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Nov. 10, 2021, 5:38 p.m. EST

10-Q: GOLDEN NUGGET ONLINE GAMING, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 in our Annual Report on Form 10-K/A for the year ended December 31, 2020, filed with the SEC.

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 Quarterly Report on Form 10-Q and our Annual Report on Form 10-K/A for the year ended December 31, 2020, filed with the SEC.

Overview

Golden Nugget Online Gaming, Inc. (formerly known as Landcadia 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 in New Jersey, Michigan and West Virginia where we offer patrons the ability to play their favorite casino games and bet on live-action sports events, and in Virginia, where we offer online sports betting only.

We operate as an umbrella partnership C-corporation, or "Up-C," meaning that substantially all of our assets are held indirectly through Golden Nugget Online Gaming LLC ("GNOG LLC"), our indirect subsidiary, and our business is conducted through GNOG LLC.

Acquisition Transaction

As of May 9, 2019, we were a blank check company formed under the laws of the State 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. On December 29, 2020, we completed the Acquisition Transaction and changed our name to Golden 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 of GNOG LLC. (See Note 3 in the Notes to the Consolidated Financial Statements).

The historical financial information of Landcadia 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 stockholders who elect to redeem their shares of common stock in connection with the business combination. 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 to December 29, 2020 besides GNOG LLC's operations.

DraftKings Merger

On August 9, 2021, the Company, DraftKings Inc., a Nevada corporation ("DraftKings"), New Duke Holdco, Inc., a Nevada corporation and a wholly owned subsidiary of DraftKings ("New DraftKings"), Duke Merger Sub, Inc., a Nevada corporation and a wholly owned subsidiary of New DraftKings ("Duke Merger Sub"), and Gulf Merger Sub, Inc., a Delaware 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 "Merger Agreement"), pursuant to which DraftKings will, among other things, acquire all of the Company's issued and outstanding shares of common stock (the "GNOG Shares"). The transactions contemplated by the Merger Agreement and the other related transactions are referred to herein as the "DraftKings Merger".

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On the terms and subject to the conditions set forth in the Merger Agreement,

The Merger Agreement provides that upon the consummation of the DraftKings Merger, each holder of GNOG Shares (each, a "GNOG Shareholder") will receive

Each share of DraftKings Class A common stock ("DraftKings Class A Common Stock") issued and outstanding immediately prior to the Duke Effective Time (other than 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 DraftKings Class B common stock issued and outstanding immediately prior to the Duke Effective Time (other than excluded shares) shall be converted into one validly issued, fully paid and non-assessable share of New DraftKings Class B common stock.

At the Gulf Effective Time, each outstanding restricted stock unit (a "GNOG RSU") issued by the Company that (i) were outstanding on the date of the Merger Agreement or (ii) are issued to existing employees of the Company 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 the Company's common stock subject to such GNOG 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 GNOG 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 number of shares of the Company's common stock subject to such GNOG 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 the Company ("Private Placement Warrant") to purchase shares of the Company's Class A common stock ("GNOG 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 GNOG 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 the Company's 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,

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Related Agreements

Concurrently with the execution of the Merger Agreement, DraftKings entered into a support and registration rights agreement (the "Support Agreement") with New DraftKings, Tilman J. Fertitta ("Fertitta"), Fertitta Entertainment, Inc., a Texas corporation ("FEI"), Landry's Fertitta, LLC, a Texas limited liability company ("Landry's Fertitta"), Golden Landry's LLC, a Texas limited liability company ("Golden Landry's") and Golden Fertitta, LLC, a Texas limited liability company ("Golden Fertitta" and together with Fertitta, FEI, Landry's Fertitta and Golden 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

During March 2020, a global pandemic was declared by the World 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 of March 2020, as federal, state and local governments react to the public health crisis. The direct impact on us has been 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 2020 with significant restrictions, which eased over time. However, virus cases began to increase in the fall and winter of 2020 and capacity restrictions were reinstituted. During 2021 there has been additional concerns regarding COVID-19 variants; 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.

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 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

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 entered into 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. Initial fees received for the market access

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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 in Atlantic City, New Jersey. We receive royalties from the online casino operators based on a percentage of 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 possible returns.

