impacts to the business and financial results may arise that we are not aware of currently. While variants of COVID-19 continue to impact infection rates and theU.S. healthcare system, it is possible that the regulating bodies or the states in which we operate, or their regulating bodies, may order future shutdowns, 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 COVID-19 and its related variants. As such, there may be additional operational and financial impacts on the business from future resurgences of COVID-19 and its variant strains, which we cannot reasonably anticipate.
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 our location partners and is recognized at the time of gaming play. Amusement. Amusement revenue represents amounts collected from amusement devices operated at our various location partners and is recognized at the point the amusement device is used. Manufacturing. Manufacturing revenue represents sales of gaming terminals by Grand Vision Gaming, a wholly-owned subsidiary of Century, which is a designer and manufacturer of gaming terminals and related equipment. 40
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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
Cost of revenue. Cost of revenue consists of (i) taxes on net video gaming revenue that is payable to the appropriate jurisdiction, (ii) licenses, permits and other fees required for the operation of gaming terminals and other equipment, (iii) location revenue share, which is governed by local governing bodies and location contracts, (iv) ATM and amusement commissions payable to locations, (v) ATM and amusement fees, and (vi) costs associated with the sale of gaming terminals. 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 locations and gaming terminals. G&A expense includes payroll and related expense for account managers, business development managers, marketing, and other corporate personnel. In addition, G&A expense also 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 intangible assets and route and customer acquisition costs. Route and customer acquisition costs consist of fees paid at the inception of contracts entered into with third parties and the gaming locations in the states we serve, which allow us to install and operate 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 over 18 years, which is the expected estimated life of the contract, including expected renewals.
Location contracts acquired in a business acquisition are recorded at fair value and then amortized as an intangible asset on a straight-line basis over the expected useful life of primarily 15 years.
Other intangible assets acquired in a business acquisition are recorded at fair value and then amortized as an intangible asset on a straight-line basis over their estimated 7 to 20-year useful lives.
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 notes from Gold Rush that bore interest at the greater of 3% per annum or Accel's borrowing rate on its credit facility throughDecember 31, 2021 , as well as interest (income) expense on the interest rate caplets.
Income tax expense
Income tax expense consists mainly of taxes 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. 41
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Results of Operations
The following table summarizes Accel's results of operations on a consolidated
basis for the years ended
(in thousands, except %'s) Year Ended December 31, Increase / Decrease 2022 2021 Change Change % Revenues: Net gaming$ 925,009 $ 705,784 $ 219,225 31.1 % Amusement 21,106 16,667 4,439 26.6 % Manufacturing 7,621 - 7,621 N/A ATM fees and other revenue 16,061 12,256 3,805 31.0 % Total net revenues 969,797 734,707 235,090 32.0 % Operating expenses:
Cost of revenue (exclusive of
depreciation and amortization
expense shown below) 670,901 494,032
176,869 35.8 %
General and administrative 145,942 110,818
35,124 31.7 %
Depreciation and amortization
of property and equipment 29,295 24,636
4,659 18.9 %
Amortization of intangible
assets and route and customer
acquisition costs 17,484 22,040 (4,556) (20.7) % Other expenses, net 9,320 12,989 (3,669) (28.2) % Total operating expenses 872,942 664,515 208,427 31.4 % Operating income 96,855 70,192 26,663 38.0 % Interest expense, net 21,637 12,702 8,935 70.3 %
(Gain) loss on change in fair
value of contingent earnout shares (19,544) 9,762 (29,306) (300.2) % Loss on debt extinguishment - 1,152 (1,152) (100.0) % Income before income tax expense 94,762 46,576 48,186 103.5 % Income tax expense 20,660 15,017 5,643 37.6 % Net income$ 74,102 $ 31,559 $ 42,543 (134.8) % Revenues Total net revenues for the year endedDecember 31, 2022 were$969.8 million , an increase of$235.1 million , or 32.0%, compared to the prior year. The increase was driven by an increase in net gaming revenue of$219.2 million , or 31.1%, manufacturing revenue of$7.6 million , an increase in amusement revenue of$4.4 million , or 26.6%, and an increase in ATM fees and other revenue of$3.8 million , or 31.0%. The increase in net gaming revenue for the year endedDecember 31, 2022 reflected an increase in gaming terminals and locations due primarily to the acquisition of Century. Also impacting comparability was the prior year IGB-mandated shutdown ofIllinois video gaming due to the ongoing COVID-19 outbreak, which impacted 18 of the 365 gaming days (or 5% of gaming days) during the year endedDecember 31, 2021 . Net revenues by state are presented below (in thousands): Year Ended December 31, 2022 2021 Net revenues by state: Illinois$ 808,652 $ 730,244 Nevada 66,989 - Montana 79,639 - All other 14,517 4,463 Total net revenues$ 969,797 $ 734,707 42
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Cost of revenue
Total cost of revenue for the year ended
General and administrative
Total general and administrative expenses for the year endedDecember 31, 2022 were$145.9 million , an increase of$35.1 million , or 31.7%, compared to the prior year. General and administrative expenses for the year endedDecember 31, 2022 reflected additional operating costs from Century and higher payroll-related costs as we continue to grow our operations as well as higher fleet-related costs, including fuel, and marketing expenses. The increase was also attributable to a reduction in our prior-year monthly expenses during the previously mentioned IGB-mandated shutdown in 2021.
