The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial statements, and the notes thereto, included under Item 8 of this Annual Report on Form 10-K. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those expressed or implied in such forward- looking statements as a result of various factors, including those set forth in "Cautionary Note Regarding Forward-Looking Statements" included herein and "Risk Factors" included in this Annual Report on Form 10-K.
Overview
Golden Nugget Online Gaming, Inc. (formerly known asLandcadia Holdings II, Inc. or "GNOG", the "Company", "we", "our" or "us") is an online gaming, or iGaming, and digital sports entertainment company focused on providing our customers with the most enjoyable, realistic and exciting online gaming experience in the market. We currently operate inNew Jersey ,Michigan , andWest Virginia where we offer patrons the ability to play their favorite casino games and bet on live-action sports events, and inVirginia , where we offer online sports betting only. We commenced operations inMichigan in the first quarter of 2021 and commenced operations inWest Virginia andVirginia late in the third quarter of 2021. We operate as an umbrella partnership C-corporation, or "Up-C," meaning that substantially all of our assets are held indirectly throughGolden Nugget Online Gaming LLC ("GNOG LLC "), our indirect subsidiary, and our business is conducted throughGNOG LLC . Acquisition Transaction As ofMay 9, 2019 , we were a blank check company formed under the laws of theState of Delaware for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more businesses. OnDecember 29, 2020 , we completed the Acquisition Transaction and changed our name toGolden Nugget Online Gaming, Inc. The Acquisition Transaction was accounted for as a reverse recapitalization and the reported amounts from operations prior to the Acquisition Transaction are those ofGNOG LLC . (See Note 3 in the Notes to the Consolidated Financial Statements) for additional information. 49
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The historical financial information ofLandcadia Holdings II, Inc. (a special purpose acquisition company, or "SPAC") prior to the closing of the Acquisition Transaction has not been reflected in the financial statements as these historical amounts have been determined to be not useful information to a user of our financial statements. SPACs deposit the proceeds from their initial public offerings into a segregated trust account until a business combination occurs, where such funds are then used to pay consideration for the acquiree and/or to pay stockholderswho elect to redeem their shares of common stock in connection with the Acquisition Transaction. The operations of a SPAC, until the closing of a business combination, other than income from the trust account investments and transaction expenses, are nominal. Accordingly, no other activity in the Company was reported for periods prior toDecember 29, 2020 besidesGNOG LLC's operations.
DraftKings Merger
OnAugust 9, 2021 , the Company, DraftKings Inc., aNevada corporation ("DraftKings"),New Duke Holdco, Inc. , aNevada corporation and a wholly owned subsidiary of DraftKings ("New DraftKings"),Duke Merger Sub, Inc. , aNevada corporation and a wholly owned subsidiary of New DraftKings ("Duke Merger Sub"), andGulf Merger Sub, Inc. , aDelaware corporation and a wholly owned subsidiary of New DraftKings ("Gulf Merger Sub" and, together with Duke Merger Sub, the "Merger Subs"), entered into an agreement and plan of merger (the "DraftKings Merger Agreement"), pursuant to which New DraftKings will, among other things, acquire all of our issued and outstanding shares of common stock. The transactions contemplated by the DraftKings Merger Agreement and the other related transactions are referred to herein as the "DraftKings Merger." On the terms and subject to the conditions set forth in the Merger Agreement, (a) at the Duke Effective Time (as defined in the DraftKings Merger Agreement), Duke Merger Sub will be merged with and into DraftKings in accordance with the Nevada Revised Statutes (the "NRS"), with DraftKings becoming the surviving corporation (the "Duke Surviving Corporation ") and (b) at the Gulf Effective Time (as defined in the DraftKings Merger Agreement), Gulf Merger Sub will be merged with and into the Company in accordance with the General Corporation Law of theState of Delaware (the "DGCL"), with the Company becoming the surviving corporation (the "Gulf Surviving Corporation ", and together with theDuke Surviving Corporation , collectively the "Surviving Corporations"). In connection with the DraftKings Merger, certain affiliates ofTilman Fertitta will consummate certain reorganization transactions to allow Landcadia Holdco to become a wholly owned subsidiary of theGulf Surviving Corporation following the consummation of the DraftKings Merger. The DraftKings Merger Agreement provides that upon the consummation of the DraftKings Merger, each holder of our common stock will receive 0.365 (the "Exchange Ratio") of a share of Class A common stock, par value 0.0001 per share, of New DraftKings (the "New DraftKings Class A Common Stock") for each share of our common stock issued and outstanding immediately prior to the Gulf Effective Time, (other than certain excluded shares). Each share of Class A common stock, par value$0.0001 per share, of DraftKings ("DraftKings Class A Common Stock") issued and outstanding immediately prior to the Duke Effective Time (other than certain excluded shares) will be cancelled, cease to exist and be converted into one validly issued, fully paid and non-assessable share of New DraftKings Class A Common Stock and each share of Class B common stock, par value$0.0001 per share, of DraftKings issued and outstanding immediately prior to the Duke Effective Time (other than certain excluded shares) will be converted into one validly issued, fully paid and non-assessable share of Class B common stock, par value$0.0001 per share, of New DraftKings. At the Gulf Effective Time, each outstanding restricted stock unit issued by us (a "RSU") that (i) was outstanding on the date of the DraftKings Merger Agreement or (ii) is issued to our existing employees prior to the completion of the DraftKings Merger in accordance with existing agreements, will vest, be cancelled, and entitle the holder thereof to receive a number of shares of New DraftKings Class A Common Stock equal to the number of shares of our common stock subject to such RSU immediately prior to the Gulf Effective Time multiplied by the Exchange Ratio, less a number of shares of New DraftKings Class A Common Stock equal to any applicable withholding taxes. All other issued and outstanding RSUs will be automatically converted into an equivalent restricted stock unit of New DraftKings that entitles the holder thereof to a number of shares of New DraftKings Class A Common Stock equal to the 50
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number of shares of our common stock subject to such RSU immediately prior to the Gulf Effective Time multiplied by the Exchange Ratio, and will remain outstanding in New DraftKings.