General and Administrative. General and administrative expense includes administrative personnel costs, professional fees related to legal, audit and other consulting expenses, stock-based compensation and insurance costs.







        Results of Operations
                                 Three Months Ended September 30,                      Nine Months Ended September 30,
                            2021         2020       $Change      % Change         2021         2020       $Change      % Change
        Revenues
        Gaming            $  31,792    $ 22,938    $    8,854        38.6 %    $   82,886    $ 59,890    $   22,996        38.4 %
        Other                 3,846       2,990           856        28.6 %        11,192       8,201         2,991        36.5 %
        Total revenue        35,638      25,928         9,710        37.4 %        94,078      68,091        25,987        38.2 %
        Costs and
        expenses
        Cost of
        revenue              17,007      10,241         6,766        66.1 %        43,868      26,930        16,938        62.9 %
        Advertising
        and promotion        16,618       5,284        11,334       214.5 %        47,496      12,870        34,626       269.0 %
        General and
        administrative
        expense               7,858       2,187         5,671       259.3 %        21,260       5,648        15,612       276.4 %
        Merger related
        expenses              2,763           -         2,763                       2,763           -         2,763
        Depreciation
        and
        amortization             76          55            21        38.2 %           160         138            22        15.9 %
        Total costs
        and expenses         44,322      17,767        26,555       149.5 %       115,547      45,586        69,961       153.5 %
        Operating
        income (loss)       (8,684)       8,161      (16,845)     (206.4) %      (21,469)      22,505      (43,974)     (195.4) %
        Other expense
        (income)
        Interest
        expense, net          5,180      11,311       (6,131)      (54.2) %        15,983      19,077       (3,094)      (16.2) %
        


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                                   Three Months Ended September 30,                       Nine Months Ended September 30,
                              2021         2020        $Change      % Change         2021         2020        $Change      % Change
        Loss (gain) on
        warrant
        derivatives            18,944            -        18,944         n/a        (71,031)            -      (71,031)         n/a
        Other expense
        (income)                (101)            -         (101)         n/a             331            -           331         n/a
        Total other
        expense
        (income)               24,023       11,311        12,712       112.4 %      (54,717)       19,077      (73,794)     (386.8) %
        Income (loss)
        before income
        taxes                (32,707)      (3,150)      (29,557)       938.3 %        33,248        3,428        29,820       869.9 %
        Provision for
        income taxes          (1,361)      (1,376)            15       (1.1) %       (3,477)          914       (4,391)     (480.4) %
        Net income
        (loss)               (31,346)      (1,774)      (29,572)     1,667.0 %        36,725        2,514        34,211     1,360.8 %
        Net loss
        attributable to
        non-controlling
        interests               5,590            -         5,590         n/a          16,126            -        16,126         n/a
        Net income
        (loss)
        attributable to
        GNOG               $ (25,756)    $ (1,774)    $ (23,982)     1,351.9 %    $   52,851    $   2,514    $   50,337     2,002.3 %
        


Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

Revenues.

Gaming. Gaming revenues increased $8.9 million, or 38.6%, to $31.8 million from $22.9 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The increase was primarily the result of the impact of our launch in Michigan in late January of 2021. We also commenced operations in West Virginia and Virginia late in the third quarter.

Other. Other revenues increased $0.9 million, or 28.6%, to $3.9 million from $3.0 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. Market access and live dealer studio broadcast revenues increased $0.6 million, or 27.5%, 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 $0.2 million, or 32.5%.

Operating Costs and Expenses.

Cost of revenue. Cost of revenue increased $6.8 million, or 66.1%, for the three months ended September 30, 2021 compared to the prior year comparable period as a result of the increase in gaming revenue for the third quarter. Increased gaming taxes and market access fees associated with our launch in Michigan in late January 2021 increased cost of revenue for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Advertising and promotion. Advertising and promotion expenses increased $11.3 million, or 214.5%, to $16.6 million from $5.3 million for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. This increase from the prior year comparable period is almost entirely attributable to our launch in the Michigan market in late January 2021.

General and administrative. General and administrative expenses increased $5.7 million, or 259.3%, to $7.9 million from $2.2 million for the prior year comparable period. This increase is due largely to stock-based

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compensation of $3.4 million during the three months ended September 30, 2021, whereas there was no stock-based compensation expense in the prior year. 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 are up significantly over the prior year period.

