Item 1. Business.
Unless the context otherwise
requires, the “Company”, “DraftKings”, “New DraftKings” “we,” “our,” “us”
and similar terms refer to DraftKings Inc, a Nevada corporation.
Overview
We are a digital sports entertainment
and gaming company. We provide users with daily fantasy sports, sports betting (“Sportsbook”) and online casino (“iGaming”)
opportunities, and we are also involved in the design, development, and licensing of sports betting and casino gaming software for online
and retail sportsbook and casino gaming products.
Our mission is to make life
more exciting by responsibly creating the world’s favorite real-money games and betting experiences. We accomplish this by creating
an environment where our users can find enjoyment and fulfillment through daily fantasy sports contests, sports betting and iGaming.
We have established a following
among “skin-in-the-game” sports fans brought together by our robust daily fantasy sports technology that powers millions of
contest entries in peer-to-peer competitions every week. We leverage our technology, the scale and density of our user base and insights
from approximately 5.5 million cumulative unique paid users to continuously improve our analytics, marketing and technology. For example,
in 2013 we launched the first mobile app in daily fantasy sports, anticipating the behavioral shift of a user base that had historically
relied on a desktop-only experience. Five years later, in August 2018, we launched the first mobile sportsbook in New Jersey and
as of December 31, 2020, we offer our mobile sportsbook, retail sportsbook, iGaming or business-to-business products in 10 states
as we continue to expand our geographic footprint.
Our priorities are to (a) continue
to invest in our products and technology, (b) launch our product offerings in new geographies, (c) effectively integrate SBTech
(Global) Limited (“SBTech” or “SBT”) to form a vertically integrated business, (d) create replicable and
predictable state-level unit economics in sports betting and iGaming and (e) expand our consumer offerings.
We aspire to develop new
and innovative products with our users in mind and to be as trustworthy as we are innovative in everything we bring to market. This is
realized in what we believe to be leading-edge, proprietary technology that powers real-money games and betting experiences designed for
the “skin-in-the-game” sports fan. Our vision for DraftKings has been shaped by these users, both in who they are today and
who we anticipate they will become as the entertainment and gaming industries evolve. This vision underpins our position as a leader in
today’s fast-growing global entertainment and gaming industries.
During the fiscal years ended
December 31, 2020, 2019 and 2018 we had revenue of $614.5 million, $323.4 million, $226.3 million, approximately 883 thousand,
684 thousand and 601 thousand average monthly unique payers (“MUPs”) and an average revenue per MUP for our business-to-consumer
(“B2C”) operations (“ARPMUP”) of $51, $39 and $31. Refer to discussion in section “Key Performance Indicators
– B2C Operations” within Management’s Discussion and Analysis of Financial Condition and Results of Operations included
herein for information regarding our MUPs and ARPMUP.
Business Combination
We were incorporated in Nevada
as DEAC NV Merger Corp., a wholly owned subsidiary of our legal predecessor, Diamond Eagle Acquisition Corp. (“DEAC”), a special
purpose acquisition company. On April 23, 2020, DEAC consummated the transactions contemplated by the Business Combination Agreement
dated December 22, 2019, as amended on April 7, 2020, (the “Business Combination”) and, in connection therewith:
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i.
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DEAC merged with and into us, whereby we survived the merger and became the successor issuer to DEAC;
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ii.
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we changed our name to “DraftKings Inc.”;
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iii.
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we acquired DraftKings Inc., a Delaware corporation (“Old DK”), by way of a merger;
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iv.
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we acquired all of the issued and outstanding share capital of SBTech (the “SBTech Acquisition”); and
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v.
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DEAC’s publicly traded units (Nasdaq: DEACU) separated into their components of publicly traded DEAC Class A common stock (Nasdaq: DEAC) and DEAC public warrants (Nasdaq: DEACW), and each outstanding share of DEAC Class A common stock was exchanged, on a one-for-one basis, for shares of our Class A common stock and all of DEAC’s outstanding warrants became warrants to acquire shares of our Class A common stock.
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Upon consummation of the preceding transactions:
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(i)
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Old DK and SBTech became wholly owned subsidiaries of the Company; and
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(ii)
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beginning April 24, 2020, our shares of Class A common stock traded on the Nasdaq under the ticker symbol “DKNG” and our warrants traded on Nasdaq under the ticker symbol “DKNGW.” On July 7, 2020 we redeemed all of our outstanding public warrants that had not been exercised as of July 2, 2020 and on July 20, 2020, we delisted our publicly traded warrants. Only our Class A common stock continues to be traded on the Nasdaq.
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Our Products
Our revenues are predominantly
generated through our two reportable segments B2C and business-to-business (“B2B”) offerings.
Business-to-consumer
We have three main B2C product
offerings — daily fantasy sports (“DFS”), Sportsbook and iGaming. We consider these three offerings to
be of a similar class of product, and together they accounted for 96%, 95% and 97% of DraftKings’ B2C revenues for the fiscal years
ended December 31, 2020, 2019 and 2018, respectively. DFS, which was our sole product offering until 2018, historically drove our
revenue results and accounts for a majority of our users; however, since we launched Sportsbook and iGaming in 2018, states where Sportsbook
and iGaming have been approved accounted for a rapidly growing proportion of our users, which has contributed to our revenue growth. In
addition to our three main product offerings, our B2C segment also offers advertising and sponsorship packages to targeted advertisers
across our DFS product offerings, free games and content.
Below is a breakdown of how
each of DraftKings’ B2C offerings function:
Daily
Fantasy Sports - Since our launch, we have monetized our DFS offering by facilitating peer-to-peer play, whereby users compete
against each other for prize money. We provide users with technology that establishes DFS contests, scores the contests, distributes the
prizes and performs other administrative activities to enable the “skin-in-the-game” sports fan experience. Our revenue is
the difference between the entry fees collected and the amounts paid out to users as prizes and customer incentives in a period.
Sportsbook
- Sports betting involves a user placing a bet by wagering money on an event at some fixed odds (“proposition”)
determined by DraftKings. In the event the user wins, DraftKings pays out the bet. Similar to DFS, Sportsbook engages consumers in their
sports viewing experience. Our Sportsbook revenue is generated by setting odds that are intended to provide a built-in theoretical margin
in each proposition offered to our users. While the actual betting patterns of our users and outcomes of individual events may cause volatility
in our revenue, we believe we can deliver a stable betting win margin over the long term.
Revenue is realized by taking the settled
handle for betting markets that have been resolved and subtracting the payouts for these betting markets such that the difference is the
gross revenue, or “hold.” In addition to our online Sportsbook, we also maintain limited retail distribution in four states,
in which our retail revenue is subject to individual agreements with a land-based casino partner (a “skin”) that provide for
a revenue share. Retail distribution leverages the foot traffic for existing casino properties to convert their customers to bet in our
Sportsbook while on premise.
iGaming
- iGaming, or online casino, offerings typically include the full suite of games available in land-based casinos, such as blackjack,
roulette, baccarat and slot machines. For these offerings, we function similarly to land-based casinos, generating revenue through hold,
or gross winnings, as users play against the house. In iGaming, we believe there is typically lower volatility versus land-based casinos
since the average return to a player for specific games is easier to predict in advance based on game rules and statistics.
Our iGaming offering consists of a
combination of games that we have built in-house and licensed content from suppliers such as International Gaming Technology, iForium,
Scientific Games Corporation, Spin and Evolution for Live Dealer services. The latter are subject to standard revenue-sharing agreements
specific to each supplier, whereby the supplier receives a percentage of the net gaming revenue generated from their respective casino
games played utilizing our technology dependent on DraftKings’ overall gross gaming revenue for iGaming. In exchange, DraftKings
receives a limited license to offer the games to users in jurisdictions where use is approved by regulatory authorities. Revenue generated
through our self-developed major casino games such as blackjack results in decreased revenue share payments as a percent of revenue.
Advertising
and Sponsorship - Our advertising packages range from standard ad placements and background ad placements to more high-touch
integrations, such as sponsored DFS contest series or custom site takeovers. These are typically served and tracked by a range of advertising
products that have been built directly into our offerings and feature partnerships with brand categories ranging from entertainment
to food to automotive.
Each advertising package is bespoke,
and we offer each client a custom “menu” of advertising options, which include online media (such as display, video and audio
advertisements and page and “skin” sponsorship takeovers), custom content, including branded video content, live events
such as sponsored watch parties and sponsored free or paid games, including daily fantasy, pick’em and bracket games.
Each advertising package has a different
pricing model, with a variety of factors affecting the pricing of a particular package including, but not limited to, (i) the sport
to which the package relates and (ii) the demand for, and supply of, the individual package components.
Sponsorships and custom-built games
and content typically have fixed fee pricing. Other packages, such as custom-branded video content or online advertisements, are sold
with a guaranteed number of impressions, which are priced per a certain number of guaranteed impressions. Each time a consumer sees an
advertisement while playing, watching, reading or listening to a piece of content or playing a game, an impression is counted.
Offsetting our revenues attributable
to the B2C business is the portion of gross revenue that we allocate to new and existing user incentives and promotions, which are awarded
as a result of game play or at our discretion, through loyalty programs, free plays, deposit bonuses, discounts, rebates or other rewards
and incentives. These offsets can be redeemed across multiple product offerings and are generally used to acquire new users, reactivate
prior users and increase monetization from active users. We leverage our return on investment models that are based on lifetime value
and expected reactivation rates to determine appropriate promotional levels.
Business-to-business
We supply B2B sports betting
and iGaming services globally for various gaming operators, resellers and government-run lotteries. Our B2B business generates revenue
from operators by providing sports betting and integration to iGaming content directly to operators in exchange for a share of operators’
revenues, as well as through fixed fee contracts with resellers. Contracts with business customers are typically awarded through a sales
process or request for proposal.
In addition to providing
for a share of gaming revenue, our B2B direct customer contracts are typically non-exclusive and run for a term of three to five years
(with automatic renewal terms). Our agreements with resellers typically provide for a base fee plus a fixed monthly fee determined by
the number of operators with which the reseller contracts to access our B2B software and typically run for a term of three years
(with automatic renewal terms).
Seasonality
Our business, particularly
our B2C segment, experiences seasonality based on the relative popularity of certain sports. Although sporting events occur throughout
the year, our users are typically most active in the fourth quarter due to the overlapping calendars of the NFL and NBA seasons, which
are our most popular sports.