At the Gulf Effective Time, each outstanding warrant issued by us ("Private Placement Warrant") to purchase shares of our Class A common stock will automatically and without any required action on the part of the holder convert into a warrant to purchase a number of New DraftKings Class A Common Stock equal to the product of (x) the number of shares of our Class A common stock subject to such Private Placement Warrant immediately prior to the Gulf Effective Time multiplied by (y) the Exchange Ratio, and the exercise price of such Private Placement Warrant will be determined by dividing (1) the per share exercise price of such Private Placement Warrant immediately prior to the Gulf Effective Time by (2) the Exchange Ratio.
The DraftKings Merger is expected to be a tax-deferred transaction to our stockholders and warrant holders, and the closing of the DraftKings Merger is conditioned on the receipt of a tax opinion to such effect.
The DraftKings Merger is expected to close in the first quarter of 2022, subject to the satisfaction or waiver of certain conditions, including, among others, (i) the absence of certain legal restraints that would prohibit or seek to prohibit DraftKings Merger; (ii) the receipt of certain regulatory approvals; (iii) the approval for listing on Nasdaq of the shares of New DraftKings Class A Common Stock to be issued to DraftKings stockholders and our stockholders; (iv) the Commercial Agreement (as defined in the DraftKings Merger Agreement) being in full force and effect; and (v) the absence, since the date of the DraftKings Merger Agreement, of any effect, event, development, change, state of facts, condition, circumstance or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on us or DraftKings. Concurrently with the execution of the DraftKings Merger Agreement, DraftKings entered into a support and registration rights agreement (the "Support Agreement") with New DraftKings,Tilman J. Fertitta ("Fertitta"),Fertitta Entertainment, Inc. , aTexas corporation ("FEI"), Landry'sFertitta, LLC , aTexas limited liability company ("LF LLC "),Golden Landry's LLC, aTexas limited liability company ("Golden Landry's") andGolden Fertitta, LLC , aTexas limited liability company ("Golden Fertitta" and together with Fertitta, FEI,LF LLC andGolden Landry's , the "Fertitta Parties"), pursuant to which the Fertitta Parties agreed (i) not to transfer the New DraftKings Class A Common Stock that the Fertitta Parties will receive in the DraftKings Merger prior to the first anniversary of the closing of the DraftKings Merger and (ii) from the date of the Support Agreement to the five-year anniversary of the closing of the DraftKings Merger, not to engage in a Competing Business (as defined in the Support Agreement). New DraftKings agreed to provide the Fertitta Parties with shelf registration rights with respect to New DraftKings Class A Common Stock and warrants to purchase New DraftKings Class A Common Stock that the Fertitta Parties will receive in connection with the DraftKings Merger. In addition, the Fertitta Parties have agreed to execute (and cause its affiliates to execute) all such agreements and take such action as required to waive the obligations of all Fertitta Parties to make interest payments on behalf of the Company and of the Company to issue equity in relation to such payments.
COVID-19
DuringMarch 2020 , a global pandemic was declared by theWorld Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The pandemic has significantly impacted the economic conditions around the world, accelerating during the last half ofMarch 2020 , as federal, state and local governments react to the public health crisis. The direct impact on us was primarily through an increase in new patrons utilizing online gaming due to closures of land-based casinos and suspensions, postponement and cancellations of major sports seasons and sporting events, although sports betting accounted for less than 1% of our revenues for 2020. Land based casinos reopened in July with significant restrictions, which eased over time. However, virus cases began to increase and capacity restrictions were reinstituted. As a result, the ultimate impact of this pandemic on our financial and operating results is unknown and will depend, in part, on the length of time that these disruptions exist and the subsequent behavior of new patrons after land-based casinos reopen fully. For the year endedDecember 31, 2021 , there has been no adverse impact on revenues due to concerns regarding COVID-19. A significant or prolonged decrease in consumer spending on entertainment or leisure activities could have an adverse effect on the demand for the Company's product offerings, reducing cash flows and revenues, and thereby 51
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materially harming the Company's business, financial condition and results of operations. In addition, a recurrence of COVID-19 cases or an emergence of additional variants or strains could cause other widespread or more severe impacts depending on where infection rates are highest. As steps taken to mitigate the spread of COVID-19 have necessitated a shift away from a traditional office environment for many employees, the Company has business continuity programs in place to ensure that employees are safe and that the business continues to function with minimal disruptions to normal work operations while employees work remotely. The Company will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19.