Merger related expenses. Merger related expenses amounted to $2.8 million for the three months ended September 30, 2021 and related primarily to regulatory, legal and other professional fees incurred in connection with the DraftKings Merger. There were no merger related expenses incurred in the prior year comparable period.

Interest expense. Interest expense for the three months ended September 30, 2021 was $5.2 million as compared to $11.3 million for the three months ended September 30, 2020. The decrease is the result of the repayment of $150.0 million of the principal balance of the $300.0 term loan in connection with the December 29, 2020 closing of the Acquisition Transaction and the repayment of an additional $10.6 million in February of 2021.

Loss (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 loss on warrant derivatives during the three months ended September 30, 2021 amounted to $18.9 million and no such gains or losses were recognized for the three months ended September 30, 2020.

Provision for Income Taxes. The provision for income taxes was a benefit of $1.4 million for the three months ended September 30, 2021 compared to a benefit of $1.4 million for the comparable prior year quarter. The effective tax rate was 4.2% for the three months ended September 30, 2021 as compared to 43.7% for the three months ended September 30, 2020. This decrease in the effective tax rate is primarily a result of the loss on the warrant derivative of $18.9 million and the loss attributable to the non-controlling interest for the three months ended September 30, 2021, which are not subject to federal or state income tax in our consolidated statements of operations.

Net loss attributable to non-controlling interests. Net loss attributable to non-controlling interests represents a 40.5% economic interest in the losses from GNOG LLC for the three months ended September 30, 2021. The non-controlling interests consist of the Class B Units in Landcadia Holdco held by LF 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.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Revenues.

Gaming. Gaming revenues increased $23.0 million, or 38.4%, to $82.9 million from $59.9 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was primarily the result of the impact of our launch in Michigan in late January of 2021. We also commenced operations in West Virginia and Virginia late in the third quarter.

Other. Other revenues increased $3.0 million, or 36.5%, to $11.2 million from $8.2 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. Market access and live dealer studio broadcast revenues increased $2.3 million, or 37.2%, 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 $16.9 million, or 62.9%, for the nine months ended September 30, 2021 compared to the prior year comparable period as a result of the increase in gaming revenue for the period. Increased gaming taxes and market access fees associated with our launch in Michigan in late January 2021 and brand royalty expense paid to an affiliate which began in May 2020 also increased cost of revenue for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

Advertising and promotion. Advertising and promotion expenses increased $34.6 million, or 269.0%, to $47.5 million from $12.9 million for the nine months ended September 30, 2021 compared to the nine months ended

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September 30, 2020. This increase from the prior year comparable period is almost entirely attributable to our launch in the Michigan market in late January 2021.

General and administrative. General and administrative expenses increased $15.6 million, or 276.4%, to $21.3 million from $5.6 million for the prior year comparable period. This increase is due largely to stock-based compensation of $8.7 million during the nine months ended September 30, 2021, whereas there was no stock-based compensation expense in the prior year period. 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 are up significantly over the prior year period.

Merger related expenses. Merger related expenses amounted to $2.8 million for the nine months ended September 30, 2021 and related primarily to regulatory, legal and other professional fees incurred in connection with the DraftKings Merger. There were no merger related expenses incurred in the prior year comparable period.

Interest expense. Interest expense for the nine months ended September 30, 2021 was $16.0 million as compared to $19.1 million. We entered into a $300.0 million term loan credit agreement on April 28, 2020. We repaid $150.0 principal balance of the term loan in connection with the December 29, 2020 closing of the Acquisition Transaction and repaid an additional $10.6 million in February of 2021. In connection with this repayment during the nine months ended September 30, 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 during the nine months ended September 30, 2021 amounted to $71.0 million and no such gains were recognized for the nine months ended September 30, 2020.

Other expense. Other expense consists of prepayment premiums associated with the repayment of $10.6 million principal amount of our term loan during the nine months ended September 30, 2021, partially offset by non-cash gains on the tax receivable agreement during the period.

Provision for income taxes. The provision for income taxes was a benefit of $3.5 million for the nine months ended September 30, 2021 compared to tax expense of . . .

Nov 10, 2021

COMTEX_396689208/2041/2021-11-10T17:37:33

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