Depreciation and amortization of property and equipment
Depreciation and amortization of property and equipment for the year endedDecember 31, 2022 was$29.3 million , an increase of$4.7 million , or 18.9%, compared to the prior year, primarily due to an increased number of locations and gaming terminals. In the fourth quarter of 2021, we extended the useful lives of our gaming terminals and equipment from 10 years to 13 years. The impact of this change in estimate was a decrease in depreciation expense of$3.7 million for the year endedDecember 31, 2022 .
Amortization of intangible assets and route and customer acquisition costs
Amortization of intangible assets and route and customer acquisition costs for the year endedDecember 31, 2022 was$17.5 million , a decrease of$4.6 million , or 20.7%, compared to the prior year. In the fourth quarter of 2021, we extended the useful lives of our route and customer acquisition costs from 12.4 years to 18 years and location contracts acquired from 10 to 15 years. The impact of these changes in estimate was a decrease in amortization expense of$8.2 million for the year endedDecember 31, 2022 . This decrease was partially offset by an increase in location contracts acquired and amortization expense on other intangible assets acquired with Century.
Other expenses, net
Other expenses, net for the year endedDecember 31, 2022 were$9.3 million , a decrease of$3.7 million , or 28.2%, compared to the prior-year period. The decrease was primarily attributable to lower fair value adjustments associated with the revaluation of contingent consideration liabilities, partially offset by higher non-recurring expenses relating to lobbying efforts and new market development. Interest expense, net Interest expense, net for the year endedDecember 31, 2022 was$21.6 million , an increase of$8.9 million , or 70.3%, compared to the prior year primarily due to an increase in average outstanding debt and higher interest rates, partially offset by the benefit realized on our interest rate caplets. For the year endedDecember 31, 2022 , the weighted-average interest rate was approximately 4.4% compared to the weighted-average interest rate of approximately 3.2% for the prior year.
(Gain) loss on change in fair value of contingent earnout shares
Gain on change in fair value of contingent earnout shares for the year endedDecember 31, 2022 was$19.5 million , an increase of$29.3 million , or 300.2%, compared to the prior year which had a loss of$9.8 million . The increase was primarily due to the change in the market value of our Class A-1 common stock, which is the primary input to the valuation of the contingent earnout shares. 43
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Loss on debt extinguishment
Loss on debt extinguishment was$1.2 million for the year endedDecember 31, 2021 and was recorded in connection with the entry into Amendment No.2 of our Credit Facility inOctober 2021 . For more information on Amendment No. 2 of our Credit Facility, see the discussion within the Liquidity and Capital Resources later in this section. Income tax expense Income tax expense for the year endedDecember 31, 2022 was$20.7 million , an increase of$5.6 million , or 37.6%, compared to$15.0 million in the prior year. The effective tax rate for the year endedDecember 31, 2022 was 21.8% compared to 32.2% 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 change in the fair value of the contingent earnout shares does not create tax expense and is the primary driver for the fluctuations in the tax rate year over year.
Key Business Metrics
We use 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 withU.S. GAAP, and therefore should not be viewed as indicators of operational performance. Our management uses these key business metrics for financial planning, strategic planning and employee compensation decisions. The key business metrics include:
•Number of locations and;
•Number of gaming terminals
We also periodically review and revise our key business metrics to reflect changes in our business.
