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    LCY   US51476H1005

LANA HLDG

(LCY)
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Landcadia III : GOLDEN NUGGET ONLINE GAMING, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

05/17/2021 | 05:09pm EST

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 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 and Michigan where we offer patrons the ability to play their favorite casino games and bet on live-action sports events. We were one of the first online gaming operators to enter the New Jersey market in 2013 and we commenced operations in Michigan on January 22, 2021.

We are authorized by the New Jersey Division of Gaming Enforcement ("DGE") and the Michigan Gaming Control Board ("MGCB") to operate interactive real money online gaming in New Jersey and Michigan.

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.



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 2020with significant restrictions, which eased over time. However, virus cases began to increase in the fall and winter of 2020 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.



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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 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.



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Results of Operations



                                                     Three Months Ended March 31,
                                           2021           2020         $ Change       % Change
Revenues
Gaming                                  $   23,066$   14,905$    8,161           54.8 %
Other                                        3,683          2,438          1,245           51.1 %
Total revenue                               26,749         17,343          9,406           54.2 %
Costs and expenses
Cost of revenue                             12,116          6,745          5,371           79.6 %
Advertising and promotion                   14,371          2,977         11,394          382.7 %
General and administrative                   6,077          1,696          4,381          258.3 %
Depreciation and amortization                   44             34             10           29.4 %
Total operating costs and expenses          32,608         11,452         21,156          184.7 %
Operating income                            (5,859 )        5,891        (11,750 )       (199.5 )%
Other expense (income)
Interest expense, net                        5,708              1          5,707            n/a
Gain on warrant derivatives                (81,091 )            -        (81,091 )          n/a
Other expense                                  366              -            366            n/a
Total other (income) expense               (75,017 )            1        (75,018 )          n/a
Income before income taxes                  69,158          5,890         63,268        1,074.2 %
Provision for income taxes                    (478 )        1,703         (2,181 )       (128.1 )%
Net income                                  69,636          4,187         65,449        1,563.1 %
Net loss attributable to
non-controlling interests                    5,707              -          5,707            n/a

Net income attributable to GNOG $ 75,343$ 4,187$ 71,156 1,699.5 %

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020



Revenues.


Gaming.Gaming revenues increased $8.2 million, or 54.8%, to $23.1 million from $14.9 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily the result of higher table game and slot revenue in New Jersey during the current year period and the impact of our launch in Michigan in late January of 2021.

Other. Other revenues increased $1.2 million, or 51.1%, to $3.7 million from $2.4 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Market access and live dealer studio broadcast revenues increased $1.1 million, or 61.1%, 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 $0.1 million, or 22.7%.

Operating Costs and Expenses.

Cost of Revenue. Cost of revenue increased $5.4 million, or 79.6%, for the three months ended March 31, 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 three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Advertising and Promotion. Advertising and promotion expenses increased $11.4 million, or 382.7%, to $14.4 million from $3.0 million for the three months ended March 31, 2021 compared to the three months ended March 31, 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 $4.4 million, or 258.3%, to $6.1 million from $1.7 million for the prior year comparable period. This increase is due largely to stock-based compensation of $2.3 million during the three months ended March 31, 2021, when there was no stock-based compensation expense in the prior year. Additionally, professional fees for audit services, tax services, legal services and other costs associated with being a public are up significantly over the prior year period.

Interest expense. Interest expense for the three months ended March 31, 2021 was $5.7 million as a result of the $300.0 million term loan credit agreement we entered into 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 three months ended March 31, 2021, we expensed $0.6 million in unamortized discount and loan origination costs as interest expense.



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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 three months ended March 31, 2021 amounted to $81.1 million and no such gains were recognized for the three months ended March 31, 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 three months ended march 31, 2021, partially offset by non-cash gains on the tax receivable agreement during the quarter.

