Accel Entertainment (ACEL) Risk Analysis

We are dependent on a concentrated network of key manufacturers, developers, and third-party providers for gaming terminals, amusement machines, redemption devices, stand-alone ATMs, and related software, content, and technologies, many of which require regulatory approvals before they can be marketed or deployed. Any interruption, delay, or deterioration in supply-including from insolvency or financial distress of a key provider, serious quality control lapses, regulatory issues with a supplier or its products or licenses, tariffs and trade barriers (including those affecting imports from China), or broader supply chain dislocations-could impair our ability to procure equipment, refresh content, service existing placements, or meet contractual obligations to location partners, thereby adversely affecting our results of operations, cash flows, and financial condition. Our centralized purchasing program has delivered cost efficiencies but increases exposure to the credit and counterparty risks associated with a small number of suppliers, and during 2023 and the first half of 2024, we accelerated capital expenditures to manage component availability and supply timing, resulting in higher capital expenditures for the year than we had originally anticipated. The gaming equipment sector has experienced significant consolidation, and a substantial portion of U.S. gaming terminals is manufactured by a small number of companies. This concentration, together with cyclical demand for components and content, can lead to price and delivery volatility and reduce our bargaining leverage. If we lose a supplier, we may be unable to replace it on acceptable terms or timelines, and remaining suppliers may increase fees and costs. Even where alternative sources exist, the limited number of qualified vendors in distributed gaming and the need for regulatory certifications can constrain substitution, resulting in longer lead times, higher prices, life-cycle and end-of-life component challenges, and product quality issues. Failure by key suppliers to meet delivery commitments or to provide compliant, timely, and competitively priced products could cause delays, trigger breaches or loss of contracts with location partners, and limit our ability to introduce new or refreshed offerings. Further, we rely on specialized third-party technologies and services-such as know-your-customer, geolocation, identity verification, and payment processing-that are embedded in, or integral to, our products and programs, including our Player Rewards Program. If these technologies become unavailable on acceptable terms, experience outages or defects, or require re-certification that is delayed or denied, we may face service disruptions, increased operating expenses, and lost revenue opportunities. Collectively, these supply-side risks-including supplier concentration, industry consolidation, regulatory gating, limited alternative sources, and price and delivery volatility-could materially and adversely affect our operations, growth initiatives, and financial performance.

We participate in new and evolving aspects of the gaming industries. These industries involve significant risks and uncertainties, including legal, business and financial risks. The fast-changing environment in these industries can make it difficult to plan strategically and can provide opportunities for competitors to grow their businesses at our expense. Consequently, our future results of operations, cash flows and financial condition may be difficult to predict and may not grow at expected rates. Part of our strategy is to take advantage of the liberalization of regulations covering these industries on a municipality and state basis, which can be a protracted process. To varying degrees, governments have taken steps to change the regulation of gaming terminals through the implementation of new or revised licensing and taxation regimes. Notwithstanding the general regulatory trend of liberalization, there also continues to be significant debate over, and opposition to, the gaming industry. There can be no assurance that this opposition will not succeed in preventing the legalization of gaming in jurisdictions where it is presently prohibited, prohibiting or limiting the expansion of gaming where it is currently permitted, including expansion of gaming terminals into additional types of establishments, or causing the repeal of legalized gaming in any jurisdiction. Such opposition could also lead these jurisdictions to adopt legislation or impose a regulatory framework to govern gaming that restricts our ability to advertise games or substantially increases costs to comply with these regulations. We continue to devote significant attention to monitoring these developments; however, we cannot accurately predict the likelihood, timing, scope or terms of any state or federal legislation or regulation relating to its business. Any successful effort to curtail the expansion of, or limit or prohibit, legalized gaming could have an adverse effect on our results of operations, cash flows and financial condition.

