LANA HLDG 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 elsewhere in this Annual Report. This "Management's Discussion and Analysis of Financial Condition and Results of Operations" has been amended and restated to give effect to the restatement of our financial statements, as more fully described in Note 2 to our financial statements entitled "Restatement of Previously Issued Financial Statements". For further detail regarding the restatement, see "Explanatory Note" and "Item 9A. Controls and Procedures." 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" and "Risk Factors." 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 andMichigan 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 theNew Jersey market in 2013 and we commenced operations inMichigan onJanuary 22, 2021 . We are authorized by theNew Jersey Division of Gaming Enforcement ("DGE") and theMichigan Gaming Control Board ("MGCB") to operate interactive real money online gaming inNew Jersey andMichigan . 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 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 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 ofGNOG LLC . (See Note 4 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. 46 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 is primarily through an increase in new patrons utilizing online gaming due to closures of land-based casinos and suspensions, postponement and cancellations of major sports seasons and sporting events, although sports betting accounted for less than 1% of our revenues for 2020. Land based casinos reopened in July with significant restrictions, which eased over time. However, virus cases began to increase and capacity restrictions were reinstituted. As a result, the ultimate impact of this pandemic on our financial and operating results is unknown and will depend, in part, on the length of time that these disruptions exist and the subsequent behavior of new patrons after land-based casinos reopen fully. 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. Operations Developments OnFebruary 24, 2021 , we announced that we had entered into a definitive agreement withTioga Downs Race Track, LLC . ("Tioga Downs") for future online gaming market access in the state ofNew York , subject to legislation, regulatory approval, license eligibility and availability. This agreement gives us market access to the state ofNew York for online casino wagering under a Tioga Downs' license, regulations permitting. As part of the 20-year agreement, we will pay Tioga Downs, one of only seven commercial and tribal casinos in the state, a percentage of our net gaming revenue, which will be subject to minimum royalty payments for the duration of the term.
On
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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 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
Labor. Labor costs include all personnel costs including salaries, payroll taxes, health insurance and other benefits for management and office personnel, as well as the dealers in our live dealer studio.
Gaming Taxes. Gaming taxes are imposed by the jurisdictions in which we operate, and are typically expressed as a percentage of internet gaming revenue and internet sports wagering revenue. These percentages may vary widely from one jurisdiction to the next as we enter new markets.
Royalty and Licenses Fees. Royalty and licenses fees include fees paid to platform providers, brand royalties paid to an affiliate and fees paid to content suppliers which are generally based on various revenue sharing arrangements or levels of activity.
Selling, General and Administrative Expenses. Selling, general and administrative expense includes advertising, payment processing fees and chargebacks, professional fees and other fees and expenses.
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Results of Operations
Year Ended December 31,
2020 2019 $ Change % Change
Revenues
Gaming $ 79,919 $ 47,694 $ 32,225 67.6 %
Other 11,201 7,727 3,474 45.0 %
Total revenue 91,120 55,421 35,699 64.4 %
Costs and expenses
Labor 9,026 7,102 1,924 27.1 %
Gaming taxes 17,238 9,985 7,253 72.6 %
Royalty and licenses fees 10,128 5,875 4,253 72.4 %
Selling, general and administrative
expense 25,909 14,687 11,222 76.4 %
Acquisition Transaction related
expenses 4,137 - 4,137 n/a
Depreciation and amortization 190 135 55 40.7 %
Total operating costs and expenses 66,628 37,784 28,844 76.3 %
Operating income 24,492 17,637 6,855 38.9 %
Other expense
Interest expense, net 38,492 6 38,486 n/a
Gain on warrant derivatives (39,586 ) - (39,586 ) n/a
Other expense 25,384 - 25,384 n/a
Total other expense 24,290 6 24,284 n/a
Income before income taxes 202 17,631 (17,429 ) (98.9 )%
Provision for income taxes (7,651 ) 5,960 (13,611 ) (228.4 )%
Net income 7,853 11,671 (3,818 ) (32.7 )%
Net loss attributable to
non-controlling interests 17,350 - 17,350 n/a
Net income attributable to GNOG
115.9 %
Year Ended
Revenues.