Provision for Income Taxes. The provision for income taxes was a benefit of $0.5 million for the three months ended March 31, 2021 compared to tax expense of $1.7 million for the comparable prior year quarter. This decrease of $2.2 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, is primarily a result of the decrease in pre-tax taxable income for the period as the gain on the warrant derivative of $81.1 million and the loss attributable to the non-controlling interest for the three months ended March 31, 2021, 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 43.4% economic interest in the losses from GNOG LLC for the three months ended March 31, 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 31,350,625 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 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. On April 28, 2020, we entered into a term loan credit agreement that is guaranteed by the parent of Old GNOG, comprised of a $300.0 million interest only term loan due October 4, 2023. Net proceeds received from the term loan of $288.0, net of original issue discount, were sent to the parent of Old GNOG, who issued Old GNOG a note receivable due October 2024 (as amended and restated following the Acquisition Transaction, the "Second A&R Intercompany Note") (Note 10) 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, Second A&R Intercompany Note 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 Second A&R Intercompany Note which effectively, but indirectly provides pari passu security interest with the Golden Nugget, LLC senior secured credit facility.

In February 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 three months ended March 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. 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 ended December 31, 2020.



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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 through April 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 through April 2022, minus (B) the outstanding principal amount being prepaid.

Outlook. Considering that we have cash on hand of $153.6 million at March 31, 2021 and based on our current level of operations in New Jersey, we believe that cash on hand and cash generated from warrant exercises and cash generated from our New Jersey 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 the U.S. economy will continue to grow in 2021 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 capital 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 $25.1 million for the three months ended March 31, 2021 compared to $7.7 million used by operating activities for the three months ended March 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, stock-based compensation, gains on tax receivable agreement liability, amortization of debt issuance costs and discounts, depreciation and amortization and deferred taxes. Additionally, changes in working capital items such as accounts receivable, accounts payable, accrued liabilities, other assets and customer deposits can significantly affect operating cash flows. Cash flows used by operating activities during the three months ended March 31, 2021 were higher as a result of net income of $69.6 million for the three months ended March 31, 2021 being reduced by non-cash items totaling $79.3 million as compared to net income of $4.2 million for the three months ended March 31, 2020 being increased by non-cash items totaling $2.1 million. Working capital fluctuations further increased cash used in operating activities by $15.5 million for the three months ended March 31, 2021, most notably the increase in other assets, compared to cash used in operating activities of $14.0 million for the three months ended March 31, 2020.

Net cash provided by financing activities was $101.6 million for the three months ended March 31, 2021, compared to $2.4 million of cash used in financing activities for the three months ended March 31, 2020. The main driver of this variance is the $110.1 million in net cash received for warrant exercises offset by the repayment of $10.6 million of the term loan during the three months ended March 31, 2021. Dividends of $2.4 million were paid to the parent of Old GNOG during the comparable period in the prior year.



Critical Accounting Policies



Interim Financial Statements


The unaudited consolidated financial statements include all the accounts of GNOG and its subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). All significant intercompany accounts and transactions have been eliminated. Pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted. The interim financial information provided is unaudited, but includes all adjustments which management considers necessary for the fair presentation of the results for these periods. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period and should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's Form 10-K/A filed with the SEC.

In management's opinion, these unaudited consolidated financial statements contain all adjustments necessary to fairly present our financial position, results of operations, cash flows and changes in stockholders' equity for all periods presented. Interim results for the three months ended March 31, 2021 may not be indicative of the results that will be realized for the full year ending December 31, 2021.



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Use of Estimates


The preparation of these unaudited 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 tax receivable agreement liability. Actual results could differ from those estimates.




Reclassifications



Certain prior year amounts have been reclassified to conform to the current year presentation.

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 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 on who 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.

Volatility in the value of the public warrants and private may result in significant changes in the value of the derivatives and resulting gains and losses on our statement of operations.

For a complete discussion of our critical accounting policies and accounting estimates, please see our Annual Report for the year ended December 31, 2020.

Recent Accounting Pronouncements

In February 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 after December 15, 2021, and for interim periods within annual periods after December 15, 2022. In July 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.

In June 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 after December 15, 2019, with early adoption permitted for interim and annual periods beginning after December 15, 2018. In October 2019, the FASB approved a proposal which grants smaller reporting companies additional time to implement FASB standards on current expected credit losses (CECL) to January 2023. As a smaller reporting company, we will defer adoption of ASU No. 2016-13 until January 2023. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes-Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the timing of adopting this guidance and the impact of adoption on its financial position, results of operations and




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Financials (USD)
Sales 2020 - - -
Net income 2020 -28,9 M - -
Net cash 2020 1,02 M - -
P/E ratio 2020 -3,50x
Yield 2020 -
Capitalization 779 M 779 M -
EV / Sales 2019
EV / Sales 2020 -
Nbr of Employees -
Free-Float -
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