Number of locations
The number of locations is based on a combination of third-party portal data and data from our internal systems. We utilize this metric to continually monitor growth from organic openings, purchased locations, and competitor conversions. Competitor conversions occur when a location chooses to change terminal operators. InJanuary 2022 , the IGB began enforcing the 72-hour rule. The 72-hour rule requires terminal operators to disconnect and remove their equipment from a location if there is no activity for 72 hours. In the past, we could leave our equipment if a location was temporarily closed for repairs, remodeling or an ownership change. In addition, if a location went out of business, we could remove our equipment at our convenience. The 72-hour rule accelerated all planned removals in the first quarter of 2022. This did not materially impact gaming revenue but reduced our reported number of locations inIllinois . The following table sets forth information with respect to our primary locations: As of December 31, Increase / (Decrease) 2022 2021 Change Change % Illinois 2,648 2,584 64 2.5 % Montana 610 - 610 N/A Nevada 340 - 340 N/A Total locations 3,598 2,584 1,014 39.2 % Number of gaming terminals
The number of gaming terminals in operation is based on a combination of third-party portal data and data from our internal systems. We utilize this metric to continually monitor growth from existing locations, organic openings, purchased locations, and competitor conversions.
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As a result of the previously mentioned 72-hour rule, the removal of gaming terminals did not materially impact gaming revenue but reduced our reported number of gaming terminals.
The following table sets forth information with respect to the number of gaming terminals in our primary locations:
As ofDecember 31 ,
Increase / (Decrease)
2022 2021 Change Change % Illinois 14,397 13,639 758 5.6 % Montana 6,108 - 6,108 N/A Nevada 2,645 - 2,645 N/A
Total gaming terminals 23,150 13,639 9,511 69.7 %
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 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 also believes 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 income and Adjusted EBITDA
(in thousands) Year Ended December 31, Increase / (Decrease) 2022 2021 Change Change % Net income (loss)$ 74,102 $ 31,559 $ 42,543 134.8 % Adjustments: Amortization of intangible
assets and route and customer
acquisition costs(1) 17,484 22,040
(4,556) (20.7) %
Stock-based compensation(2) 6,840 6,403
437 6.8 %
(Gain) loss on change in fair
value of contingent earnout
shares(3) (19,544) 9,762 (29,306) (300.2) % Other expenses, net(4) 9,320 12,989 (3,669) (28.2) % Tax effect of adjustments(5) (8,327) (11,346)
3,019 (26.6) %
Adjusted net income 79,875 71,407
8,468 11.9 %
Depreciation and amortization
of property and equipment 29,295 24,636 4,659 18.9 % Interest expense, net 21,637 12,702 8,935 70.3 % Emerging markets(6) 2,598 3,403 (805) (23.7) % Income tax expense (benefit) 28,987 26,363
2,624 10.0 %
Loss on debt extinguishment - 1,152 (1,152) N/A Adjusted EBITDA$ 162,392 $ 139,663 $ 22,729 16.3 % (1)Amortization of intangible assets and route and customer acquisition costs consist of upfront cash payments and future cash payments to third-party sales agents to acquire the location partners that are not connected with a business acquisition, as well as the amortization of other intangible assets. 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 15 years. "Amortization of intangible assets and route and customer acquisition 45
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costs" aggregates the non-cash amortization charges relating to upfront route and customer acquisition cost payments and location contracts acquired, as well as the amortization of other intangible assets. (2)Stock-based compensation consists of options, restricted stock units and warrants. (3)(Gain) loss 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)Other expenses, net consists of (i) non-cash expenses including the remeasurement of contingent consideration liabilities, (ii) non-recurring lobbying and legal expenses related to distributed gaming expansion in current or prospective markets, (iii) non-recurring costs associated with COVID-19 and (iv) other non-recurring expenses. (5)Calculated by excluding the impact of the non-GAAP adjustments from the current period tax provision calculations. (6)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. The Company currently viewsNebraska ,Iowa andPennsylvania as its emerging markets. Prior toJuly 2022 ,Georgia was considered an emerging market. Adjusted EBITDA for the year endedDecember 31, 2022 was$162.4 million , an increase of$22.7 million , or 16.3%, compared to the prior year. The increase in performance was attributable to an increase in the number of locations and gaming terminals, due primarily to the acquisition of Century. Also impacting the year-over-year comparison was the absence of the previously mentioned IGB-mandated shutdown ofIllinois video gaming due to the ongoing COVID-19 outbreak that impacted our performance in the prior-year period.