We are currently involved in several lawsuits. See Note 20, Commitments and Contingencies, of the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more information. We may also become subject to litigation claims in the operation of our business, including, but not limited to, with respect to employee matters (including discrimination and harassment claims), alleged product and system malfunctions, alleged intellectual property infringement and claims relating to contracts, licenses, acquisitions and strategic investments. We may incur significant expense defending or settling any such litigation, and such claims may distract management's attention from our core business operations or could harm our reputation with location partners, employees, investors and others. Additionally, adverse judgments that may be decided against us could result in significant monetary damages or injunctive relief that could adversely affect our ability to conduct business, our results of operations, cash flows and financial condition.

Our revenue growth and future success depend in large part on the successful addition of new locations as partners (whether through organic growth or acquisitions) and on the entry into new markets. Our ability to succeed in new markets depends in part on displacing entrenched competitors and developing or expanding sales channels and leveraging partner relationships. In many cases, we are attempting to enter into or expand our presence in these newer markets, where the appeal and success of gaming terminals and other forms of entertainment has not yet been proven. There can be no assurance that gaming will have success with new location partners or in new markets, or that we will succeed in capturing a significant or even acceptable market share in any new markets. If we fail to successfully expand into these markets, we may have difficulty growing our business and may lose business to our competitors. Success in new and existing markets also depends on our and our suppliers' ability to deliver timely, creative and appealing content for gaming terminals, stand-alone ATMs, redemption devices and amusement devices that match evolving consumer preferences; however, game popularity is cyclical and unpredictable, and our suppliers face inventory, pricing and approval constraints that can limit availability or increase our costs, which could harm our ability to refresh content, retain locations, or attract new partners. Failure to accurately anticipate the needs of location and player preferences could result in loss of business to competitors, which would adversely affect our results of operations, cash flows and financial condition. Much of the content included must receive regulatory certifications or approvals before deployment, and these approvals can be delayed or denied, limiting our ability to launch new offerings, secure placements with location partners, or expand into additional jurisdictions on anticipated timelines or at all. Beyond product expansion, we are continuously evaluating additional opportunities that are complementary to our core business, such as our acquisition of the Fairmount Park - Casino & Racing ("Fairmount") in Collinsville, Illinois. Any acquisition of additional businesses, services, resources or assets, including gaming parlors, casinos or hospitality/retail operations, may subject us to additional risks. With any such expansion, we encounter additional industry-specific regulatory regimes, development and construction risks, and operational complexities that could delay projects, increase capital needs, and impair anticipated returns if approvals are slow, conditions are imposed, or market acceptance does not materialize as expected. At the same time, slow growth or declines in demand for gaming terminals could reduce demand for our services and negatively impact our results of operations, cash flows and financial condition. Even with the expansion of gaming into new jurisdictions, the opening of new locations and the addition of new gaming terminals and amusement machines in existing locations, demand for our services may decline due to location partner preferences, unfavorable economic conditions, the failure to obtain regulatory approvals, or the availability of financing for location partners and for us, any of which could constrain growth, reduce returns on new deployments, and divert resources from other initiatives. Competitive pressures from other gaming and entertainment options, including online and mobile gaming, casinos and alternative leisure activities, further increase execution risk and could adversely affect our ability to capture share in new or existing markets.

We believe that our success depends, in part, on protecting our intellectual property. Our intellectual property includes certain trademarks, service marks and trade names relating to our business, products and services. Our success may depend, in part, on our ability to obtain protection for these trademarks and other intellectual property rights. There can be no assurance that we will be able to build and maintain consumer value in our trademarks or other intellectual property or that any trademark or other intellectual property right will provide competitive advantages. Despite our efforts to protect our proprietary rights, parties may infringe on our trademarks and our rights may be invalidated or unenforceable. Monitoring the unauthorized use of our intellectual property is difficult. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources. We cannot assure you that all of the steps we have taken to protect our trademarks will be adequate to prevent imitation of our trademarks by others. The unauthorized use or reproduction of our trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill, which could adversely affect our business.