Components of Our Results of Operations
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Our Revenues Revenues. Gaming. We earn revenues primarily through online real money gaming, offering a suite of games similar to those available in land-based casinos, as well as online sports wagering. Similar to land-based casinos, the revenue recognized is the aggregate net difference between gaming wins and losses. We record accruals related to the incremental anticipated payouts of progressive jackpots as the progressive game is played. Free play and other incentives to customers are recorded as a reduction of gaming revenue. Other. We have entered into contracts to manage multi-year market access agreements with other online betting operators that are authorized to operate online casino and online sports wagering. We receive royalties from the online betting operators and reimbursements for costs incurred, such as licensing fees, investigative fees, and certain back-office costs. Initial fees received for the market access agreements and prepaid guaranteed minimum royalties are deferred and recognized over the term of the contract as the performance obligations are satisfied. We have entered into contracts to manage multi-year live dealer studio broadcast license agreements with online casino operators that provide for the use of the live table games that are broadcast from our studio at the Golden Nugget inAtlantic City, New Jersey . We receive royalties from the online casino operators based on a percentage of Gross Gaming Revenue (GGR). We also offer some "private tables" for which we receive a flat monthly fee in addition to a percentage of GGR.
Our Operating Costs and Expenses
Cost of revenue. Cost of revenue includes the gaming taxes that are imposed by the jurisdictions in which we operate, fees paid to platform and content providers, market access and license fees, brand royalties, payment processing fees and related chargebacks, labor and other related costs associated with our live dealer studio and other reimbursable costs incurred. Advertising and promotion. Advertising and promotion expense includes costs associated with marketing our product offerings and other related costs incurred to acquire new customers. We use a variety of advertising channels to optimize our marketing spend based on performance and the highest anticipated returns General and administrative expenses. General and administrative expense includes payment processing fees and chargebacks, professional fees and other fees and expenses. 52 Table of Contents Results of Operations Year EndedDecember 31, 2021 Compared to Year EndedDecember 31, 2020 (in thousands) Year Ended December 31, 2021 2020 $Change % Change Revenues Gaming$ 113,352 $ 79,919 $ 33,433 41.8 % Other 14,892 11,201 3,691 33.0 % Total revenue 128,244 91,120 37,124 40.7 % Costs and expenses Cost of revenue 61,198 36,531 24,667 67.5 % Advertising and promotion 61,656 17,468 44,188 253.0 % General and administrative expense 28,814 8,302 20,512 247.1 % Merger and Acquisition Transaction related expenses 6,332 4,137 2,195 53.1 % Depreciation and amortization 255 190 65 34.2 % Total costs and expenses 158,255 66,628 91,627 137.5 % Operating income (loss) (30,011) 24,492 (54,503) (222.5) % Other expense (income) Interest expense, net 21,192 38,492 (17,300) (44.9) % Gain on warrant derivatives (105,213) (39,586) (65,627) 165.8 % Other expense 409 25,384 (24,975) (98.4) % Total other expense (income) (83,612) 24,290 (107,902) (444.2) % Income before income taxes 53,601 202 53,399 n/a Provision for income taxes (4,276) (7,651) 3,375 (44.1) % Net income 57,877 7,853 50,024 637.0 % Net loss attributable to non-controlling interests 21,693 17,350
4,343 25.0 %
Net income attributable to GNOG
Revenues. Gaming. Gaming revenues increased$33.4 million , or 41.8%, to$113.4 million from$79.9 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . The increase was primarily the result of the impact of our launch inMichigan in late January of 2021. We also commenced operations inWest Virginia andVirginia late in the third quarter. Other. Other revenues increased$3.7 million , or 33.0%, to$14.9 million from$11.2 million for the year endedDecember 31, 2021 compared to the comparable prior year. Market access and live dealer studio broadcast revenues increased$2.7 million , or 30.6%, as royalties with existing partners increased and the addition of a new partner when compared to the prior year period. Reimbursable revenues under these arrangements also increased by$1.0 million , or 41.3%.
Operating Costs and Expenses.