Gaming. Gaming revenues increased$32.2 million , or 67.6%, to$79.9 million from$47.7 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The increase was primarily the result of higher table game and slot revenue during the current year period resulting from an increase in new patrons using online gaming in light of the casino closures stemming from the outbreak of COVID-19. Other. Other revenues increased$3.5 million , or 45.0%, to$11.2 million from$7.7 million for the year endedDecember 31, 2020 compared to the comparable prior year period. Market access and live dealer studio broadcast revenues increased$2.9 million , or 48.3%, as royalties with existing partners increased and the addition of a new partner when compared to the prior year period. Reimbursable revenues under these arrangements also increased by$0.6 million , or 34.2%.
Operating Costs and Expenses.
Labor. Labor expense increased
Gaming Taxes. Gaming taxes increased
Royalty and Licenses Fees. Royalty and license fees increased$4.3 million , or 72.4%, for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 as a direct result of the increase in gaming revenues for the period as well as a brand royalty expense paid to an affiliate which began
May of 2020.
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Selling, General and Administrative Expenses. Selling, general and
administrative expense increased $11.2 million , or 76.4%, for the year ended
December 31, 2020 compared with the year ended December 31, 2019 . The increase
is primarily attributable to increased advertising expenditures and higher
payment processor fees. As a percentage of total revenue, selling general and
administrative expenses were 28.4% for the year ended December 31, 2020 as
compared to 26.5% for the year December 31, 2019 .
Acquisition related expenses. Acquisition related expenses totaled $4.1 million
for the year ended December 31, 2020 and represent costs incurred in connection
with the December 29, 2020 Acquisition Transaction consisting of professional
fees and other related expenses.
Interest expense. Interest expense for the year ended December 31, 2020
increased by $38.5 million as a result of the $300.0 million term loan credit
agreement we entered into on April 28, 2020 . We also repaid $150.0 principal
balance of the term loan in connection with the December 29, 2020 closing of the
Acquisition Transaction. In connection with this repayment, $8.3 million in
unamortized discount and loan origination coasts were expensed as interest
expense. Proceeds received from the initial term loan were distributed to LF
LLC .
Gain on warrant derivatives. In accordance with ASC 815-40, we classify our warrants as derivative liabilities measured at fair value, with changes in fair value each period reported in earnings. The gain on warrant derivatives amounted to$39.6 million for the year endedDecember 31, 2020 and no such gains were recognized for the year endedDecember 31, 2019 . Other expense. Other expense consists of prepayment premiums and other related costs associated with the repayment of$150.0 million principal amount of our term loan in conjunction with theDecember 29, 2020 closing of the Acquisition Transaction.
Provision for Income Taxes. The provision for income taxes decreased$13.6 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , primarily as a result of the decrease in pre-tax income for the period and the loss attributable to the non-controlling interest for the year endedDecember 31, 2020 , which is not subject to federal or state income tax in our consolidated statements of operations. The effective tax rate for the year endedDecember 31, 2020 was 19.4% compared to 33.8% in the prior year comparable period. This reduction in the effective tax rate for the year endedDecember 31, 2020 was the result of losses attributable to non-controlling interests for the post Acquisition Transaction period, which also reduces the amount of state income tax, and the change in unrecognized tax benefits for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Net loss attributable to non-controlling interests. Net loss attributable to non-controlling interests represents a 45.9% economic interest in our losses from the Closing Date throughDecember 31, 2020 . The non-controlling interests consist of the ClassB Units in Landcadia Holdco held byLF LLC that have no voting rights and that are redeemable, together with an equal number of Class B common stock, for either 31,350,625 shares of Class A common stock or an equal value of cash, at our election.
Year ended
Year Ended December 31,
2019 2018 $ Change % Change
REVENUES:
Gaming $ 47,694 $ 38,827 $ 8,867 22.8 %
Other 7,727 4,075 3,652 89.6 %
Total revenue 55,421 42,902 12,519 29.2 %
COSTS AND EXPENSES:
Labor 7,102 5,153 1,949 37.8 %
Gaming taxes 9,985 8,378 1,607 19.2 %
Royalty and licenses fees 5,875 4,530 1,345 29.7 %
Selling, general and administrative
expense 14,687 12,840 1,847 14.4 %
Depreciation and amortization 135 126 9 7.1 %
Total operating costs and expenses 37,784 31,027 6,757 21.8 %
OPERATING INCOME 17,637 11,875 5,762 48.5 %
OTHER EXPENSE:
Interest expense, net 6 8 (2 ) (25.0 )%
Total other expense 6 8 (2 ) (25.0 )%
Income before income taxes 17,631 11,867 5,764 48.6 %
Provision for income taxes 5,960 4,708 1,252 26.6 %
Net income $ 11,671 $ 7,159 $ 4,512 63.0 %
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Revenues.