Our Technology and Product Development
In order to build the best
real-money games and product offerings, we have invested in core disciplines across our technology, analytics and marketing, which have
allowed us to rapidly bring innovative new experiences to market while gaining a unique understanding of our users. The result has been
market leadership in our industry, fueled by a brand reputation and a depth of user trust that has set us apart from our competitors.
Our product offerings are
comprised of varying levels of proprietary and third-party software. These product offerings are bound together with a common account
management and regulatory compliance service and can be accessed with the same account and wallet. Across our product offerings, we have
endeavored to own the technology in-house for any critical component and to utilize a combination of new technologies, including data
science and machine learning, to optimize conversion and efficiency.
DraftKings’ core product
offerings are built on top of integrated, proprietary account management technology. This technology provides our users with access to
their account history across all product offerings and a uniform identity verification system, which is critical in enabling seamless
navigation from our national DFS audience to Sportsbook and iGaming products, as existing DFS users need not manage a separate set of
account credentials and payment methods for each product offering. Our users also enjoy a highly functional wallet which, in many cases,
permits user funds to flow freely from product to product. The technology is certified to safely store user payment information, which
reduces our dependency on any particular payment processor, provides redundancy and gives us the flexibility to route our payment volume
to a processor of our choosing. In addition, our technology is built to be customizable to the specific regulations of individual jurisdictions.
Through our B2B business, we also maintain an account management service that is used by our B2B operators, and as a result, we expect
to realize synergies following completion of our integration with SBTech.
Across our product offerings,
we actively use data science and machine learning to help optimize conversion and monetization. Within the DFS offering, data science
algorithms are used to customize a user’s contest home screen based upon his or her past play history. We build recommendations
by identifying the type of contests that a user is most likely to play, along with the entry fee and prize structure that he or she will
find most appealing. In addition, contest-pacing algorithms identify contests that might present a financial exposure and increase the
contests’ visibility within the product appropriately. Similarly, within the Sportsbook offering, recommendation engines are used
to present betting markets to users based upon their past play history and location. These services are also critical to our back-end
infrastructure, as they drive key elements of our fraud and compliance program.
Marketing
User
Acquisition and Retention - Our ability to effectively market is paramount to our operational success. Utilizing a blend of
analytics and data science as our foundation, we leverage our marketing to acquire, retain and reactivate users while building a trusted
consumer-facing brand. We use a variety of free and paid marketing channels, in combination with compelling offers and exciting games,
to achieve our objectives. Furthermore, we optimize our marketing spend using data collected since the beginning of our operations, as
well as additional data that we collect from vendors, partners and data providers. Our marketing spend is based on a return-on-investment
model that considers a variety of factors, including the performance of different marketing channels, predicted lifetime value and behavior
of users across various product offerings, the location of our users and our estimate of when enabling legislation and regulations for
sports betting and iGaming may come to fruition.
Where paid marketing is concerned,
we leverage a broad array of advertising channels, including television, radio, social media platforms such as Facebook, Instagram,
Twitter and Snap, affiliates and paid and organic search, and other digital channels such as mobile display. For Sportsbook and iGaming,
these efforts are concentrated within the specific jurisdictions that have passed enabling legislation and regulations, and in which we
operate or intend to operate (which vary on a per-offering basis). Our marketing expenditures tend to be highly seasonal, with most spend
correlating with the start of a sports season and during its playoffs and championships.
In addition to traditional paid advertising
channels, we cross-promote our product offerings to our existing user base through internal channels such as mobile push notifications,
email and text messages, and external channels such as Facebook, Twitter, Instagram and Snapchat. Through those channels, we use
a combination of content, contests and promotions to engage existing users. Additionally, we incentivize our users to refer new users
through our “Refer-a-Friend” program, offering incentives such as free entries into tournaments or free bets if the referred
user ultimately interacts with our product offerings.
Team
and League Relationships - We engage in relationships with sports leagues to improve our brand and awareness, acquire users,
improve user retention and create differentiated experiences for our users.
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In September 2019, we entered into a multi-year relationship with NFL Properties LLC and NFL Enterprises LLC in which our companies agreed to collaborate on a variety of content and product offerings on the DraftKings DFS app, as well as integrations across NFL media properties.
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In July 2019, we entered into a multi-year relationship with PGA Tour, Inc and PGATOUR.COM, LLC. As part of the relationship, DraftKings’ daily fantasy golf players will have the ability to receive real-time video highlights for players in their respective lineups. Other elements of this relationship will create expanded DFS-specific content offerings and brand integration into both the PGA TOUR and DraftKings’ offerings.
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In August 2020, we expanded our partnership with Major League Baseball to remain the official and exclusive daily fantasy sports partner of the league. The extension includes an expanded partnership providing for an increase in DraftKings’ content rights, product integration and prizing within DraftKings’ DFS games.
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We engage in similar multi-year relationships
with professional sports teams, which serve to bolster our brand affiliation and create unique collaborative integrations for our users.
We also engage in relationship deals
with media companies to create content and integrated marketing experiences. In July 2015, we entered into a multi-year relationship
with Fox Networks Group, Inc. (“FOX”), which provided DraftKings with committed media and integrations across FOX’s
national, local and digital properties. With this relationship, FOX also made an investment in DraftKings. In September 2020, we
entered into a multi-year agreement with ESPN to become a co-exclusive sportsbook link-out provider and exclusive daily fantasy sports
link-out provider across a selection of ESPN’s digital properties. Under the agreement, we will be able to advertise our product
offerings across ESPN’s digital platforms and through integrations into ESPN programming. More recently, we have established major
partnerships with media entities like Vox and Bleacher Report as we seek to grow our audience of U.S. sports fans.
B2B
Business Marketing - Our core B2B marketing strategy is centered around attending and exhibiting at major trade shows around
the world. SBTech’s trade show marketing is supplemented with digital and offline marketing campaigns in leading industry publications,
websites, regular media pieces and participation on industry panels. SBTech’s reputation and customer testimonials also assist in
its marketing and business efforts.
Distribution
We distribute our B2C product
offerings through various channels, including traditional websites, direct app downloads and global direct-to-consumer digital platforms
such as the Apple App Store and the Google Play store. These two digital platforms are the main distribution channels for our product
offerings. Our DFS product offering is delivered as a free application through both the Apple App Store and Google Play Store and is also
accessible via mobile and traditional websites. Our Sportsbook and iGaming product offerings are primarily distributed through the Apple
App Store and a traditional website. We allow our Android Sportsbook and iGaming users to install our Sportsbook and iGaming product offerings
through our website. We derive nearly all of our revenue through products distributed via the Apple App Store, Google Play Store and via
traditional websites. For all of our offerings, neither Apple nor Google take any revenue share for distributing our product.
For our B2B segment, Sportsbook
and iGaming products and services are distributed online via the Apple App Store, Google Play Store and traditional websites by operators
that have licensed such products and services directly from SBTech, while retail products and services are distributed primarily via self-service
betting terminals and standalone computer terminals. Similarly, Apple and Google do not take any revenue share for distributing those
products and services. We also license our B2B products and services to resellers (through a fixed-fee model) who sublicense to operators,
and in such cases, the reseller is responsible for the maintenance of the products and services.
Intellectual Property
Our business substantially
relies on the creation, acquisition, use and protection of intellectual property. Some of this intellectual property is in the form of
software code, patented technology and trade secrets that we use to develop and properly run our DFS, Sportsbook and iGaming offerings
and related services. We also create intellectual property that includes proprietary daily fantasy sports, sports betting and iGaming-related
technology and content as well as proprietary data acquired from the use of our daily fantasy sports, sports betting and iGaming product
offerings.
While most of the intellectual
property we use is created by us, we have obtained rights to use intellectual property of third parties through licenses and service agreements
with those third parties. Although we believe these licenses are sufficient for the operation of the company, these licenses typically
limit our use of the third parties’ intellectual property to specific uses and for specific time periods.
We protect our intellectual
property rights by relying on federal, state and common law rights, as well as contractual restrictions. We control access to our proprietary
technology by entering into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality
agreements with third parties. We also engage in monitoring the activities of third parties with respect to potential infringing uses
of our intellectual property by third parties.
We actively seek patent protection
covering inventions originating from us and, from time to time, review opportunities to acquire patents to the extent we believe such
patents may be useful or relevant to our business.
In addition to these contractual
arrangements, we also rely on a combination of trade secret, copyright, trademark, trade dress, domain name and patents to protect our
DFS, Sportsbook and iGaming product offerings and other intellectual property. We typically own the copyright to the software code to
our content, as well as trademarks under which our DFS, Sportsbook and iGaming product offerings and related services are marketed. We
pursue the registration of our domain names, trademarks, and service marks in the United States and in locations outside the United States.
Our registered trademarks in the United States include “DraftKings,” and the names of our services and applications, among
others.
Competition
We operate in the global
entertainment and gaming industries with our business-to-consumer offerings such as DFS, Sportsbook and iGaming, and our business-to-business
offerings. Our users face a vast array of entertainment choices. Other forms of entertainment, such as television, movies, sporting events
and in-person casinos, are more well established and may be perceived by our users to offer greater variety, affordability, interactivity
and enjoyment. We compete with these other forms of entertainment for the discretionary time and income of our users.
The specific industries in
which we operate are characterized by dynamic customer demand and technological advances, and there is intense competition among online
gaming and entertainment providers. A number of established, well-financed companies producing online gaming and/or interactive entertainment
products and services compete with our offerings, and other well-capitalized companies may introduce competitive services. There has also
been considerable consolidation among competitors in the entertainment and gaming industries and such consolidation and future consolidation
could result in the formation of larger competitors with increased financial resources and altered cost structures, which may enable them
to offer more competitive products, gain a larger market share, expand offerings and broaden their geographic scope of operations.
Human Capital Resources
As a multinational technology
company with over 2,600 employees located in eight countries, our business success is driven by our highly skilled workforce. With our
global technology and product team, consisting of over 1,350 employees (which includes over 1,100 engineers), we are well positioned to
deliver new, innovative and exciting products to our growing base of customers.
At DraftKings, we recognize
that engaging and developing our employees is a key to our success and we rely on attracting and retaining our talent to deliver on DraftKings’
goal to be a leader in today’s fast-growing global entertainment and gaming industries. We routinely gauge our employees’
level of engagement and satisfaction through quarterly pulse surveys. These surveys ensure we hear directly from our valuable employees
on how we can better focus on the following areas: (i) DraftKings’ mission/vision, (ii) role clarity and engagement, (iii) employee
development and (iv) inclusion, equity and belonging.