Liquidity and Capital Resources
In order to maintain sufficient liquidity, we review our cash flow projections and available funds with our Board of Directors to consider modifying our capital structure and seeking additional sources of liquidity, if needed. The availability of additional liquidity options will depend on the economic and financial environment, our creditworthiness, our historical and projected financial and operating performance, and our continued compliance with financial covenants. As a result of possible future economic, financial and operating declines, possible declines in our creditworthiness and potential non-compliance with financial covenants, we may have less liquidity than anticipated, fewer sources of liquidity than anticipated, less attractive financing terms and less flexibility in determining when and how to use the liquidity that is available. We believe that our cash and cash equivalents, cash flows from operations and borrowing availability under our senior secured credit facility will be sufficient to meet our capital requirements for the next twelve months. Our primary short-term cash needs are paying operating expenses, contingent earnout payments and equipment purchase commitments, servicing outstanding indebtedness, and funding our Board of Directors approved share repurchase program and near-term acquisitions. As ofDecember 31, 2022 , we had$224.1 million in cash and cash equivalents.
Senior Secured Credit Facility
OnNovember 13, 2019 , in order to refinance our prior credit facility, for working capital and other general purposes, we entered into a credit agreement (as amended, 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$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.
The additional term loan facility was available for borrowings until
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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 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 0.50% and the floor for the Base Rate to 1.50%. We incurred costs of$0.4 million associated with the amendment of the Credit Agreement, of which$0.3 million was capitalized and will be amortized over the remaining life of the facility. The waivers of financial covenant breach were never utilized as we remained in compliance with all debt covenants during these periods.
On
•an increase in the amount of the revolving credit facility from
•$350.0 million initial term loan facility, the proceeds of which were applied to refinancing existing indebtedness, and
•$400.0 million delayed draw term loan facility, which is available for
borrowings until
The maturity date of the Credit Agreement was extended toOctober 22, 2026 . The interest rate and covenants remained unchanged. The Company incurred$4.3 million in debt issuance costs associated with Amendment No. 2. The Company also recognized a loss on debt extinguishment of$1.2 million for the year endedDecember 31, 2021 in connection with the amendment.
As of
The obligations under the Credit Agreement are guaranteed by us 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 the assets of the Guarantors, subject to certain exceptions. Certain future-formed or acquired wholly owned domestic subsidiaries 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 our 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 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 ofDecember 31, 2022 , the weighted-average interest rate was approximately 4.4%. 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. We are 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 the Company 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 up to 1.75% or (b) LIBOR (50 bps floor) plus a margin up to 2.75%, at the option of the Company. 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 47
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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.
We were in compliance with all debt covenants as of
Interest rate caplets
We manage our exposure to some of its interest rate risk through the use of interest rate caplets, which are derivative financial instruments. OnJanuary 12, 2022 , we hedged the variability of the cash flows attributable to the changes in the 1-month LIBOR interest rate on the first$300 million of the term loan under the Credit Agreement by entering into a 4-year series of 48 deferred premium caplets ("caplets"). The caplets mature at the end of each month and protect us if interest rates exceed 2% of 1-month LIBOR. The maturing dates of these caplets coincide with the timing of our interest payments and each caplet is expected to be highly effective at offsetting changes in interest payment cash flows. The aggregate premium for these caplets was$3.9 million , which was the initial fair value of the caplets recorded in the Company's financial statements, and was financed as additional debt. The Company recognized an unrealized gain on the change in fair value of the interest rate caplets of$12.2 million , net of income taxes, for the year endedDecember 31, 2022 . For more information on how we determine the fair value of the caplets, see Note 13 to our consolidated financial statements included herein. Further, as the 1-month LIBOR interest rate exceeded 2% in second half of 2022, the Company recognized interest income on the caplets of$1.5 million for the year endedDecember 31, 2022 , which is reflected in interest expense, net in the consolidated statements of operations and other comprehensive income (loss).
