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 endedDecember 31, 2020 , filed with theSEC . 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 endedDecember 31, 2020 , filed with theSEC .
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 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). 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 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 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 "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". 21 Table of Contents On the terms and subject to the conditions set forth in the Merger Agreement, (a) at the Duke Effective Time (as defined in the Merger Agreement), Duke Merger Sub will be merged with and into DraftKings in accordance with theNevada 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 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 allowLandcadia HoldCo, LLC to become a wholly-owned subsidiary of the Company following the consummation of the DraftKings Merger. The Merger Agreement provides that upon the consummation of the DraftKings Merger, each holder of GNOG Shares (each, a "GNOG Shareholder") will receive 0.365 (the "Exchange Ratio") of a share of New DraftKings Class A common stock (the "New DraftKings Class A Common Stock") for each GNOG Share issued and outstanding immediately prior to the Gulf Effective Time, other than any Excluded Shares (as defined in the Merger Agreement). 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, (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 the Company's stockholders; (iv) the Commercial Agreement (as defined in the Merger Agreement) being in full force and effect; (v) the absence, since the date of the 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 the Company or DraftKings; and (vi) the Registration Statement on Form S-4 becoming effective in accordance with the provisions of the Securities Act of 1933 as amended
(the "Securities Act"). 22 Table of Contents 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. , aTexas corporation ("FEI"), Landry'sFertitta, LLC , aTexas limited liability company ("Landry's Fertitta"),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, Landry's Fertitta 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 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 inJuly 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 23
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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 inAtlantic 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) % 24 Table of Contents Three Months Ended September 30,
Nine Months Ended
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
Revenues.
Gaming. Gaming revenues increased$8.9 million , or 38.6%, to$31.8 million from$22.9 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 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$0.9 million , or 28.6%, to$3.9 million from$3.0 million for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 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 endedSeptember 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 inMichigan in lateJanuary 2021 increased cost of revenue for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 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 endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . This increase from the prior year comparable period is almost entirely attributable to our launch in theMichigan market in lateJanuary 2021 .
General and administrative. General and administrative expenses increased
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compensation of$3.4 million during the three months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 was$5.2 million as compared to$11.3 million for the three months endedSeptember 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 theDecember 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 endedSeptember 30, 2021 amounted to$18.9 million and no such gains or losses were recognized for the three months endedSeptember 30, 2020 . Provision for Income Taxes. The provision for income taxes was a benefit of$1.4 million for the three months endedSeptember 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 endedSeptember 30, 2021 as compared to 43.7% for the three months endedSeptember 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 endedSeptember 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 fromGNOG LLC for the three months endedSeptember 30, 2021 . 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.
Nine Months Ended
Revenues. Gaming. Gaming revenues increased$23.0 million , or 38.4%, to$82.9 million from$59.9 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 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$3.0 million , or 36.5%, to$11.2 million from$8.2 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 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 endedSeptember 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 inMichigan in lateJanuary 2021 and brand royalty expense paid to an affiliate which began inMay 2020 also increased cost of revenue for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 .
Advertising and promotion. Advertising and promotion expenses increased
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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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 was$16.0 million as compared to$19.1 million . We entered into a$300.0 million term loan credit agreement onApril 28, 2020 . We repaid$150.0 principal balance of the 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 during the nine months endedSeptember 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 endedSeptember 30, 2021 amounted to$71.0 million and no such gains were recognized for the nine months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 compared to tax expense of$0.9 million for the comparable prior year quarter. This decrease of$4.4 million for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , is primarily a result of pre-tax losses for the period as the gain on the warrant derivative of$71.0 million and the loss attributable to the non-controlling interest for the nine months endedSeptember 30, 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 an average 41.4% economic interest in the losses fromGNOG LLC for the nine months endedSeptember 30, 2021 . 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.
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 27
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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. OnApril 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 dueOctober 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 dueOctober 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 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 nine months endedSeptember 30, 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 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. Outlook. Considering that we have cash and cash equivalents of$134.4 million atSeptember 30, 2021 and based on our current level of operations inNew Jersey , we believe that cash on hand and cash generated from ourNew 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 theU.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 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$29.5 million for the nine months endedSeptember 30, 2021 compared to$24.4 million provided by operating activities for the nine months endedSeptember 30, 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 gains 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 nine months endedSeptember 30, 2021 were higher as a result of net income of$36.7 million for the nine months endedSeptember 30, 2021 being reduced by non-cash items totaling$62.8 million as compared to net income of$2.5 million for the nine months endedSeptember 30, 2020 being decreased by non-cash items totaling$0.6 million . Working capital fluctuations further increased cash used in operating activities by$3.4 million 28 Table of Contents
for the nine months endedSeptember 30, 2021 , most notably the increase in other assets, compared to cash provided by working capital fluctuations of$22.5 for the nine months endedSeptember 30, 2020 .
Net cash used in investing activities was
Net cash provided by financing activities was$102.1 million for nine months endedSeptember 30, 2021 , compared to$14.1 million of cash used in financing activities for the nine months endedSeptember 30, 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 nine months endedSeptember 30, 2021 . Dividends of$30.8 million were paid to the parent of Old GNOG during the comparable period in the prior year and contributions fromLF, LLC amounted to$16.8 million .
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 inthe United States of America ("GAAP"). All significant intercompany accounts and transactions have been eliminated. Pursuant to the rules and regulations of theSecurities 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 theSEC . 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 and nine months endedSeptember 30, 2021 may not be indicative of the results that will be realized for the full year endingDecember 31, 2021 .
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 TRA 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
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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
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.
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