We have committed to and
formalized employee development programs that support inclusion, equity and belonging, and promote creativity and innovation through various
leadership and talent management programs. DraftKings’ talent training programs are designed to provide increased career and internal
mobility for our employees, identify development opportunities, and proactively support succession planning.
We also offer our employees
a holistic total rewards package with premier health and welfare programs for employees and family members. In addition, every employee
is eligible for equity awards to share in the Company’s financial success. Our unlimited paid time off programs enable our workforce
to enjoy personal time away from their job responsibilities.
In early March 2020,
we took swift action to protect our employees’ health in response to the COVID-19 pandemic, including closing our offices. We have
encouraged most of our employees to work from home through at least July 2021, when we plan to reassess the global health situation
and make decisions about the timing of reopening our offices, with the safety of our employees being the highest priority. In the meantime,
we have implemented health and safety protocols in our offices to ensure that we are ready for the safe return of our employees to our
offices when the time comes. In order to ensure the success of our employees during the shift to remote work, we developed training
resources for managers to ensure they had the proper skills to lead remote teams and delivered trainings to employees on how to be effective
while working remotely.
Government Regulation
DraftKings is subject to
various U.S. and foreign laws and regulations that affect our ability to operate our DFS, Sportsbook and iGaming product offerings. These
product offerings are generally subject to extensive and evolving regulations that could change based on political and social norms and
that could be interpreted in ways that could negatively impact our business.
The gaming industry (inclusive
of our iGaming and Sportsbook product offerings) is highly regulated and we must maintain licenses and pay gaming taxes or a percentage
of revenue where required by the jurisdictions in which we operate in order to continue our operations. Our business is subject to extensive
regulation under the laws, rules and regulations of the jurisdictions in which we operate. These laws, rules and regulations
generally concern the responsibility, financial stability, integrity and character of the owners, managers and persons with material financial
interests in the gaming operations along with the integrity and security of the iGaming and Sportsbook product offerings. Violations of
laws or regulations in one jurisdiction could result in disciplinary action in that and other jurisdictions.
Gaming laws are generally
based upon declarations of public policy designed to protect gaming consumers and the viability and integrity of the gaming industry.
Gaming laws also may be designed to protect and maximize state and local tax revenues, as well as to enhance economic development and
tourism. To accomplish these public policy goals, gaming laws establish stringent procedures to ensure that participants in the gaming
industry meet certain standards of character and responsibility.
Licensing and Suitability Determinations
In order to operate in certain jurisdictions,
we must obtain either a temporary or permanent license or determination of suitability from the responsible authorities. We seek to ensure
that we obtain all necessary licenses to develop and put forth our offerings in the jurisdictions in which we operate and where our users
are located.
Gaming laws in certain jurisdictions
require us, and each of our subsidiaries engaged in gaming operations, certain of our directors, officers and employees, and in some cases,
certain of our shareholders, to obtain licenses from gaming authorities. Such licenses typically require a determination that the applicant
qualifies or is suitable to hold the license. When determining whether to grant such a license to an applicant, gaming authorities generally
consider: (i) the financial stability, integrity and responsibility of the applicant (including verification of the applicant’s
sources of funding); (ii) the quality and security of the applicant’s online real-money gaming platform, hardware and
related software (including the platform’s ability to operate in compliance with local regulation, as applicable); (iii) the
applicant’s history; (iv) the applicant’s ability to operate its gaming business in a socially responsible manner;
and (v) in certain circumstances, the effect on competition.
Gaming authorities may, subject to
certain administrative procedural requirements, (i) deny an application, or limit, condition, revoke or suspend any license issued
by them; (ii) impose fines, either on a mandatory basis or as a consensual settlement of regulatory action; (iii) demand
that named individuals or shareholders be disassociated from a gaming business; and (iv) in serious cases, liaise with local
prosecutors to pursue legal action, which may result in civil or criminal penalties.
Events that may trigger revocation
of such a gaming license or another form of sanction vary by jurisdiction. However, typical events include, among others: (i) conviction
in any jurisdiction of certain persons with an interest in, or key personnel of, the licensee of an offense that is punishable by imprisonment
or may otherwise cast doubt on such person’s integrity; (ii) failure without reasonable cause to comply with any material
term or condition of the gaming license; (iii) declaration of, or otherwise engaging in, certain bankruptcy, insolvency, winding-up
or discontinuance activities, or an order or application with respect to the same; (iv) obtaining the gaming license by a materially
false or misleading representation or in some other improper way; (v) violation of applicable anti-money laundering or terrorist
financing laws or regulations; (vi) failure to meet commitments to users; (vii) failure to pay in a timely manner
all gaming or betting taxes or fees due; or (viii) determination by the gaming authority that there is another material and
sufficient reason to revoke or impose another form of sanction upon the licensee.
Product-Specific Licensing
Daily Fantasy Sports
DraftKings’ DFS is available
in 43 U.S. states, the District of Columbia, and eight international jurisdictions. In those states that currently require a license or
registration for DFS operations, DraftKings has either obtained from the relevant regulatory authority, the appropriate license or registration,
has obtained a provisional license, or is operating pursuant to a grandfathering clause that allows operation pending the availability
of licensing applications and subsequent grant of a license. DraftKings also has three foreign DFS licenses and operates under those licenses
in eight countries. Various state laws and regulations govern our licenses, but generally such state laws and regulations define paid
fantasy sports, establish the rules concerning the application and licensure procedures for gaming operators in the fantasy sports
business and regulate practices for paid fantasy sports deemed to be detrimental to the public interest. As part of the licensing process,
we must submit, in some jurisdictions, extensive materials on our operations, including our technology and data security, age verification
of users, segregation of account funds and responsible gaming initiatives.
In the United States, our DFS licenses
are generally granted for a predetermined period of time (typically ranging from one to four years) or require documents to be supplied
on a regular basis in order to maintain our licenses. We also maintain DFS licenses in Great Britain, Malta and Australia.
In Great Britain, online gaming and
sports betting is subject to the Gambling Act 2005 (the “GA2005”), as amended by the Gambling (Licensing and Advertising)
Act 2014, and the regulations promulgated thereunder. Under the GA2005, entities wishing to offer online sports betting (which for purposes
of GA2005 is defined to include DFS) and/or online casino services to persons located in Great Britain must first obtain a remote gambling
operating license from the Gambling Commission. We hold a remote-pool-betting operating license authorizing us to offer our DFS product
to residents of Great Britain. That license may be varied to add further product categories permitting, for example, fixed-odds-sports
betting and online casinos. We also hold a gambling software operating license issued by the Gambling Commission, which authorizes us
to develop the DFS software we use. Our British licenses are not limited by a term, subject to the payment of annual fees and compliance
with license conditions.
In Malta, online gaming and sports
betting is subject to the Gaming Act 2018 and the regulations promulgated thereunder. Fantasy sports (including DFS) are considered a
controlled skill game for the purposes of the Gaming Authorizations Regulations. Our subsidiary, Crown DFS Malta Limited, holds a gaming
services license, issued by the Malta Gaming Authority, which authorizes the holder to conduct controlled skill games. Our Malta license
was originally issued in 2017. Under the Gaming Act 2018, it has a duration of 10 years.
Malta is a Member State of the European
Union, and that has made it an increasingly popular hub for online betting and gaming businesses. We rely upon our Malta license to conduct
DFS operations not only in Malta, but also in certain other EU Member States, including Germany, Austria, the Republic of Ireland and
the Netherlands.
In Australia, online gaming and sports
betting is regulated at both the federal and state/territory levels. A sports betting operator that holds a license in one state or territory
may offer services across all other states (subject to certain specific statutory restrictions that may apply). Our subsidiary, DraftKings
Australia Pty Ltd, is the holder of a sports bookmaking license issued by the Northern Territory Racing Commission, which enables DraftKings
Australia Pty Ltd to conduct DFS contests. The Northern Territory license was issued in November 2017 for a duration of five years,
subject to the payment of annual fees and compliance with license conditions.
Sportsbook
As of December 31, 2020, 22 U.S.
states and the District of Columbia have legalized some form of sports betting. Of those 23 legal jurisdictions, fifteen have legalized
online sports betting. Of those fifteen jurisdictions, thirteen are live, and DraftKings operates in ten of them. As of December 31,
2020, we operate our online sports betting product via the DraftKings Sportsbook app in Colorado, Illinois, Indiana, Iowa,
New Hampshire, New Jersey, Pennsylvania, Tennessee and West Virginia pursuant to our licenses, temporary licenses, or executed vendor
agreements granted by the gaming or lottery commission of such states, specifically, the Colorado Limited Gaming Control Commission, the
Illinois Gaming Board, the Indiana Gaming Commission, the Iowa Racing and Gaming Commission, the New Hampshire Lottery Commission, the
New Jersey Division of Gaming Enforcement, the Pennsylvania Gaming Control Board, the Tennessee Education Lottery Corporation and the
West Virginia Lottery. We also operate retail sportsbooks in Colorado, Illinois, Iowa, Mississippi, New Hampshire, New Jersey
and New York pursuant to state licensing regimes. Subsequent to December 31, 2020, we also operate our online sports betting product
in Virginia pursuant to a license granted by the Virginia Lottery and in Michigan pursuant to a license granted by the Michigan Gaming
Control Board.
On May 14, 2018, the U.S. Supreme
Court issued an opinion determining that PASPA was unconstitutional. PASPA prohibited certain states from “authorizing by law”
any form of sports betting. In striking down PASPA, the Supreme Court opened the potential for state-by-state authorization of sports
betting. Several states and territories, including Arkansas, Colorado, Delaware, Illinois, Indiana, Iowa, Michigan, Mississippi,
Montana, Nevada, New Hampshire, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Puerto Rico, Rhode Island, Tennessee, Virginia,
Washington, Washington, D.C. and West Virginia already have laws authorizing and regulating some form of sports betting online or in brick-and-mortar
establishments. Sports betting in the United States is subject to additional laws, rules and regulations at the state level. See
“Risk Factors - Risk Factors Relating to our Business and Industry - Our business is subject to a variety of U.S. and foreign
laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business. Any change
in existing regulations or their interpretation, or the regulatory climate applicable to our products and services, or changes in tax
rules and regulations or interpretation thereof related to our products and services, could adversely impact our ability to operate
our business as currently conducted or as we seek to operate in the future, which could have a material adverse effect on our financial
condition and results of operations.”
iGaming
As of December 31, 2020, we operate
our iGaming product in New Jersey, pursuant to a transactional waiver granted by the New Jersey Division of Gaming Enforcement, in Pennsylvania,
pursuant to a license granted by the Pennsylvania Gaming Control Board, and in West Virginia, pursuant to an interim license granted by
the West Virginia Lottery. Subsequent to December 31, 2020, we also operate our iGaming technology in Michigan pursuant to a provisional
supplier license granted by the Michigan Gaming Control Board.