Cost of revenue. Cost of revenue increased$24.7 million , or 67.5%, to$61.2 million from$36.5 million for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 , as a result of the increase in gaming revenue. Increased gaming taxes and market access fees associated with our launch inMichigan in lateJanuary 2021 and brand royalty expense paid to an affiliate which began inMay 2020 also increased cost of revenue for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 Advertising and promotion. Advertising and promotion expense increased$44.2 million , or 253%, to$61.7 million from$17.5 million for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . This increase from the prior year is almost entirely attributable to our launch in theMichigan market in lateJanuary 2021 . 53
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General and administrative. General and administrative expenses increased$20.5 million , or 247.1%, to$28.8 million from$8.3 million for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . This increase is due largely to stock-based compensation of$12.0 million compared to$0.0 million for the year endedDecember 31, 2021 and 2020, respectively. Compensation expense is also higher than the prior year period and professional fees for audit services, tax services, legal services and other costs associated with being a public company for the entire fiscal year resulted in a significant increase in expenses as compared to the prior period. Merger and Acquisition Transaction-related expenses. Merger and Acquisition Transaction related expenses increased$2.2 million , or 53.1%, to$6.3 million from$4.1 million for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 and related primarily to regulatory, legal and other professional fees incurred in connection with the DraftKings Merger. The prior year expenses were legal and other professional fees related to the Acquisition Transaction. Interest expense. Interest expense decreased$17.3 million , or 44.9%, to$21.2 million from$38.5 million for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 . We repaid$150.0 million of the principal balance of the$300.0 million term loan in connection with theDecember 29, 2020 closing of the Acquisition Transaction and repaid an additional$10.6 million in February of 2021. In connection with this repayment for the year endedDecember 31, 2021 , we expensed$0.6 million in unamortized discount and loan origination costs as interest expense. Gain on warrant derivatives. In accordance with ASC 815-40, we classify our warrants as derivative liabilities measured at fair value, with changes in fair value each period reported in earnings. The gain on warrant derivatives amounted to$105.2 million for the year endedDecember 31, 2021 as compared to a gain of$39.6 million for the year endedDecember 31, 2020 , primarily due to changes in the underlying share price of our class A common stock. Other expense. Other expense consists of prepayment premiums associated with the repayment of$10.6 million principal amount of our term loan inFebruary 2021 , partially offset by non-cash gains on the tax receivable agreement during the period. Other expense in prior year consisted of prepayment premiums associated with the repayment of$150.0 million principal amount of our term loan in connection with the Acquisition Transaction onDecember 29, 2020 . Provision for income taxes. The provision for income taxes was a benefit of$4.3 million for the year endedDecember 31, 2021 compared to a benefit of$7.7 million for the prior year. This decrease in benefit of$3.4 million is the result of certain non-deductible expenses in 2021 and the recording of a valuation allowance on a portion of the net deferred tax assets. Additionally, the reversal of an uncertain tax position in 2020 increased the tax benefit in the prior year. The effective tax rate for the year endedDecember 31, 2021 was negative 8.0% and reflects that the gain on warrant derivatives of$105.2 million and the loss attributable to the non-controlling interests for the year, are not subject to federal or state income tax. Net loss attributable to non-controlling interests. Net loss attributable to non-controlling interests represents a 41.2% economic interest in the losses inGNOG, LLC . The non-controlling interests consist of the ClassB Units in Landcadia Holdco held byLF LLC that have no voting rights and that are redeemable, together with an equal number of Class B common stock, for either 31,657,545 shares of Class A common stock or an equal value of cash, at our
election. 54 Table of Contents Year EndedDecember 31, 2020 Compared to the Year endedDecember 31, 2019 (in thousands) Year Ended December 31, 2020 2019 $Change % Change Revenues Gaming$ 79,919 $ 47,694 $ 32,225 67.6 % Other 11,201 7,727 3,474 45.0 % Total revenue 91,120 55,421 35,699 64.4 % Costs and expenses Cost of revenue 36,531 22,318 14,213 63.7 % Advertising and promotion 17,468 9,291 8,177 88.0 %
General and administrative expense 8,302 6,040 2,262 37.5 % Acquisition Transaction related expenses 4,137 - 4,137 n/a Depreciation and amortization 190 135 55 40.7 % Total costs and expenses 66,628 37,784 28,844 76.3 % Operating income (loss) 24,492 17,637 6,855 38.9 % Other expense (income) Interest expense, net 38,492 6 38,486 n/a Gain on warrant derivatives (39,586) - (39,586) n/a Other expense 25,384 - 25,384 n/a Total other expense 24,290 6 24,284 n/a Income before income taxes 202 17,631 (17,429) n/a Provision for income taxes (7,651) 5,960 (13,611) (228.4) % Net income 7,853 11,671 (3,818) (32.7) % Net loss attributable to non-controlling interests 17,350 - 17,350 n/a
Net income attributable to GNOG
115.9 % Revenues. Gaming. Gaming revenues increased$32.2 million , or 67.6%, to$79.9 million from$47.7 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase was primarily the result of higher table game and slot revenue during the current year period resulting from an increase in new patrons using online gaming in light of the casino closures stemming from the outbreak of COVID-19.
Other.
Other revenues increased$3.5 million , or 45.0%, to$11.2 million from$7.7 million for the year endedDecember 31, 2020 compared to the comparable prior year period. Market access and live dealer studio broadcast revenues increased$2.9 million , or 48.3%, as royalties with existing partners increased and the addition of a new partner when compared to the prior year period. Reimbursable revenues under these arrangements also increased by$0.6 million , or 34.2%.