We believe that our success depends, in large part, on providing secure products, services and systems to locations and players, and on the ability to avoid, detect, replicate and correct software and hardware anomalies and fraudulent manipulation of products and services. Our business sometimes involves the storage, processing and transmission of proprietary, confidential and personal information, and any future player program we may institute will also involve such information. We also maintain certain other proprietary and confidential information relating to our business and personal information of our personnel. All of our products, services and systems are designed with security features to prevent fraudulent activity. Despite these security measures, our products, services and systems may be vulnerable to attacks by location partners, players, retailers, vendors or employees, or breaches due to cyber-attacks, viruses, malicious software, computer hacking, security breaches or other disruptions. Expanded use of the Internet and other interactive technologies may result in increased security risks for us and our location partners because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not foreseeable or recognized until launched against a target and we may be unable to anticipate these techniques or to implement adequate preventative measures. Furthermore, hackers and data thieves are becoming increasingly sophisticated and could operate large-scale and complex automated attacks. Moreover, the rapid evolution and increased adoption of artificial intelligence ("AI") technologies may intensify our cybersecurity risks. Although we do not currently utilize AI to a significant extent in our operations, we are actively evaluating and expect to implement AI solutions in the near-to-medium term to enhance various aspects of our business. The integration of AI technologies into our operations could exacerbate the challenges discussed above and may introduce operational risks, including system failures, cybersecurity vulnerabilities, and potential disruptions to our business processes. While we believe the intentional and deliberate adoption of certain AI processes could provide long-term benefits, there is uncertainty regarding its successful implementation and the associated risks. Any security breach or incident could result in unauthorized access to, misuse of, or unauthorized acquisition of certain data, the loss, corruption or alteration of this data, interruptions in operations or damage to computers or systems or those of certain players or third-party platforms. Any of these incidents could expose us to claims, litigation, fines and potential liability. Our ability to prevent anomalies and monitor and ensure the quality and integrity of our products and services is periodically reviewed and enhanced, and we regularly assess the adequacy of security systems, including the security of our games and software, to protect against any material loss to location partners and players, as well as the integrity of our products and services and our games. However, these measures may not be sufficient to prevent future attacks, breaches or disruptions. There is a risk that our products, services or systems may be used to defraud, launder money or engage in other illegal activities at its locations. Our gaming machines have also experienced anomalies in the past. Games and gaming machines may be replaced by us and other gaming machine operators if they do not perform according to expectations, or they may be shut down by regulators. The occurrence of anomalies in, or fraudulent manipulation of, our gaming machines or other products and services, may give rise to claims from players or location partners, may lead to claims for lost revenue and profits and related litigation by location partners and may subject us to investigation or other action by regulatory authorities, including suspension or revocation of licenses or other disciplinary action. In addition, in the event of the occurrence of any such issues with our products and services, substantial resources may be diverted from other projects to correct the issues, which may delay other projects and the achievement of strategic objectives. Further, third party-hosted solution providers that provide services to us, such as Microsoft, Salesforce or NetSuite, have in the past been subject to cyber security incidents. Although these incidents have not had a material impact on our business, results of operations, financial condition or reputation to date, a future failure of these third parties' security systems and infrastructure could adversely affect us.

The products that we provide to our location partners could be defective, fail to perform as designed or otherwise cause harm to players or location partners. If any of the products we provide are defective, we may be required to recall the products and/or repair or replace them, which could result in substantial expenses and affect profitability. In the event of any repair or recall, we could be dependent on the services, responsiveness or product stock of key suppliers, and any delay in their ability to resupply or assist in servicing key products could affect our ability to maintain the gaming terminals in location partners. Any problem with the performance of our products could harm our reputation, which could result in a loss of existing or potential locations and players. In addition, the occurrence of errors in, or fraudulent manipulation of, our products or software may give rise to claims by location partners or by players, including claims by location partners for lost revenues and related litigation that could result in significant liability. Any claims brought against us by location partners or players may result in the diversion of management's time and attention, expenditure of large amounts of cash on legal fees and payment of damages, lower demand for products or services, or injury to reputation. Our insurance or recourse against other parties may not sufficiently cover a judgment against us or a settlement payment, and any insurance payment is subject to customary deductibles, limits and exclusions. In addition, a judgment against us or a settlement could make it difficult for us to obtain insurance in the coverage amounts necessary to adequately insure our businesses, or at all, and could materially increase insurance premiums and deductibles. Software bugs or malfunctions, errors in distribution or installation of our software, failure of products to perform as approved by the appropriate regulatory bodies or other errors or malfunctions, may subject us to investigation or other action by gaming regulatory authorities, including fines.