Generally, online gambling in the United
States is only lawful when specifically permitted under applicable state law. At the federal level, several laws provide federal law enforcement
with the authority to enforce and prosecute gambling operations conducted in violation of underlying state gambling laws. These enforcement
laws include the Unlawful Internet Gambling Enforcement Act (the “UIGEA”), the Illegal Gambling Business Act and the Travel
Act. No violation of the UIGEA, the Illegal Gambling Business Act or the Travel Act can be found absent a violation of an underlying state
law or other federal law.
In addition, the Wire Act of 1961 (the
“Wire Act”) provides that anyone engaged in the business of betting or wagering knowingly uses a wire communication facility
for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on
any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit
as a result of bets or wagers, or for information assisting in the placing of bets or wagers, will be fined or imprisoned, or both. However,
the Wire Act notes that it shall not be construed to prevent the transmission in interstate or foreign commerce of information for use
in news reporting of sporting events or contests, or for the transmission of information assisting in the placing of bets or wagers on
a sporting event or contest from a state or foreign country where betting on that sporting event or contest is legal into a state or foreign
country in which such betting is legal. There is ongoing legal action as to whether the Wire Act applies beyond sports betting. A federal
court of first instance has ruled that it does not; the decision was appealed but rejected on January 20, 2021 by the U.S. Court
of Appeals for the First Circuit.
B2B
Our B2B business, formerly SBTech,
has obtained licenses (and approvals, as applicable) in six states in the United States and in the United Kingdom, Gibraltar, Malta and
Romania. Additionally, our B2B business has certified its software in various territories, including in Denmark, Italy, Nigeria,
Portugal, South Africa, Spain and Sweden, and its services are available in Azerbaijan, Belgium, Cyprus, Czech Republic, Greece, Mexico
and Spain under local licenses held by operators using SBTech’s products and services in these jurisdictions.
As of December 31, 2020, we supply
our SBTech products and services, sportsbook and iGaming services online in New Jersey and our SBTech products and services and sportsbook
online in Oregon pursuant to an agreement with the Oregon State Lottery. We also supply retail sportsbook services in Arkansas, Colorado, Indiana,
Mississippi, New Jersey and Pennsylvania pursuant to state licensing regimes. In addition, we supply our SBTech products and services,
sportsbook and iGaming services to customers in additional jurisdictions.
Data Protection and Privacy
In addition to our licensing regime
for our offerings, we also take significant measures to protect users’ privacy and data. Our programs consist of the following:
Because we handle, collect, store,
receive, transmit and otherwise process certain personal information of our users and employees, we are also subject to federal, state
and foreign laws related to the privacy and protection of such data. Regulations such as the California Consumer Privacy Act, which is
a new, untested law, could affect our business, and its potential impact is unknown.
With our operations in Europe, we may
also face particular privacy, data security and data protection risks in connection with requirements of the General Data Protection Regulation
of the European Union (EU) 2016/679 (the “GDPR”) and other data protection regulations. Any failure to comply with these rules may
result in regulatory fines or penalties including orders that require us to change the way we process data. In the event of a data breach,
we are also subject to breach notification laws in the jurisdictions in which we operate, including the GDPR, and the risk of litigation
and regulatory enforcement actions.
Any significant change to applicable
laws, regulations, interpretations of laws or regulations, or market practices, regarding the use of personal data, or regarding the manner
in which we seek to comply with applicable laws and regulations, could require us to make modifications to our products, services, policies,
procedures, notices, and business practices, including potentially material changes. Such changes could potentially have an adverse impact
on our business.
Compliance
We have developed and implemented an
internal compliance program to help ensure that we comply with legal and regulatory requirements imposed on us in connection with our
DFS, Sportsbook and iGaming activities. Our compliance program focuses on, among other things, reducing and managing problematic gaming
and providing tools to assist users in making educated choices related to gaming activities.
SBTech offerings have been built from
the ground up to meet the needs of differing regulatory regimes, including configurable regulatory and responsible gaming controls such
as responsible gaming tests, operator alerts on player behavior, deposit limits, betting limits, loss limits, timeout facilities, session
limits, reality checks, balance thresholds and intended gaming amounts. These features allow the operators’ customers full control
of their gaming to allow them to play responsibly.
Responsible and Safer Gaming
We view the safety and welfare of our
users as critical to our business and have made appropriate investments in our processes and systems. We are committed to industry-leading
responsible gaming practices and seek to provide our users with the resources and services they need to play responsibly. Additionally,
all our employees take responsible gaming training with mandatory periodic refresher training, overseen by our compliance team.
Segment and Related Information
A discussion of our segment
structure is available in Note 12, Segment Information, of the Notes to the Consolidated Financial Statements included in this
Annual Report.
Available Information
Our Internet address is www.DraftKings.com.
Our website and the information contained therein or linked thereto are not part of this Annual Report. We make available free of charge
through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
proxy statements, registration statements and amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or furnish them to the SEC. The SEC maintains a website that contains reports,
proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically
by accessing the SEC’s website at www.sec.gov.
Item 1A. Risk Factors.
Our business is subject to
numerous risks and uncertainties that you should be aware of in evaluating our business. If any such risks and uncertainties actually
occur, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks described
below are not the only risks that we face. Additional risks and uncertainties not currently known to us, or that we currently deem to
be immaterial may also materially adversely affect our business, prospects, financial condition and results of operations. The risk factors
described below should be read together with the other information set forth in this Annual Report, including our consolidated financial
statements and the related notes, as well as in other documents that we file with the SEC.
Summary of the Material Risks Associated with Our Business
These risks include, but are not limited to, the
following:
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Competition within the global entertainment and gaming industries is intense and our existing and potential users may be attracted to competing forms of entertainment such as television, movies and sporting events, as well as other entertainment and gaming options on the Internet. If our offerings do not continue to be popular, our business could be harmed.
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Reductions in discretionary consumer spending could have an adverse effect on our business, financial condition, results of operations and prospects.
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Our projections are subject to significant risks, assumptions, estimates and uncertainties, including assumptions regarding future legislation and changes in regulations, both inside and outside of the United States. As a result, our projected revenues, market share, expenses and profitability may differ materially from our expectations.
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The success, including win or hold rates, of existing or future sports betting and iGaming products depends on a variety of factors and is not completely controlled by us.
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We rely on information technology and other systems and services, and any failures, errors, defects or disruptions in our systems or services could diminish our brand and reputation, subject us to liability, disrupt our business, affect our ability to scale our technical infrastructure and adversely affect our operating results and growth prospects. Our games and other software applications and systems, and the third-party platforms upon which they are made available could contain undetected errors.
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We rely on other third-party sports data providers for real-time and accurate data for sporting events, and if such third parties do not perform adequately or terminate their relationships with us, our costs may increase and our business, financial condition and results of operations could be adversely affected.
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If Internet and other technology-based service providers experience service interruptions, our ability to conduct our business may be impaired and our business, financial condition and results of operations could be adversely affected.
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We rely on strategic relationships with casinos, tribes and horse-tracks in order to be able to offer our products in certain jurisdictions. If we cannot establish and manage such relationships with such partners, our business, financial condition and results of operations could be adversely affected.
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Our growth prospects may suffer if we are unable to develop successful offerings or if we fail to pursue additional offerings. In addition, if we fail to make the right investment decisions in our offerings and technology, we may not attract and retain key users and our revenue and results of operations may decline.
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Our business model depends upon the continued compatibility between our app and the major mobile operating systems and upon third-party platforms for the distribution of our product offerings. If Google Play or the Apple App Store prevent users from downloading our apps or block advertising from being delivered to our users, our ability to grow our revenue, profitability and prospects may be adversely affected.
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We may invest in or acquire other businesses, and our business may suffer if we are unable to successfully integrate acquired businesses into our company or otherwise manage the growth associated with multiple acquisitions.
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Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business. Any change in existing regulations or their interpretation, or the regulatory climate applicable to our products and services, or changes in tax rules and regulations or interpretation thereof related to our products and services, could adversely impact our ability to operate our business as currently conducted or as we seek to operate in the future, which could have a material adverse effect on our financial condition and results of operations.
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Our growth prospects depend on the legal status of real-money gaming in various jurisdictions, predominantly within the United States, and legalization may not occur in as many states as we expect, or may occur at a slower pace than we anticipate. Additionally, even if jurisdictions legalize real money gaming, this may be accompanied by legislative or regulatory restrictions and/or taxes that make it impracticable or less attractive to operate in those jurisdictions, or the process of implementing regulations or securing the necessary licenses to operate in a particular jurisdiction may take longer than we anticipate, which could adversely affect our future results of operations and make it more difficult to meet our expectations for financial performance.
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Our growth prospects and market potential will depend on our ability to obtain licenses to operate in a number of jurisdictions and if we fail to obtain and subsequently maintain such licenses our business, financial condition, results of operations and prospects could be impaired.
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We have been, and continue to be, the subject of governmental investigations and inquiries with respect to the operation of our businesses and we could be subject to future governmental investigations and inquiries, legal proceedings and enforcement actions. Any such investigation, inquiry, proceeding or action, could adversely affect our business.
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Negative events or negative media coverage relating to, or a declining popularity of, daily fantasy sports, sports betting, the underlying sports or athletes, online sports betting or iGaming in particular, or other negative coverage may adversely impact our ability to retain or attract users, which could have an adverse impact on our business.
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Due to the nature of our business, we are subject to taxation in a number of jurisdictions and changes in, or new interpretations of, tax laws, tax rulings or their application by tax authorities could result in additional tax liabilities and could materially affect our financial condition and results of operations. We are also subject to periodic audits and examinations by the Internal Revenue Service (the “IRS”), as well as state and local taxing authorities, the results of which may materially impact our financial statements in the period in which the audit or examination occurs.