Operating Costs and Expenses.
Cost of revenue. Cost of revenue increased$14.2 million , or 63.7%, to$36.5 million from$22.3 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , as a result of the increase in revenues. Gaming taxes, royalties and payment processing fees all increased proportionately with the increase in gaming revenues for the year. Advertising and promotion. Advertising and promotion expenses increased$8.2 million , or 88.0%, to$17.5 million from$9.3 million for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . We increased our advertising expenditures during 2020 to attract new and former patrons to online gaming in light of the casino closures stemming from the outbreak of COVID-19. General and administrative Expenses. General and administrative expense increased$2.3 million , or 37.5%, to$8.3 million for the year endedDecember 31, 2020 from$6.0 million for the prior year period. This increase is due largely to 55
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higher compensation expense and professional fees for audit services, tax services, legal services and other costs associated with becoming a public company when compared to the prior year.
Acquisition Transaction-related expenses. Acquisition Transaction-related expenses totaled$4.1 million for the year endedDecember 31, 2020 and represent costs incurred in connection with theDecember 29, 2020 Acquisition Transaction consisting of professional fees and other related expenses. Interest expense. Interest expense for the year endedDecember 31, 2020 increased by$38.5 million as a result of the$300.0 million term loan credit agreement we entered into onApril 28, 2020 . We also repaid$150.0 million principal balance of the term loan in connection with theDecember 29, 2020 closing of the Acquisition Transaction. In connection with this repayment,$8.3 million in unamortized discount and loan origination coasts were expensed as interest expense. Proceeds received from the initial term loan were distributed toLF LLC . Gain on warrant derivatives. In accordance with ASC 815-40, we classify our warrants as derivative liabilities measured at fair value, with changes in fair value each period reported in earnings. The gain on warrant derivatives amounted to$39.6 million for the year endedDecember 31, 2020 and no such gains were recognized for the year endedDecember 31, 2019 . Other expense. Other expense consists of prepayment premiums and other related costs associated with the repayment of$150.0 million principal amount of our term loan in conjunction with theDecember 29, 2020 closing of the Acquisition Transaction. Provision for income taxes. The provision for income taxes decreased$13.6 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , primarily as a result of the decrease in pre-tax income for the period and the loss attributable to the non-controlling interest for the year endedDecember 31, 2020 , which is not subject to federal or state income tax in our consolidated statements of operations. The effective tax rate for the year endedDecember 31, 2020 was (3,787.6)% compared to 33.8% in the prior year comparable period. This reduction in the effective tax rate for the year endedDecember 31, 2020 was the result of losses attributable to non-controlling interests for the post Acquisition Transaction period, which also reduces the amount of state income tax, and the change in unrecognized tax benefits for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Net loss attributable to non-controlling interests. Net loss attributable to non-controlling interests represents a 45.9% economic interest in our losses from the closing date of the Acquisition Transaction throughDecember 31, 2020 . The non-controlling interests consist of the ClassB Units in Landcadia Holdco held byLF LLC that have no voting rights and that are redeemable, together with an equal number of Class B common stock, for either 31,350,625 shares of Class A common stock or an equal value of cash, at our election.
Liquidity and Capital Resources
We measure liquidity in terms of our ability to fund the cash requirements of our business operations, including working capital and capital expenditure needs, contractual obligations and other commitments, with cash flows from operations and other sources of funding. Our current working capital needs relate mainly to launching our iGaming and sports wagering product offerings in new markets, as well as compensation and benefits for our employees. Our ability to expand and grow our business will depend on many factors, including working capital needs and the evolution of our operating cash flows. Further expansion into new markets will likely require additional capital either from affiliates or third parties and based on our financial performance, we believe we will have access to that capital. The future economic environment, however, could limit our ability to raise capital by issuing new equity or debt securities on acceptable terms or at all, and lenders may be unwilling to lend funds on acceptable terms or at all in the amounts that would be required to supplement cash flows to support our expansion plans. The sale of additional equity investments or convertible debt securities would result in dilution to our stockholders and may not be available on favorable terms or at all, particularly in light of the current conditions in the financial and credit markets. Additional debt would result in increased expenses and would 56
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likely impose new restrictive covenants which may be similar or different than those restrictions contained in the covenants under our current Credit Agreement.