Gaming. Gaming revenues increased$8.9 million , or 22.8%, to$47.7 million from$38.8 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The increase was primarily the result of higher table game and slot revenue during the current year as compared to the prior year. The increase in table games revenues was largely driven by Live Dealer, which grew significantly during the year endedDecember 31, 2019 . Other. Other revenues for the year endedDecember 31, 2019 increased$3.7 million , or 89.6%, to$7.7 million from$4.1 million for the comparable prior year period. Market access andLive Studio broadcast revenues increased$3.3 million , or 125.7%, as royalties with existing partners increased and the addition of a new partner for 2019. Reimbursable revenues under these arrangements also increased by$0.4 million , or 24.9%.
Operating Costs and Expenses.
Labor. Labor expense increased$1.9 million , or 37.8%, for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 , primarily as a result of the addition of more dealers in ourLive Studio and increased hours of operation. Gaming Taxes. Gaming taxes increased$1.6 million , or 19.2%, for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 as a direct result of the increase in casino gaming revenue for the year. Royalty and Licenses Fees. Royalty and license fees increased$1.3 million , or 29.7%, for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 as a direct result of the increase in casino gaming revenues for the year. Selling, General and Administrative Expenses. Selling, general and administrative expense increased$1.8 million , or 14.4%, for the year endedDecember 31, 2019 as compared with the year endedDecember 31, 2018 . The increase is primarily attributable to increased advertising expenditures and higher payment processor fees. As a percentage of total revenue, selling general and administrative expenses were 26.5% for the year endedDecember 31, 2019 as compared to 29.9% for the year endedDecember 31, 2018 . Provision for Income Taxes. The provision for income taxes increased$1.2 million , or 26.6%, for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 as a result the increase in pre- tax income for the year. The effective tax rate for the year endedDecember 31, 2019 was 33.8% compared to 39.7 % in the prior year comparable period. This decrease is attributable to a decrease in deferred state income taxes associated withNew Jersey state income tax rate reductions.
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. In the next twelve months, we expect to spend approximately$25.0 million in licensing and market access fees to expand operations toPennsylvania , WestVirginia, Illinois ,Virginia and other states. We also expect to incur losses in these new markets as we grow our business of an additional$30.0 million to$40.0 million in the next twelve months. We expect to become profitable in these new markets by the end of the third year of operations. 51 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. Our liquidity is subject to various risks including the risks identified in "Risk Factors" of this Annual Report. Immediately following the Acquisition Transaction, we had$80.0 million in cash. Pursuant to the redemption of our public warrants that closed onMarch 8, 2021 , we raised an additional$110.2 million and issued 9.6 million additional shares of our Class A common stock. Capital expenditures have historically not been significant uses of cash and are not expected to be going forward.
Credit Agreement. We are party to the Credit Agreement by and among
The Credit Agreement provides for senior secured term loans in the aggregate amount of$300.0 million . After giving effect to the Acquisition Transaction, including the debt repayment, the aggregate principal amount of indebtedness under the Credit Agreement is$150.0 million . As of the closing of the Acquisition Transaction, the outstanding senior secured term loans under the Credit Agreement are set to mature onOctober 4, 2023 . All outstanding term loans bear interest on the daily balance thereof, at our option, at either (1) an adjusted LIBOR or (2) a base rate, in each case plus an applicable margin. The applicable margin is 12.0% with respect to LIBOR loans and 11.0% with respect to base rate loans. Following the closing of the Acquisition Transaction, a portion of the amount payable on the outstanding term loans will be provided by payments made byLF LLC toGNOG LLC under the Second A&R Intercompany Note, which as of Closing, will require payments in an amount equal to six percent (6%) per annum on the outstanding principal balance of the Second A&R Intercompany Note, payable on a quarterly basis as provided for therein in return for additional Class B common stock and Holdco Class B units. None of such payments will reduce the principal balance on the Second A&R Intercompany Note, rather such payments, and the related equity issuances, are treated as capital transactions for accounting purposes. OnDecember 31, 2020 , the Company agreed that it would, in lieu ofLF LLC , pay the required interest payment of$2.3 million toGNOG LLC due on such date under the Second A&R Intercompany Note. As a result of the Company making such payment, no shares of Class B common stock or HoldCo ClassB Units were issued toLF LLC under theHoldCo
LLC Agreement. The Credit Agreement was amended onJune 12, 2020 andJune 29, 2020 to amend certain provisions to permit our subsidiaryGNOG Holdco and LF LLC to enter into the Purchase Agreement and consummate the Acquisition Transaction including, but not limited to, amendments to permit the formation of GNOG Holdco, the merger ofGNOG Inc. intoGNOG LLC , and the sale byLF LLC of the equity in GNOG Holdco. Outlook. Considering that we have cash on hand of$77.9 million atDecember 31, 2020 and the redemption of our public warrants, which raised$110.2 million in cash throughMarch 8, 2021 , and based on our current level of operations, we believe that cash on hand and cash generated from warrant exercises 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 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.