Cash Flows
The following table summarizes Accel's net cash provided by or used in operating activities, investing activities and financing activities for the periods indicated and should be read in conjunction with our consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K:
(in thousands) Year EndedDecember 31, 2022
2021 Change
Net cash provided by operating activities$ 107,999 $
110,755
Net cash used in investing activities (189,263)
(34,544) (154,719)
Net cash provided by (used in) financing activities 106,591 (11,876) 118,467
Net cash provided by operating activities
For the year endedDecember 31, 2022 , net cash provided by operating activities was$108.0 million , a decrease of$2.8 million over the prior year. The decrease can be attributed to lower working capital adjustments and payments made on our contingent consideration, partially offset by higher net income and an increase in deferred income taxes. 48
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Net cash used in investing activities
For the year endedDecember 31, 2022 , net cash used in investing activities was$189.3 million , an increase in cash used of$154.7 million over the prior year and was primarily attributable to cash used for business and asset acquisitions in addition to higher purchases of property and equipment. We anticipate our capital expenditures will be approximately$40-45 million in 2023.
Net cash provided by (used in) financing activities
For the year ended
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance withU.S. GAAP. In applying accounting principles, it is often required to use estimates. These estimates consider the facts, circumstances and information available, and may be based on subjective inputs, assumptions and information known and unknown to us. Material changes in certain of the estimates that we use could affect, by a material amount, our consolidated financial position and results of operations. Although results may vary, we believe our estimates are reasonable and appropriate. The following describes certain significant accounting policies that involve more subjective and complex judgments where the effect on our consolidated financial position and operating performance could be material.
Route and customer acquisition costs
Our route and customer acquisition costs consist of fees paid, typically an upfront payment and future installment payments over the life of the contract, entered into with third parties and location partners. These contracts are non-cancelable and allow us to install and operate gaming terminals in the various gaming locations in the states we serve. The upfront payment and future installment payments are recorded at the net present value using a discount rate equal to our incremental borrowing costs. In certain instances, future installment payments are estimated based on a forecast of the location's future revenue performance or the number of gaming terminals at the location. These estimates may change over time and cause a change in the net present value of the liability. For locations that close prior to the end of the contractual term, we write-off the net book value of the route and the related installment payables not yet paid and record a gain or loss in the consolidated statements of operations and comprehensive income (loss) as a component of general and administrative expense. Additionally, most of the route acquisition contracts allow us to clawback some upfront and installment payments over the initial years of a contract if the location is unable to secure the appropriate licensing or it goes out of business prior to the end of the contract term. In the instances where a claw-back or recovery is triggered and we assess it as probable of being recovered, a receivable will be recorded. Upfront payments with a claw-back prior to a location going live are capitalized and will not begin amortization until the respective location commences operations.
Business combinations and goodwill
For acquisitions meeting the definition of a business combination, the acquisition method of accounting is used. The acquisition date is the date on which Accel obtains operating control over the acquired business. The consideration paid is determined on the acquisition date and is the sum of the fair values of the assets acquired by Accel and the liabilities assumed by Accel, including the fair value of any asset or liability resulting from a deferred consideration arrangement. Acquisition-related costs, such as professional fees, are excluded from the consideration transferred and are expensed as incurred. Any contingent consideration is measured at its fair value on the acquisition date, recorded as a liability and accreted over its payment term in Accel's consolidated statements of operations and comprehensive income (loss) as other expenses, net. Location contract intangibles, which represent the acquisition-date fair value of the preexisting relationships between the acquired company and gaming locations, are generally measured at fair value using an income approach which measures the fair value based on the estimated future cash flows using certain projected financial information such as revenue projections, cost of revenue margins and 49
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other assumptions such as discount rates. Acquired tangible personal property such as gaming equipment is generally measured at fair value using a cost approach which measures the fair value based on the cost to reproduce or replace the asset.Goodwill is measured as the excess of the consideration transferred over the fair value of the net identifiable assets acquired and liabilities assumed. The relevance of this policy and the described methods and assumptions vary from period to period depending on the volume of applicable acquisitions occurring. 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 establishments, and higher in cold weather between February and April, when players will typically spend more time indoors. Holidays, vacation seasons, and sporting events may also cause Accel's results to fluctuate.
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