Credit Agreement. OnApril 28, 2020 , we entered into a term loan credit agreement that is guaranteed by our indirect parent, comprised of a$300.0 million interest only term loan dueOctober 4, 2023 . Net proceeds received from the term loan of$288.0 million , net of original issue discount, were sent to the parent of Old GNOG,who issued Old GNOG a note receivable dueOctober 2024 (as amended and restated following the Acquisition Transaction, the "Second A&R Intercompany Note" (Refer to Note 12 in the Notes to the Consolidated Financial Statements) in the same amount, with substantially similar terms as the credit agreement. The Second A&R Intercompany Note was accounted for as contra-equity, similar to a subscription receivable; however, in the reverse recapitalization recorded in connection with the Acquisition Transaction, the Second A&R Intercompany Note from our indirect parent was accounted for as a distribution to the parent of Old GNOG, reducing retained earnings. The term loan was issued at a 4% discount. The term loan bears interest at the London Interbank Offered Rate ("LIBOR") plus 12%, with a 1% floor, and interest payments are made quarterly. The term loan is secured by the Second A&R Intercompany Note which effectively, but indirectly provides pari passu security interest with theGolden Nugget, LLC senior secured credit facility. InFebruary 2021 , we repaid$10.6 million of the term loan and incurred a prepayment premium of$1.6 million which was expensed as other expense in our consolidated statement of operations. Additionally, we expensed$0.2 million in deferred debt issuance costs and$0.4 million in unamortized debt discount as interest expense in our consolidated statement of operations for the year endedDecember 31, 2021 . In connection with the Acquisition Transaction, we repaid$150.0 million of the$300.0 million term loan and incurred a prepayment premium of$24.0 million , which along with other related fees and expenses was expensed as other expense in our consolidated statement of operations during the year endedDecember 31, 2020 . Additionally, we expensed$3.3 million in deferred debt issuance costs and$5.0 million in unamortized discount as interest expense in our consolidated statement of operations for the year endedDecember 31, 2020 . The term loan credit agreement contains certain negative covenants including restrictions on incurring additional indebtedness or liens, liquidation or dissolution, limitations on disposal of assets and paying dividends. The term loan credit agreement also contains a make-whole provision that is in effect throughApril 2022 . The prepayment premium under the make-whole provision is calculated as (A) the present value of (i) 100% of the aggregate principal amount of the term loan prepaid, plus (ii) all required remaining scheduled interest payments throughApril 2022 , minus (B) the outstanding principal amount being prepaid. Agreement withDanville Development . OnNovember 18, 2020 , we entered into a definitive agreement withDanville Development , for market access toIllinois . Pursuant to this agreement, we have committed to provide a mezzanine loan in the amount of$30.0 million toDanville Development for the development and construction of a new Golden Nugget-branded casino inDanville, Illinois . We currently expect to fully fund the mezzanine loan in the first or second quarter of 2022. The definitive agreement has a term of 20 years and requires us to payDanville Development a percentage of our online net gaming revenue, subject to minimum royalty payments over the term. Tax Receivable Agreement. In connection with the Acquisition Transaction, we entered into the Tax Receivable Agreement ("TRA") withLF LLC as additional consideration. The TRA generally provides for the payment by us toLF LLC of 85% of certain tax benefits that we actually realize or are deemed to realize from the use of certain tax attributes in periods after the closing of the Acquisition Transaction. We will retain the tax benefit, if any, of the remaining 15% of these tax attributes. Assuming no exchange ofLF LLC's ClassB Units pursuant theA&R Holdco LLC Agreement, the estimated liability under the TRA ("the TRA liability") of$24.2 million is included on our consolidated balance sheets as ofDecember 31, 2021 . The TRA provides for an accelerated lump sum payment on the occurrence of certain events, among them a change of control. The planned DraftKings Merger qualifies as a change of control event, however, will not result in any TRA liability asLF LLC has agreed to waive this payment contingent upon completion of the DraftKings Merger. Upon successful completion of the DraftKings Merger, the TRA will be terminated and the TRA 57
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liability will be fully satisfied, extinguished, and released. Refer to Note 12 in the Notes to the Consolidated Financial Statements for additional details.
Other Contractual Obligations and Contingencies. We have entered into a number of agreements for advertising, licensing, market access, technology, and other services. We also entered into several equipment notes totaling$1.3 million to finance computer equipment and other related infrastructure with original terms of three to four years that mature fromJune 2024 toDecember 2024 . Contractual Obligations. As ofDecember 31, 2021 , we had contractual obligations as described below. Our obligations include "off-balance sheet arrangements" whereby liabilities associated with unconditional purchase obligations are not fully reflected in our balance sheets (in thousands). Refer to Note 11 in the Notes to the Consolidated Financial Statements for additional details. 2022 2023 2024 2025 2026 Thereafter Total Term loan credit agreement $ -$ 139,385 $ - $ - $ - $ -$ 139,385 Interest on term loan credit agreement 18,372 13,942 - - - - 32,314 Operating leases 379 379 259 84 - - 1,101 Mezzanine loan commitment 30,000 - - - - - 30,000 Other contractual obligations 27,309 5,325 26,310 23,684 10,600 53,250 146,478 76,060 159,031 26,569 23,768 10,600 53,250 349,278