Our success and competitive position are largely dependent upon, among other things, the efforts and skills of our senior executives and management team. The loss of the services of these persons or other key personnel could deplete our institutional knowledge and could have an adverse effect on our business, financial condition, and results of operations. The market for these employees is competitive, and we could experience difficulty from time to time in hiring and retaining the personnel necessary to support our business.

Our revenue is largely driven by players' disposable incomes and level of gaming activity at our location partners. Adverse macroeconomic and socio-political conditions-such as recession or economic slowdown, inflation or stagflation, rising interest rates, reduced liquidity and credit availability, labor shortages, instability in banking or financial markets, geopolitical conflicts or sanctions, civil unrest, terrorism or the threat thereof, reciprocal and increased tariffs and global sanctions, epidemics, pandemics or other public health issues-can decrease discretionary spending, reduce visit frequency and play levels, and negatively affect our business, results of operations, cash flows and financial condition. The current U.S. presidential administration has imposed new and increased tariffs on foreign goods, and foreign countries in turn have imposed tariffs on the U.S., which could increase costs for consumers. The actual or perceived impact of tariffs on consumer spending and inflation or an economic downturn or recession could lead to fewer customer visits and decreased discretionary spending by our customers. Additionally, these factors can impair location partners' access to capital or operating liquidity, leading to closures or bankruptcies that diminish our footprint and revenue, and may contribute to volatility in equity markets that affects our cost of capital and financial flexibility. We cannot predict the timing, duration or magnitude of these conditions or their cumulative effect on consumer behavior or our partners. We are further exposed to local and regional conditions because our operations are geographically concentrated, specifically in Illinois, Montana and Nevada. We are subject to similar concentration risks in Georgia, Iowa, Louisiana and Nebraska and any other gaming jurisdictions into which we expand, including Pennsylvania. Local economic trends and unemployment rates, changes in state and local gaming laws and regulations, competitive dynamics, demographic shifts, weather-related disruptions and other natural events, and changes affecting tourism or travel patterns can disproportionately impact our performance in those markets. Our dependence on local customer bases at location partners heightens these risks, and our planned Illinois casino and racing operations will increase our exposure to Illinois-specific conditions and regulatory developments. If Illinois, Montana or Nevada-or other states in which we operate, such as Georgia, Iowa, Louisiana, Nebraska, or Pennsylvania-experience adverse conditions to a greater degree than other regions, our results of operations, cash flows and financial condition could be more negatively affected than if our operations were more geographically diversified.

We may be impacted by severe weather and other geological events, which could potentially be exacerbated by climate change. For example, we could be impacted by fires, hurricanes, tornados, earthquakes or floods that could disrupt operations, including our Fairmount racino that holds outdoor events, or the operations of our location partners, suppliers, data service providers and regulators. Natural disasters or other disruptions at any of our facilities or suppliers' facilities may impair or delay the operation, development, provisions or delivery of our products and services. Additionally, disruptions experienced by our regulators due to natural disasters or otherwise could delay the introduction of new products or entry into new jurisdictions where regulatory approval is necessary. While we insure against certain business interruption risks, there can be no assurance that such insurance will adequately compensate for any losses incurred as a result of natural or other disasters. Any serious disruption to our operations, or those of our location partners, suppliers, data service providers, or regulators, could have an adverse effect on our results of operations, cash flows and financial condition.