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While we work to integrate the DraftKings and SBT businesses and operations, management’s focus and resources may be diverted from operational matters and other strategic opportunities.
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Although we expect that the Business Combination will produce substantial synergies, the integration of the two companies, incorporated in different countries, with geographically dispersed operations, and with different business cultures and compensation structures, presents management challenges. There can be no assurance that this integration, and the synergies expected to result from that integration, will be achieved as rapidly or to the extent currently anticipated.
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Our business now includes a B2B business model, primarily in international jurisdictions, which business depends on the underlying financial performance of our direct operators and its resellers. As a material part of SBT’s revenue is currently generated through resellers and direct sales to operators, a decline in such resellers’ or direct operators’ financial performance or a termination of some or all of the agreements with such resellers or operators could have a material adverse effect on our business.
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SBT’s business, which includes significant international operations, is likely to expose us to foreign currency transaction and translation risks. As a result, changes in the valuation of the U.S. dollar in relation to other currencies could have positive or negative effects on our profit and financial position.
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The trading price of our Class A common stock has been, and will likely continue to be, volatile and you could lose all or part of your investment.
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Because we are a “controlled company” under The Nasdaq Stock Market listing standards, our stockholders may not have certain corporate governance protections that are available to stockholders of companies that are not controlled companies.
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Our dual class structure has the effect of concentrating voting power with our Chief Executive Officer and Co-Founder, which limits an investor’s ability to influence the outcome of important transactions, including a change in control.
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The summary risk factors
described above should be read together with the text of the full risk factors below and in the other information set forth in this Annual
Report, including our consolidated financial statements and the related notes, as well as in other documents that we file with the SEC.
If any such risks and uncertainties actually occur, our business, prospects, financial condition and results of operations could be materially
and adversely affected. The risks summarized above or described in full below are not the only risks that we face. Additional risks and
uncertainties not currently known to us, or that we currently deem to be immaterial may also materially adversely affect our business,
prospects, financial condition and results of operations.
Risk Factors Relating to Our Business and Industry
Competition within the global entertainment
and gaming industries is intense and our existing and potential users may be attracted to competing forms of entertainment such as television,
movies and sporting events, as well as other entertainment and gaming options on the Internet. If our offerings do not continue to be
popular, our business could be harmed.
We operate in the global
entertainment and gaming industries with our business-to-consumer offerings such as DFS, Sportsbook and iGaming, and our business-to-business
offerings. Our users face a vast array of entertainment choices. Other forms of entertainment, such as television, movies, sporting events
and in-person casinos, are more well established and may be perceived by our users to offer greater variety, affordability, interactivity
and enjoyment. We compete with these other forms of entertainment for the discretionary time and income of our users. If we are unable
to sustain sufficient interest in our recently launched sports betting and iGaming offerings in comparison to other forms of entertainment,
including new forms of entertainment, our business model may not continue to be viable.
The specific industries in
which we operate are characterized by dynamic customer demand and technological advances, and there is intense competition among online
gaming and entertainment providers. A number of established, well-financed companies producing online gaming and/or interactive entertainment
products and services compete with our offerings, and other well-capitalized companies may introduce competitive services. Such competitors
may spend more money and time on developing and testing products and services, undertake more extensive marketing campaigns, adopt more
aggressive pricing or promotional policies or otherwise develop more commercially successful products or services than ours, which could
negatively impact our business. Our competitors may also develop products, features, or services that are similar to ours or that achieve
greater market acceptance. Such competitors may also undertake more far-reaching and successful product development efforts or marketing
campaigns, or may adopt more aggressive pricing policies. Furthermore, new competitors, whether licensed or not, may enter the iGaming
industry. There has also been considerable consolidation among competitors in the entertainment and gaming industries and such consolidation
and future consolidation could result in the formation of larger competitors with increased financial resources and altered cost structures,
which may enable them to offer more competitive products, gain a larger market share, expand offerings and broaden their geographic scope
of operations. If we are not able to maintain or improve our market share, or if our offerings do not continue to be popular, our business
could suffer.
Economic downturns and political and market
conditions beyond our control could adversely affect our business, financial condition and results of operations.
Our financial performance
is subject to global and U.S. economic conditions and their impact on levels of spending by users and advertisers. Economic recessions
have had, and may continue to have, far reaching adverse consequences across many industries, including the global entertainment and gaming
industries, which may adversely affect our business and financial condition. In the past decade, global and U.S. economies have experienced
tepid growth following the financial crisis in 2008 – 2009 and there appears to be an increasing risk of a recession due to international
trade and monetary policy, the global coronavirus pandemic and other changes. If the national and international economic recovery slows
or stalls, these economies experience another recession or any of the relevant regional or local economies suffers a downturn, we may
experience a material adverse effect on our business, financial condition, results of operations or prospects.
In addition, changes in general
market, economic and political conditions in domestic and foreign economies or financial markets, including fluctuation in stock markets
resulting from, among other things, trends in the economy as a whole may reduce users’ disposable income and advertisers’
budgets. Any one of these changes could have a material adverse effect on our business, financial condition, results of operations or
prospects.
Reductions in discretionary consumer spending
could have an adverse effect on our business, financial condition, results of operations and prospects.
Our business is particularly
sensitive to reductions from time to time in discretionary consumer spending. Demand for entertainment and leisure activities, including
gaming, can be affected by changes in the economy and consumer tastes, both of which are difficult to predict and beyond our control. Unfavorable
changes in general economic conditions, including recessions, economic slowdowns, sustained high levels of unemployment, and rising prices
or the perception by consumers of weak or weakening economic conditions, may reduce our users’ disposable income or result in fewer
individuals engaging in entertainment and leisure activities, such as daily fantasy sports, sports betting and iGaming. As a result,
we cannot ensure that demand for our offerings will remain constant. Adverse developments affecting economies throughout the world,
including a general tightening of availability of credit, decreased liquidity in certain financial markets, increased interest rates,
foreign exchange fluctuations, increased energy costs, acts of war or terrorism, transportation disruptions, natural disasters, declining
consumer confidence, sustained high levels of unemployment or significant declines in stock markets, as well as concerns regarding pandemics,
epidemics and the spread of contagious diseases, could lead to a further reduction in discretionary spending on leisure activities, such
as daily fantasy sports and gaming.
For example, the outbreak
of COVID-19, a virus originating in China causing potentially deadly respiratory tract infections, has negatively affected economic conditions
regionally as well as globally, and has caused a reduction in consumer spending. Efforts to contain the effect of the virus have
included travel restrictions and restrictions on public gatherings. Many businesses have eliminated non-essential travel and canceled
in-person events to reduce instances of employees and others being exposed to large public gatherings, and state and local governments
across the United States have restricted business activities and strongly encouraged, instituted orders or otherwise restricted individuals
from leaving their home.
The direct impact on our
business beyond disruptions in normal business operations in several of our offices has been primarily through the suspension, postponement
and cancellation of major sports and sporting events. Although many major sports seasons and sporting events have recommenced in
recent months, COVID-19 could have a continued material adverse impact on economic and market conditions and trigger a period of continued
global economic slowdown, especially in light of potential subsequent waves or new strains of the virus. The rapid development and
fluidity of this situation precludes any prediction as to the ultimate impact of COVID-19, which remains a material uncertainty and risk
with respect to DraftKings, our performance, and our financial results and could adversely affect our financial results. In particular,
these changes have reduced customers’ use of, and spending on, our product offerings, and have caused us to issue refunds for canceled
events, and some retail casinos where we have a branded sportsbooks and DFS have reduced their capacity. Cancellation of March Madness,
the delay in the MLB season, the truncated NBA playoffs, and other events affected by COVID-19 has had an adverse impact on our revenue. Our
revenue continues to depend on major sports seasons and sporting events, and we may not generate as much revenue as we would have without
the cancellation or postponements in the wake of COVID-19. If a large number of our employees and/or a subset of our key employees
and executives are impacted by COVID-19, our ability to continue to operate effectively may be negatively impacted. The ultimate
severity of the coronavirus outbreak is uncertain at this time and therefore we cannot predict the full impact it may have on our end
markets and our operations; however, the effect on our results could be material and adverse. Any significant or prolonged decrease
in consumer spending on entertainment or leisure activities could adversely affect the demand for our offerings, reducing our cash flows
and revenues, and thereby materially harming our business, financial condition, results of operations and prospects.
We may experience fluctuations in our operating
results, which make our future results difficult to predict and could cause our operating results to fall below expectations.
Our financial results have
fluctuated in the past and we expect our financial results to fluctuate from quarter to quarter in the future. These fluctuations may
be due to a variety of factors, some of which are outside of our control and may not fully reflect the underlying performance of our business.
Our financial results in
any given quarter may be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including
the impact of seasonality and our betting results, and the other risks and uncertainties set forth herein. In particular, our betting
operations have significant exposure to, and may be materially impacted by, sporting events and seasons, which can result in short-term
volatility in betting win margins and user engagement, thus impacting revenues. While we have been able to forecast revenues from our
daily fantasy sports business with greater precision than for new offerings, we cannot provide assurances that consumers will engage with
our DFS offerings on a consistent basis. Consumer engagement in our daily fantasy sports, sports betting and iGaming services may decline
or fluctuate as a result of a number of factors, including the popularity of the underlying sports, the user’s level of satisfaction
with our offerings, our ability to improve and innovate, our ability to adapt our offerings, outages and disruptions of online services,
the availability of live sporting events, the services offered by our competitors, our marketing and advertising efforts or declines in
consumer activity generally as a result of economic downturns, among others. Any decline or fluctuation in the recurring portion of our
business may have a negative impact on our business, financial condition, results of operations or prospects.
In our iGaming product offering,
operator losses are limited per stake to a maximum payout. When looking at bets across a period of time, however, these losses can potentially
be significant. Our quarterly financial results may also fluctuate based on whether we may pay out any jackpots to our iGaming users during
the relevant quarter. As part of our iGaming offering, we may offer progressive jackpot games. Each time a progressive jackpot game is
played, a portion of the amount wagered by the user is contributed to the jackpot for that specific game or group of games. Once a jackpot
is won, the progressive jackpot is reset with a predetermined base amount. While we maintain a provision for these progressive jackpots
in the event we choose to offer them, the cost of the progressive jackpot payout would be a cash outflow for our business in the period
in which it is won with a potentially significant adverse effect on our financial condition and cash flows. Because winning is underpinned
by a random mechanism, we cannot predict with absolute certainty when a jackpot will be won. In addition, we do not insure against random
outcomes or jackpot wins.