Considering our cash and cash equivalents of$112.7 million atDecember 31, 2021 and based on our current and expected cash flows from operations inNew Jersey , we believe that cash on hand and cash generated from our operations will be adequate to meet our anticipated obligations under our contracts, debt service requirements, capital expenditures and working capital needs for the next twelve months. However, we cannot be certain that our business will generate sufficient cash flow from operations; that theU.S. economy will continue to grow in 2022 and beyond; that our anticipated earnings projections will be realized; or that future equity offerings or borrowings will be available in the capital markets to enable us to service our indebtedness or to make anticipated advertising expenditures. If we expand our business into new markets in the future, our cash requirements may increase significantly, and we may need to complete equity or debt financings to meet these requirements. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. Cash Flows. Net cash used by operating activities was$64.1 million for the year endedDecember 31, 2021 compared to$20.5 million of cash provided by operating activities for the year endedDecember 31, 2020 . Factors affecting changes in operating cash flows are similar to those that impact net income, with the exception of non-cash items such as gain on warrant derivatives, amortization of debt issuance costs and discounts, depreciation and amortization, stock-based compensation and deferred taxes. Additionally, changes in working capital items such as accounts receivable, accounts payable, accrued liabilities and customer deposits can significantly affect operating cash flows. Cash flows from operating activities during the year endedDecember 31, 2021 were lower as a result of net income of$57.9 million that included a$105.2 million gain on exercise of warrants for the year endedDecember 31, 2021 as compared to net income of$7.9 million that included a$39.6 million gain on exercise of warrants for the year endedDecember 31, 2020 . In the year endedDecember 31, 2021 , non-cash items offsetting net income totaled$93.7 million compared to$12.2 million for the year endedDecember 31, 2020 . A decrease in working capital items of$28.3 million for the year endedDecember 31, 2021 compared to an increase of$24.8 million for the year endedDecember 31, 2020 also increased the cash used in operations. Net cash provided by operating activities was$20.5 million for the year endedDecember 31, 2020 compared to$35.2 million for the year endedDecember 31, 2019 . Factors affecting changes in operating cash flows are similar to those that impact net income, with the exception of non-cash items such as amortization of debt issuance costs and discounts, depreciation and amortization, stock-based compensation and deferred taxes. Additionally, changes in working capital items such as accounts receivable, accounts payable, accrued liabilities and customer deposits can significantly affect operating cash flows. Cash flows from operating activities during the year endedDecember 31, 2020 58 Table of Contents were lower as a result of a net income of$7.9 million for the year endedDecember 31, 2020 as compared to net income of$11.7 million for the year endedDecember 31, 2019 . In the year endedDecember 31, 2020 , non-cash items offsetting net income totaled$12.2 million compared to$0.4 million for the year endedDecember 31, 2019 . An increase in working capital items of$24.8 million for the year endedDecember 31, 2020 compared to$23.1 million for the year endedDecember 31, 2019 slightly increased the cash provided by operations. Net cash used in investing activities was$1.1 million related to property and equipment additions for the year endedDecember 31, 2021 as compared to$0.1 million used in investing activities related to property and equipment additions for the year endedDecember 31, 2020 . Net cash used in investing activities was$0.1 million related to property and equipment additions for the year endedDecember 31, 2020 , as compared to$0.0 million used in investing activities for the year endedDecember 31, 2019 . Net cash provided by financing activities was$102.1 million for the year endedDecember 31, 2021 , compared to$73.1 million of cash used in financing activities for the year endedDecember 31, 2020 . The main driver of this variance is the$110.1 million cash received as a result of the public warrants exercised early in 2021 offset by the repayment of$10.6 million of the term loan during the year endingDecember 31, 2021 . Additionally, dividends of$30.6 million were paid to the parent of Old GNOG during the comparable period in the prior year and contributions from parent of Old GNOG amounted to$16.8 million . Net cash provided by financing activities was$73.1 million for the year endedDecember 31, 2020 , compared to$10.9 million of cash used in financing activities for the year endedDecember 31, 2019 . The main driver of this variance is the$270.4 million cash received in the Acquisition Transaction offset by the repayment of$175.4 million of the term loan. There was also a larger dividend paid to the parent of Old GNOG and amounts paid for debt issuance costs in 2020, offset by a contribution from our parent. Proceeds received from the term loan were sent toLF LLC , the parent of Old GNOG,who issued us a note receivable dueOctober 24, 2024 .
Critical Accounting Policies
Use of Estimates
The preparation of the audited consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the period reported. Management utilizes estimates, including, but not limited to, the useful lives of assets and inputs used to calculate the TRA liability. Actual results could differ from those estimates.
Emerging Growth Company
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our consolidated financial statements with another company which is either not an emerging growth company or an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used. 59 Table of Contents Revenue and Cost Recognition
We recognize revenue for services when the services are performed and when we have no substantive performance obligations remaining. Online real money gaming revenues are recognized as the aggregate net difference between gaming wins and losses and are recorded as gaming revenue in the accompanying statements of operations, with liabilities recognized for funds deposited by customers before gaming play occurs. We report 100% of wins as revenue and our content provider's share is reported in costs and expenses. Jackpots, other than the incremental progressive jackpots, are recognized at the time they are won by customers. We accrue the incremental progressive jackpots as the progressive games are played, and the progressive jackpot amount increases, with a corresponding reduction to gaming revenues. Free play and other incentives to customers related to internet gaming play are recorded as a reduction of gaming revenue. We are contracted to manage multi-year market access agreements with online gaming operators that are authorized to operate real money online gaming and sports betting, for which we receive royalties and cost reimbursement. Initial fees received for the market access agreements and prepaid guaranteed minimum royalties are deferred and recognized ratably over the term of the contract as the performance obligations are satisfied.