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Cash Flows. Net cash used by operating activities was$4.9 million for the year endedDecember 31, 2020 compared to$35.2 million provided by operating activities for the year endedDecember 31, 2019 . Factors affecting changes in operating cash flows are similar to those that impact net income, with the exception of non-cash items such as amortization of debt issuance costs and discounts, depreciation and amortization, stock-based compensation and deferred taxes. Additionally, changes in working capital items such as accounts receivable, accounts payable, accrued liabilities and customer deposits can significantly affect operating cash flows. Cash flows from operating activities during the year endedDecember 31, 2020 were lower as a result of a net loss of$31.7 million for the year endedDecember 31, 2020 as compared to net income of$11.7 million for the year endedDecember 31, 2019 . In the year endedDecember 31, 2020 , non-cash items offsetting these net losses totaled$2.0 million compared to$0.4 million for the year endedDecember 31 2019 . An increase in working capital items of$1.7 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 also reduced
the cash used in operations.
Net cash used in investing activities was
Net cash provided by financing activities was$98.5 million for the year endedDecember 31, 2020 , compared to$10.9 million of cash used in financing activities for the year endedDecember 31, 2019 . The main driver of this variance is the$270.4 million cash received in the Acquisition Transaction offset by the repayment of$150.0 million of the term loan. There was also a larger dividend paid to the parent of Old GNOG and amounts paid for debt issuance costs in 2020, offset by a contribution from our parent. Proceeds received from the term loan were sent toLF LLC , the parent of Old GNOG,who issued us a note receivable dueOctober 24, 2024 . Net cash provided by operating activities was$35.2 million for the year endedDecember 31, 2019 compared to$26.4 million for the year endedDecember 31, 2018 . Factors affecting changes in operating cash flows are similar to those that impact net income, with the exception of non-cash items such as depreciation and amortization and deferred taxes. Additionally, changes in working capital items such as accounts receivable, accounts payable, accrued liabilities and customer deposits can significantly affect operating cash flows. Cash flows from operating activities during 2019 were higher as a result of an increase in net income of$4.5 million and working capital changes that increased cash by an additional$4.7 million as compared to the prior year. The most significant working capital changes resulted from an increase in customer deposits associated with increased wagering activity and an increase in deposits by our skin partners in excess of required amounts, which increased restricted cash during 2019. These increases were partially offset by the reduction in cash flows of$0.4 million compared to 2018 for non-cash items, primarily deferred taxes. Net cash used in financing activities were$10.9 million for the year endedDecember 31, 2019 , or$4.1 million less than was used in 2018. This decrease relates to the repayment of a note payable to our parent during the year endedDecember 31, 2018 Contractual Obligations
As ofDecember 31, 2020 , we had contractual obligations as described below. Our obligations include "off-balance sheet arrangements" whereby liabilities associated with unconditional purchase obligations are not fully reflected in our balance sheets (in thousands). 2021 2022 2023 2024 2025 Thereafter Total Term loan credit agreement $ - $ -$ 150,000 $ - $ - $ -$ 150,000 Interest on term loan credit agreement 19,771 19,771 15,004 - - - 54,546 Operating leases 112 112 112 112 84 - 532 Mezzanine loan commitment 30,000 30,000 Other contractual obligations 12,479 4,300 2,800 3,400 16,584 5,750 45,313 62,362 24,183 167,916 3,512 16,668 5,750 280,391 (1) In addition to the contractual obligations in the table above, onNovember 18, 2020 , we entered into a definitive agreement withDanville Development , for market access to theState of Illinois . Pursuant to this agreement, we have committed to cause to be provided a mezzanine loan in the amount of$30.0 million toDanville Development for the development and construction a new Golden Nugget branded casino inDanville, Illinois . This mezzanine loan is currently expected to be fully funded in the fourth quarter of 2021. 53 Critical Accounting Policies The acquisition ofGNOG LLC has been accounted for as a reverse recapitalization. Under this method of accounting,GNOG LLC was treated as the acquirer for financial reporting purposes. Therefore, the consolidated financial statements included herein reflect (i) the historical operating results ofGNOG LLC prior to the Acquisition Transaction, (ii) our combined results following the Acquisition Transaction, (iii) the assets, liabilities and accumulated deficit ofGNOG LLC at their historical amounts, and (iv) our equity and earnings per share presented for the period from the Closing Date through the end of the year.