Our projections are subject to significant
risks, assumptions, estimates and uncertainties, including assumptions regarding future legislation and changes in regulations, both inside
and outside of the United States. As a result, our projected revenues, market share, expenses and profitability may differ materially
from our expectations.
We operate in rapidly changing
and competitive industries and our projections are subject to the risks and assumptions made by management with respect to our industries.
Operating results are difficult to forecast because they generally depend on our assessment of the timing of adoption of future legislation
and regulations by different states, which are uncertain. Furthermore, if we invest in the development of new products or distribution
channels that do not achieve significant commercial success, whether because of competition or otherwise, we may not recover the often
substantial “up front” costs of developing and marketing those products and distribution channels, or recover the opportunity
cost of diverting management and financial resources away from other products or distribution channels.
Additionally, as described
above under “— Reductions in discretionary consumer spending could have an adverse effect on our business, financial condition,
results of operations and prospects,” our business may be affected by reductions in consumer spending from time to time as a result
of a number of factors which may be difficult to predict. This may result in decreased revenue levels, and we may be unable to adopt measures
in a timely manner to compensate for any unexpected shortfall in income. This inability could cause our operating results in a given quarter
to be higher or lower than expected. If actual results differ from our estimates, analysts may react negatively and our stock price could
be materially impacted.
We have a new business model, which makes
it difficult for us to forecast our financial results, creates uncertainty as to how investors will evaluate our prospects, and increases
the risk that we will not be successful.
DraftKings was incorporated
in 2011 and began offering the DFS products in 2012. DraftKings expanded from its DFS product offering to include Sportsbook and iGaming
product offerings in 2018. Following the consummation of the Business Combination, we have a new business model and new offerings, including
sports betting technology. Accordingly, it will be difficult for us to forecast our future financial results, and it will be uncertain
how our new business model will affect investors’ perceptions and expectations of our prospects. Additionally, as the only vertically
integrated U.S.-based sports betting and online gaming company, it may be difficult for investors to evaluate our business due to the
lack of similarly situated competitors. Furthermore, our new business model may not be successful. You should not rely upon our historical
financial results as indicators of our future financial performance, and our financial results and stock price may be volatile.
DraftKings has a history of losses and we may continue to incur
losses in the future.
Since DraftKings was incorporated in 2011, it has experienced net losses
and negative cash flows from operations. We experienced net losses of $1,231.8 million and $142.7 million in the years ended December 31,
2020 and 2019, respectively. We may continue to experience losses in the future, and we cannot assure you that we will achieve profitability.
We may continue to incur significant losses in future periods. We expect our operating expenses to increase in the future as we expand
our operations. Furthermore, as a public company, we have incurred and expect to continue to incur additional legal, accounting and other
expenses that Old DK did not incur as a private company. If our revenue does not grow at a greater rate than our expenses, we will not
be able to achieve or maintain profitability. We may incur significant losses in the future for many reasons, including those described
in the other risks and uncertainties described in this Annual Report. Additionally, we may encounter unforeseen expenses, operating delays,
or other unknown factors that may result in losses in future periods. If our expenses exceed our revenue, our business may be negatively
impacted and we may never achieve or maintain profitability.
Our results of operations may fluctuate
due to seasonality and other factors and, therefore, our periodic operating results will not be guarantees of future performance.
Our DFS and Sportsbook operations
may fluctuate due to seasonal trends and other factors. We believe that significant sporting events such as the playoffs and championship
games, tend to impact, among other things, revenues from operations, key metrics and customer activity, and as such, DraftKings’
historical revenues generally have been highest in the fourth quarter when most of those games occur. A majority of our current sports
betting and DFS revenue is and will continue to be generated from bets placed on, or contests relating to, the National Football League
and the National Basketball Association, each of which have their own respective off-seasons, which may cause decreases in our future
revenues during such periods. Our revenues may also be affected by the scheduling of major sporting events that do not occur annually,
such as the World Cup, or the cancellation or postponement of sporting events and races, such as the postponement of the 2020 Summer Olympic
Games that were supposed to take place this past summer. In addition, certain individuals or teams advancing or failing to advance and
their scores and other results within specific tournaments, games or events may impact our financial performance.
The success, including win or hold rates,
of existing or future sports betting and iGaming products depends on a variety of factors and is not completely controlled by us.
The sports betting and iGaming
industries are characterized by an element of chance. Accordingly, we employ theoretical win rates to estimate what a certain type of
sports bet or iGame, on average, will win or lose in the long run. Net win is impacted by variations in the hold percentage (the ratio
of net win to total amount wagered), or actual outcome, on our iGames and sports betting we offer to our users. We use the hold percentage
as an indicator of an iGame’s or sports bet’s performance against its expected outcome. Although each iGame or sports bet
generally performs within a defined statistical range of outcomes, actual outcomes may vary for any given period. In addition to the element
of chance, win rates (hold percentages) may also (depending on the game involved) be affected by the spread of limits and factors that
are beyond our control, such as a user’s skill, experience and behavior, the mix of games played, the financial resources of users,
the volume of bets placed and the amount of time spent gambling. As a result of the variability in these factors, the actual win rates
on our online iGames and sports bets may differ from the theoretical win rates we have estimated and could result in the winnings of our
iGame’s or sports bet’s users exceeding those anticipated. The variability of win rates (hold rates) also have the potential
to negatively impact our financial condition, results of operations, and cash flows.
Our success also depends
in part on our ability to anticipate and satisfy user preferences in a timely manner. As we will operate in a dynamic environment characterized
by rapidly changing industry and legal standards, our products will be subject to changing consumer preferences that cannot be predicted
with certainty. We will need to continually introduce new offerings and identify future product offerings that complement our existing
technology, respond to our users’ needs and improve and enhance our existing technology to maintain or increase our user engagement
and growth of our business. We may not be able to compete effectively unless our product selection keeps up with trends in the digital
sports entertainment and gaming industries in which we compete, or trends in new gaming products.
We rely on information technology and other
systems and services, and any failures, errors, defects or disruptions in our systems or services could diminish our brand and reputation,
subject us to liability, disrupt our business, affect our ability to scale our technical infrastructure and adversely affect our operating
results and growth prospects. Our games and other software applications and systems, and the third-party platforms upon which they are
made available could contain undetected errors.
Our technology infrastructure
is critical to the performance of our offerings and to user satisfaction. We devote significant resources to network and data security
to protect our systems and data. However, our systems may not be adequately designed with the necessary reliability and redundancy to
avoid performance delays or outages that could be harmful to our business. We cannot assure you that the measures we take to prevent or
hinder cyber-attacks and protect our systems, data and user information and to prevent outages, data or information loss, fraud and to
prevent or detect security breaches, including a disaster recovery strategy for server and equipment failure and back-office systems and
the use of third parties for certain cybersecurity services, will provide absolute security. We have experienced, and we may in the future
experience, website disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes,
human or software errors and capacity constraints. Such disruptions have not had a material impact on us; however, future disruptions
from unauthorized access to, fraudulent manipulation of, or tampering with our computer systems and technological infrastructure, or those
of third parties, could result in a wide range of negative outcomes, each of which could materially adversely affect our business, financial
condition, results of operations and prospects.
Additionally, our products
may contain errors, bugs, flaws or corrupted data, and these defects may only become apparent after their launch. If a particular product
offering is unavailable when users attempt to access it or navigation through our offerings is slower than they expect, users may be unable
to place their bets or set their line-ups in time and may be less likely to return to our products and services as often, if at all. Furthermore,
programming errors, defects and data corruption could disrupt our operations, adversely affect the experience of our users, harm our reputation,
cause our users to stop utilizing our offerings, divert our resources and delay market acceptance of our offerings, any of which could
result in legal liability to us or harm our business, financial condition, results of operations and prospects.
If our user base and engagement
continue to grow, and the amount and types of offerings continue to grow and evolve, we will need an increasing amount of technical infrastructure,
including network capacity and computing power, to continue to satisfy our users’ needs. Such infrastructure expansion may be complex,
and unanticipated delays in completing these projects or availability of components may lead to increased project costs, operational inefficiencies,
or interruptions in the delivery or degradation of the quality of our offerings. In addition, there may be issues related to this infrastructure
that are not identified during the testing phases of design and implementation, which may only become evident after we have started to
fully use the underlying equipment or software, that could further degrade the user experience or increase our costs. As such, we could
fail to continue to effectively scale and grow our technical infrastructure to accommodate increased demands. In addition, our business
may be subject to interruptions, delays or failures resulting from adverse weather conditions, other natural disasters, power loss, terrorism,
cyber-attacks, public health emergencies (such as the coronavirus) or other catastrophic events.
We believe that if our users
have a negative experience with our offerings, or if our brand or reputation is negatively affected, users may be less inclined to continue
or resume utilizing our products or to recommend our offerings to other potential users. As such, a failure or significant interruption
in our service could harm our reputation, business and operating results.
Despite our security measures, our information
technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions.
Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen.
Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect
the privacy of personal information, and regulatory penalties, disruption of our operations and the services we provide to users, damage
to our reputation, and a loss of confidence in our products and services, which could adversely affect our business.
The secure maintenance and
transmission of user information is a critical element of our operations. Our information technology and other systems that maintain and
transmit user information, or those of service providers, business partners or employee information may be compromised by a malicious
third- party penetration of our network security, or that of a third-party service provider or business partner, or impacted by intentional
or unintentional actions or inactions by our employees, or those of a third- party service provider or business partner. As a result,
our users’ information may be lost, disclosed, accessed or taken without our users’ consent. We have experienced cyber-attacks,
attempts to breach our systems and other similar incidents in the past. For example, we have been and expect that we will continue to
be subject to attempts to gain unauthorized access to or through our information systems or those we develop for our customers, whether
by our employees or third parties, including cyber-attacks by computer programmers and hackers who may develop and deploy viruses, worms
or other malicious software programs. To date these attacks have not had a material impact on our operations or financial results, but
we cannot provide assurance that they will not have a material impact in the future.