Stock-Based Compensation
We measure compensation expenses for stock awards in accordance with ASC 718, Compensation-Stock Compensation. We record compensation expense over the requisite service period for restricted stock units ("RSUs") based on the grant date fair value of the award. Stock compensation expense for performance-based restricted stock units ("PBRSUs") is recognized over the requisite period for each separately vesting tranche as though each tranche of the award is, in substance, a separate award. This will result in an accelerated recognition of compensation cost. The grant date fair value of the PBRSUs is estimated on the date of the grant using a Monte-Carlo simulation model used to simulate a distribution of future stock price paths based on historical volatility levels. The expense for RSUs and PBRSUs are included in general and administrative expense in our statements of operations. Our policy is to account for forfeitures of share-based compensation awards as they occur. Refer to Note 9 in the Notes to the Consolidated Financial Statements for additional details.
Income Taxes
We were subject to a tax sharing agreement with certain affiliates prior to theDecember 29, 2020 closing date of the Acquisition Transaction and we recognized tax assets and liabilities associated with temporary differences on a separate return basis in accordance with GAAP. Following the consummation of the Acquisition Transaction, we operate as an Up-C, meaning that substantially all of our assets are held indirectly throughGolden Nugget Online Gaming LLC ("GNOG LLC "), our indirect subsidiary, and our business is conducted throughGNOG LLC . We follow the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the underlying assets are realized or liabilities are settled. A valuation allowance reduces deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. We use a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order to be recognized in the financial statements. Accordingly, we report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Warrant Derivative Liabilities
In accordance with ASC 815-40, Derivatives and Hedging: Contracts in an Entities Own Equity, entities must consider whether to classify contracts that may be settled in its own stock, such as warrants, as equity of the entity or as 60
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an asset or liability. If an event that is not within the entity's control could require net cash settlement, then the contract should be classified as an asset or a liability rather than as equity. We have determined because the terms of public warrants include a provision that entitles all warrant holders to cash for their warrants in the event of a qualifying cash tender offer, while only certain of the holders of the underlying shares of common stock would be entitled to cash, our public warrants are classified as a liability measured at fair value, with changes in fair value each period reported in earnings. The sponsor warrants contain provisions that change depending onwho holds the warrant. If the sponsor warrants are held by someone other than the initial purchasers or their permitted transferees, the sponsor warrants will be redeemable by us and exercisable by such holders on the same basis as the public warrants. This feature precludes the sponsor warrants from being indexed to our common stock, and thus the warrants are classified as a liability measured at fair value, with changes in fair value each period reported in earnings. Using the three-tier fair value hierarchy as described in Note 2 in the Notes to the Consolidated Financial Statements, our public warrants were valued using level 1 inputs and the sponsor warrants were valued using level 3 inputs. All of the public warrants were exercised or redeemed during the first quarter of 2021. The fair value of the sponsor warrants was estimated using a modified version of the Black-Scholes option pricing formula for European calls. Specifically, we assumed a term for the sponsor warrants equal to the contractual term from the closing date of the Acquisition Transaction. We then discounted the resulting value to the valuation date using a risk-free interest rate. Significant level 3 inputs used to calculate the fair value of the sponsor warrants include the share price on the valuation date, expected volatility, expected term and the risk-free interest rate. Refer to Note 2 in the Notes to the Consolidated Financial Statements for additional details. Volatility in the value of the public warrants and sponsor warrants may result in significant changes in the value of the derivatives and resulting gains and losses on our statement of operations.
Recent Accounting Pronouncements
InFebruary 2016 , the FASB issued ASU 2016-02, "Leases (Topic 842)." This guidance requires recognition of most lease liabilities on the balance sheet to give investors, lenders, and other financial statement users a more comprehensive view of a company's long-term financial obligations, as well as the assets it owns versus leases. ASU 2016-02 will be effective for fiscal years beginning afterDecember 15, 2021 , and for interim periods within annual periods afterDecember 15, 2022 . InJuly 2018 , the FASB issued ASU 2018-11 making transition requirements less burdensome. The standard provides an option to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in the Company's financial statements. We are currently evaluating the impact that this guidance will have on our financial statements as well as the expected adoption method. We do not believe the adoption of this standard will have a material impact on our financial statements. InJune 2016 , the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments", as additional guidance on the measurement of credit losses on financial instruments. The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. In addition, the guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The new guidance is effective for all public companies for interim and annual periods beginning afterDecember 15, 2019 , with early adoption permitted for interim and annual periods beginning afterDecember 15, 2018 . InOctober 2019 , the FASB approved a proposal which grants smaller reporting companies additional time to implement FASB standards on current expected credit losses (CECL) toJanuary 2023 . As a smaller reporting company, we will defer adoption of ASU No. 2016-13 untilJanuary 2023 . We are currently evaluating the impact this guidance will have on our consolidated financial statements. 61
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