These audited consolidated financial statements include all the accounts of GNOG and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The financial statements included herein have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). GAAP 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. Emerging Growth Company Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. The Partnership has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Partnership, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Partnership's consolidated financial statements with another company which is neither an emerging growth company nor an emerging growth company, which has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting
standards used. Revenue and Cost Recognition
We recognize revenue for services when the services are performed and when we have no substantive performance obligations remaining. Online real money gaming revenues are recognized as the aggregate net difference between gaming wins and losses and are recorded as gaming revenue in the accompanying statements of operations, with liabilities recognized for funds deposited by customers before gaming play occurs. We report 100% of wins as revenue and our content provider's share is reported in costs and expenses. Jackpots, other than the incremental progressive jackpots, are recognized at the time they are won by customers. We accrue the incremental progressive jackpots as the progressive games are played, and the progressive jackpot amount increases, with a corresponding reduction to gaming revenues. Free play and other incentives to customers related to internet gaming play are recorded as a reduction of gaming revenue. We are contracted to manage multi-year market access agreements with online gaming operators that are authorized to operate real money online gaming and sports betting inNew Jersey , for which we receive royalties and cost reimbursement. Initial fees received for the market access agreements and prepaid guaranteed minimum royalties are deferred and recognized over the term of the contract as the performance obligations are satisfied. Gaming Taxes
We incur gaming taxes, which are determined by each jurisdiction in which we operate, and are generally based on a percentage of gross gaming revenues ("GGR") minus applicable deductions. We record a liability for gaming taxes payable as accrued gaming and related taxes in our consolidated balance sheets.
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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 onwho holds the warrant. If the sponsor warrants are held by someone other than the initial purchasers or their permitted transferees, the sponsor warrants will be redeemable by us and exercisable by such holders on the same basis as the public warrants.This feature precludes the sponsor warrants from being indexed to our common stock, and thus the warrants are classified as a liability measured at fair value, with changes in fair value each period reported in earnings.
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.
As ofDecember 29, 2020 , the closing date of the Acquisition Transaction, the value of the public warrants and sponsor warrants was$109.6 million and$106.3 million , respectively. Subsequently we adjusted the liability to fair value atDecember 31, 2020 and recorded a gain on warrant derivatives of$39.6 million in on our statement of operations. As ofDecember 31, 2020 the fair value of our warrant derivative liabilities totaled$176.4 million . Advertising Advertising costs are expensed as incurred during such year and are recorded a selling, general and administrative expense in our accompanying statements of operations. Advertising expenses were$17.5 million ,$9.3 million and$8.2 million , in 2020, 2019 and 2018, respectively. Stock-Based Compensation
We record compensation expense over the requisite service period for all stock-based compensation based on the grant date fair value of the award. The expense is included in selling, general and administrative expense in our statements of operations. Our policy is to account for forfeitures of share-based compensation awards as they occur.
Income Taxes
We were subject to a tax sharing agreement with certain affiliates prior to theDecember 29, 2020 closing date of the Acquisition Transaction and we recognized tax assets and liabilities associated with temporary differences on a separate return basis in accordance with GAAP. Following the consummation of the Acquisition Transaction, we operate as an Up-C, meaning that substantially all of our assets are held indirectly throughGolden Nugget Online Gaming LLC ("GNOG LLC "), our indirect subsidiary, and our business is conducted throughGNOG LLC . We follow the liability method of accounting for income taxes. Under this method, deferred income taxes are recorded based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the underlying assets are realized or liabilities are settled. A valuation allowance reduces deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. We use a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order to be recognized in the financial statements. Accordingly, we report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. 55
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