We rely on encryption and
authentication technology licensed from third parties in an effort to securely transmit confidential and sensitive information, including
credit card numbers. Advances in computer capabilities, new technological discoveries or other developments may result in the whole or
partial failure of this technology to protect transaction data or other confidential and sensitive information from being breached or
compromised. In addition, websites are often attacked through compromised credentials, including those obtained through phishing and credential
stuffing. Our security measures, and those of our third-party service providers, may not detect or prevent all attempts to breach our
systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or
other attacks and similar disruptions that may jeopardize the security of information stored in or transmitted by our websites, networks
and systems or that we or such third parties otherwise maintain, including payment card systems, which may subject us to fines or higher
transaction fees or limit or terminate our access to certain payment methods. We and such third parties may not anticipate or prevent
all types of attacks until after they have already been launched. Further, techniques used to obtain unauthorized access to or sabotage
systems change frequently and may not be known until launched against us or our third-party service providers.
In addition, security breaches
can also occur as a result of non-technical issues, including intentional or inadvertent breaches by our employees or by third parties.
These risks may increase over time as the complexity and number of technical systems and applications we use also increases. Breaches
of our security measures or those of our third-party service providers or cybersecurity incidents could result in unauthorized access
to our sites, networks and systems; unauthorized access to and misappropriation of user information, including users’ personally
identifiable information, or other confidential or proprietary information of ourselves or third parties; viruses, worms, spyware or other
malware being served from our sites, networks or systems; deletion or modification of content or the display of unauthorized content on
our sites; interruption, disruption or malfunction of operations; costs relating to breach remediation, deployment of additional personnel
and protection technologies, response to governmental investigations and media inquiries and coverage; engagement of third-party experts
and consultants; litigation, regulatory action and other potential liabilities. In the past, we have experienced social engineering, phishing,
malware and similar attacks and threats of denial-of-service attacks, none of which to date has been material to our business; however,
such attacks could in the future have a material adverse effect on our operations. If any of these breaches of security should occur and
be material, our reputation and brand could be damaged, our business may suffer, we could be required to expend significant capital and
other resources to alleviate problems caused by such breaches, and we could be exposed to a risk of loss, litigation or regulatory action
and possible liability. We cannot guarantee that recovery protocols and backup systems will be sufficient to prevent data loss. Actual
or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies,
train employees and engage third-party experts and consultants. While we maintain cybersecurity insurance coverage that we believe is
adequate for our business, such coverage may not cover all potential costs and expenses associated with cybersecurity incidents that may
occur in the future.
In addition, any party who
is able to illicitly obtain a user’s password could access the user’s transaction data or personal information, resulting
in the perception that our systems are insecure. Any compromise or breach of our security measures, or those of our third-party service
providers, could violate applicable privacy, data protection, data security, network and information systems security and other laws and
cause significant legal and financial exposure, adverse publicity and a loss of confidence in our security measures, which could have
a material adverse effect on our business, financial condition, results of operations and prospects. We continue to devote significant
resources to protect against security breaches or we may need to in the future to address problems caused by breaches, including notifying
affected subscribers and responding to any resulting litigation, which in turn, diverts resources from the growth and expansion of our
business.
We rely on Amazon Web Services to deliver
our offerings to users, and any disruption of or interference with our use of Amazon Web Services could adversely affect our business,
financial condition, results of operations and prospects.
We currently host our sports
betting, iGaming and daily fantasy sports offerings and support our operations using Amazon Web Services (“AWS”), a third-party
provider of cloud infrastructure services, along with other service providers traditionally used by SBT. We do not, and will not, have
control over the operations of the facilities or infrastructure of the third-party service providers that we use. Such third parties’
facilities are vulnerable to damage or interruption from natural disasters, cybersecurity attacks, terrorist attacks, power outages and
similar events or acts of misconduct. Our technology’s continuing and uninterrupted performance will be critical to our success.
We have experienced, and we expect that in the future we will experience, interruptions, delays and outages in service and availability
from these third-party service providers from time to time due to a variety of factors, including infrastructure changes, human or software
errors, website hosting disruptions and capacity constraints. In addition, any changes in these third parties’ service levels may
adversely affect our ability to meet the requirements of our users. Since our technology’s continuing and uninterrupted performance
is critical to our success, sustained or repeated system failures would reduce the attractiveness of our offerings. It may become increasingly
difficult to maintain and improve our performance, especially during peak usage times, as we expand and the usage of our offerings increases.
Any negative publicity arising from these disruptions could harm our reputation and brand and may adversely affect the usage of our offerings.
Our commercial agreement
with AWS will remain in effect until terminated by AWS or us. AWS may only terminate the agreement for convenience after complying with
the contractual 30 day prior notice requirement, except for extraordinary circumstances as laid out in AWS standard terms. AWS may also
terminate the agreement for cause upon a breach of the agreement or for failure to pay amounts due, in each case, subject to AWS providing
prior written notice and a 30-day cure period. In the event that our agreement with AWS is terminated or we add additional cloud infrastructure
service providers, such as the one currently used by SBT, we may experience significant costs or downtime in connection with the transfer
to, or the addition of, new cloud infrastructure service providers. Although alternative providers could host our offerings on a substantially
similar basis to AWS, transitioning the cloud infrastructure currently hosted by AWS to alternative providers could potentially be disruptive
and we could incur significant one-time costs.
Any of the above circumstances
or events may harm our reputation and brand, reduce the availability or usage of our technology, lead to a significant loss of revenue,
increase our costs and impair our ability to attract new users, any of which could adversely affect our business, financial condition
and results of operations.
We rely on third-party providers to validate
the identity and identify the location of our users, and if such providers fail to perform adequately, provide accurate information or
we do not maintain business relationships with them, our business, financial condition and results of operations could be adversely affected.
There is no guarantee that
the third-party geolocation and identity verification systems that we rely on will perform adequately, or be effective. We rely on our
geolocation and identity verification systems to ensure we are in compliance with certain laws and regulations, and any service disruption
to those systems would prohibit us from operating our offerings, and would adversely affect our business. Additionally, incorrect or misleading
geolocation and identity verification data with respect to current or potential users received from third-party service providers may
result in us inadvertently allowing access to our offerings to individuals who should not be permitted to access them, or otherwise inadvertently
deny access to individuals who should be able to access our offerings, in each case based on inaccurate identity or geographic location
determination. Our third-party geolocation services provider relies on its ability to obtain information necessary to determine geolocation
from mobile devices, operating systems, and other sources. Changes, disruptions or temporary or permanent failure to access such sources
by our third-party services providers may result in their inability to accurately determine the location of our users. Moreover, our inability
to maintain our existing contracts with third-party services providers, or to replace them with equivalent third parties, may result in
our inability to access geolocation and identity verification data necessary for our day-to-day operations. If any of these risks materializes,
we may be subject to disciplinary action, fines, lawsuits, and our business, financial condition and results of operations could be adversely
affected.
Our technology contains third-party open
source software components, and failure to comply with the terms of the underlying open source software licenses could restrict our ability
to provide our offerings.
Our technology contains software
modules licensed to us by third-party authors under “open source” licenses. Use and distribution of open source software may
entail greater risks than use of third-party commercial software, as open source licensors generally do not provide support, warranties,
indemnification or other contractual protections regarding infringement claims or the quality of the code. In addition, the public availability
of such software may make it easier for others to compromise our technology.
Some open source licenses
contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source
software we use, or grant other licenses to our intellectual property. If we combine our proprietary software with open source software
in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software
to the public. This would allow our competitors to create similar offerings with lower development effort and time and ultimately could
result in a loss of our competitive advantages. Alternatively, to avoid the public release of the affected portions of our source code,
we could be required to expend substantial time and resources to re-engineer some or all of our software.
Although we monitor our use
of open source software to avoid subjecting our technology to conditions we do not intend, the terms of many open source licenses have
not been interpreted by U.S. or foreign courts, and there is a risk that these licenses could be construed in a way that could impose
unanticipated conditions or restrictions on our ability to provide or distribute our technology. From time to time, there have been claims
challenging the ownership of open source software against companies that incorporate open source software into their solutions. As a result,
we could be subject to lawsuits by parties claiming ownership of what we believe to be open source software. Moreover, we cannot assure
you that our processes for controlling our use of open source software in our technology will be effective. If we are held to have breached
or failed to fully comply with all the terms and conditions of an open source software license, we could face infringement or other liability,
or be required to seek costly licenses from third parties to continue providing our offerings on terms that are not economically feasible,
to re-engineer our technology, to discontinue or delay the provision of our offerings if re-engineering could not be accomplished on a
timely basis or to make generally available, in source code form, our proprietary code, any of which could adversely affect our business,
financial condition and results of operations.
We rely on third-party payment processors
to process deposits and withdrawals made by our users, and if we cannot manage our relationships with such third parties and other payment-related
risks, our business, financial condition and results of operations could be adversely affected.
We rely on a limited number
of third-party payment processors to process deposits and withdrawals made by our users. If any of our third-party payment processors
terminates its relationship with us or refuses to renew its agreement with us on commercially reasonable terms, we would need to find
an alternate payment processor, and may not be able to secure similar terms or replace such payment processor in an acceptable time frame.
Further, the software and services provided by our third-party payment processors may not meet our expectations, contain errors or vulnerabilities,
be compromised or experience outages. Any of these risks could cause us to lose our ability to accept online payments or other payment
transactions or make timely payments to our users, any of which could make our technology less trustworthy and convenient and adversely
affect our ability to attract and retain our users.
Nearly all of our payments
are made by credit card, debit card or through other third-party payment services, which subjects us to certain regulations and to the
risk of fraud. We may in the future offer new payment options to users that may be subject to additional regulations and risks. We are
also subject to a number of other laws and regulations relating to the payments we accept from our users, including with respect to money
laundering, money transfers, privacy and information security. If we fail to comply with applicable rules and regulations, we may
be subject to civil or criminal penalties, fines and/or higher transaction fees and may lose our ability to accept online payments or
other payment card transactions, which could make our offerings less convenient and attractive to our users. If any of these events were
to occur, our business, financial condition and results of operations could be adversely affected.
For example, if we are deemed
to be a money transmitter as defined by applicable regulation, we could be subject to certain laws, rules and regulations enforced
by multiple authorities and governing bodies in the United States and numerous state and local agencies who may define money transmitter
differently. For example, certain states may have a more expansive view of who qualifies as a money transmitter. Additionally, outside
of the United States, we could be subject to additional laws, rules and regulations related to the provision of payments and financial
services, and if we expand into new jurisdictions, the foreign regulations and regulators governing our business that we are subject to
will expand as well. If we are found to be a money transmitter under any applicable regulation and we are not in compliance with such
regulations, we may be subject to fines or other penalties in one or more jurisdictions levied by federal or state or local regulators,
including state Attorneys General, as well as those levied by foreign regulators. In addition to fines, penalties for failing to comply
with applicable rules and regulations could include criminal and civil proceedings, forfeiture of significant assets or other enforcement
actions. We could also be required to make changes to our business practices or compliance programs as a result of regulatory scrutiny.
Additionally, our payment
processors require us to comply with payment card network operating rules, which are set and interpreted by the payment card networks.
The payment card networks could adopt new operating rules or interpret or reinterpret existing rules in ways that might prohibit
us from providing certain offerings to some users, be costly to implement or difficult to follow. We have agreed to reimburse our payment
processors for fines they are assessed by payment card networks if we or our users violate these rules. Any of the foregoing risks could
adversely affect our business, financial condition and results of operations.
We rely on other third-party sports data
providers for real-time and accurate data for sporting events, and if such third parties do not perform adequately or terminate their
relationships with us, our costs may increase and our business, financial condition and results of operations could be adversely affected.
We rely on third-party sports
data providers such as SportRadar and BetGenius to obtain accurate information regarding schedules, results, performance and outcomes
of sporting events. We rely on this data to determine when and how bets are settled or how users rank in their fantasy contests. We have
experienced, and may continue to experience, errors in this data feed which may result in us incorrectly settling bets or ranking users
in their contests. If we cannot adequately resolve the issue with our users, our users may have a negative experience with our offerings,
our brand or reputation may be negatively affected and our users may be less inclined to continue or resume utilizing our products or
recommend our offerings to other potential users. As such, a failure or significant interruption in our service may harm our reputation,
business and operating results.
Furthermore, if any of our
sports data partners terminates its relationship with us or refuses to renew its agreement with us on commercially reasonable terms, we
would need to find an alternate provider, and may not be able to secure similar terms or replace such providers in an acceptable time
frame. Any of these risks could increase our costs and adversely affect our business, financial condition and results of operations. Further,
any negative publicity related to any of our third-party partners, including any publicity related to regulatory concerns, could adversely
affect our reputation and brand, and could potentially lead to increased regulatory or litigation exposure.
We rely on other third-party service providers
and if such third parties do not perform adequately or terminate their relationships with us, our costs may increase and our business,
financial condition and results of operations could be adversely affected.
Our success depends in part
on our relationships with other third-party service providers. For example, we rely on third parties for content delivery, load balancing
and protection against distributed denial-of-service attacks. If those providers do not perform adequately, our users may experience issues
or interruptions with their experiences. Furthermore, if any of our partners terminates its relationship with us or refuses to renew its
agreement with us on commercially reasonable terms, we would need to find an alternate provider, and may not be able to secure similar
terms or replace such providers in an acceptable time frame. We also rely on other software and services supplied by third parties, such
as communications and internal software, and our business may be adversely affected to the extent such software and services do not meet
our expectations, contain errors or vulnerabilities, are compromised or experience outages. Any of these risks could increase our costs
and adversely affect our business, financial condition and results of operations. Further, any negative publicity related to any of our
third- party partners, including any publicity related to regulatory concerns, could adversely affect our reputation and brand, and could
potentially lead to increased regulatory or litigation exposure.
We incorporate technology
from third parties into our offerings. We cannot be certain that our licensors are not infringing the intellectual property rights of
others or that the suppliers and licensors have sufficient rights to the technology in all jurisdictions in which we may operate. Some
of our license agreements may be terminated by our licensors for convenience. If we are unable to obtain or maintain rights to any of
this technology because of intellectual property infringement claims brought by third parties against our suppliers and licensors or against
us, or if we are unable to continue to obtain the technology or enter into new agreements on commercially reasonable terms, our ability
to develop our offerings containing that technology could be severely limited and our business could be harmed.
Additionally, if we are unable
to obtain necessary technology from third parties, we may be forced to acquire or develop alternate technology, which may require significant
time and effort and may be of lower quality or performance standards. This would limit and delay our ability to provide new or competitive
offerings and increase our costs. If alternate technology cannot be obtained or developed, we may not be able to offer certain functionality
as part of our offerings, which could adversely affect our business, financial condition and results of operations.
If we fail to detect fraud or theft, including
by our users and employees, our reputation may suffer which could harm our brand and reputation and negatively impact our business, financial
condition and results of operations and can subject us to investigations and litigation.
We have in the past incurred,
and may in the future incur, losses from various types of financial fraud, including use of stolen or fraudulent credit card data, claims
of unauthorized payments by a user and attempted payments by users with insufficient funds. Bad actors use increasingly sophisticated
methods to engage in illegal activities involving personal information, such as unauthorized use of another person’s identity, account
information or payment information and unauthorized acquisition or use of credit or debit card details, bank account information and mobile
phone numbers and accounts. Under current credit card practices, we may be liable for use of funds on our products with fraudulent credit
card data, even if the associated financial institution approved the credit card transaction.
Acts of fraud may involve
various tactics, including collusion. Successful exploitation of our systems could have negative effects on our product offerings, services
and user experience and could harm our reputation. Failure to discover such acts or schemes in a timely manner could result in harm to
our operations. In addition, negative publicity related to such schemes could have an adverse effect on our reputation, potentially causing
a material adverse effect on our business, financial condition, results of operations and prospects. In the event of the occurrence of
any such issues with our existing technology or product offerings, substantial engineering and marketing resources and management attention
may be diverted from other projects to correct these issues, which may delay other projects and the achievement of our strategic objectives.
In addition, any misappropriation
of, or access to, users’ or other proprietary information or other breach of our information security could result in legal claims
or legal proceedings, including regulatory investigations and actions, or liability for failure to comply with privacy and information
security laws, including for failure to protect personal information or for misusing personal information, which could disrupt our operations,
force us to modify our business practices, damage our reputation and expose us to claims from our users, regulators, employees and other
persons, any of which could have an adverse effect on our business, financial condition, results of operations and prospects.
Despite measures we have
taken to detect and reduce the occurrence of fraudulent or other malicious activity on our offerings, we cannot guarantee that any of
our measures will be effective or will scale efficiently with our business. Our failure to adequately detect or prevent fraudulent transactions
could harm our reputation or brand, result in litigation or regulatory action and lead to expenses that could adversely affect our business,
financial condition and results of operations.
If Internet and other technology-based service
providers experience service interruptions, our ability to conduct our business may be impaired and our business, financial condition
and results of operations could be adversely affected.
A substantial portion of
our network infrastructure is provided by third parties, including Internet service providers and other technology-based service providers.
See “— We rely on Amazon Web Services to deliver our offerings to users and any disruption of or interference with our use
of Amazon Web Services could adversely affect our business, financial condition, results of operations and prospects.” We require
technology-based service providers to implement cyber-attack-resilient systems and processes. However, if Internet service providers experience
service interruptions, including because of cyber-attacks, or due to an event causing an unusually high volume of Internet use (such as
a pandemic or public health emergency), communications over the Internet may be interrupted and impair our ability to conduct our business.
Internet service providers and other technology-based service providers may in the future roll out upgraded or new mobile or other telecommunications
services, such as 5G or 6G services, which may not be successful and thus may impact the ability of our users to access our offerings
in a timely fashion or at all. In addition, our ability to process e-commerce transactions depends on bank processing and credit card
systems. To prepare for system problems, we continuously seek to strengthen and enhance our current facilities and the capabilities of
our system infrastructure and support. Nevertheless, there can be no assurance that the Internet infrastructure or our own network systems
will continue to be able to meet the demand placed on us by the continued growth of the Internet, the overall online gaming industry and
our users. Any difficulties these providers face, including the potential of certain network traffic receiving priority over other traffic
(i.e., lack of net neutrality), may adversely affect our business, and we exercise little control over these providers, which increases
our vulnerability to problems with the services they provide. Any system failure as a result of reliance on third parties, such as network,
software or hardware failure, including as a result of cyber-attacks, which causes a loss of our users’ property or personal information
or a delay or interruption in our online services and products and e-commerce services, including our ability to handle existing or increased
traffic, could result in a loss of anticipated revenue, interruptions to our offerings, cause us to incur significant legal, remediation
and notification costs, degrade the customer experience and cause users to lose confidence in our offerings, any of which could have a
material adverse effect on our business, financial condition, results of operations and prospects.
We rely on strategic relationships with
casinos, tribes and horse-tracks in order to be able to offer our sports betting and iGaming products in certain jurisdictions. If we
cannot establish and manage such relationships with such partners, our business, financial condition and results of operations could be
adversely affected.
Under the sports betting
and iGaming laws of certain states, online sports betting and iGaming are limited to a finite number of retail operators, such as casinos,
tribes or tracks, who own a “skin” or “skins” under that state’s law. A “skin” is a legally-authorized
license from a state to offer online sports betting or iGaming services provided by such a retail operator. The “skin” provides
a market access opportunity for mobile operators to operate in the jurisdiction pending licensure and other required approvals by the
state’s regulator. The entities that control those “skins,” and the numbers of “skins” available, are typically
determined by a state’s law authorizing sports betting or iGaming. In most of the jurisdictions in which we offer sports betting
and iGaming, we currently rely on a casino, tribe or track in order to get a “skin.” These “skins” are what allows
us to gain access to jurisdictions where online operators are required to have a retail relationship. If we cannot establish, renew or
manage our relationships, our relationships could terminate and we would not be allowed to operate in those jurisdictions until we enter
into new ones. As a result, our business, financial condition and results of operations could be adversely affected.
Our growth will depend, in part, on the
success of our strategic relationships with third parties. Overreliance on certain third parties, or our inability to extend existing
relationships or agree to new relationships may cause unanticipated costs for us and impact our financial performance in the future.
We rely on relationships
with sports leagues and teams, professional athletes and athlete organizations, advertisers, casinos and other third parties in order
to attract users to our offerings. These relationships along with providers of online services, search engines, social media, directories
and other websites and ecommerce businesses direct consumers to our offerings. In addition, many of the parties with whom we have advertising
arrangements provide advertising services to other companies, including other fantasy sports and gaming products with whom we compete.
While we believe there are other third parties that could drive users to our offerings, adding or transitioning to them may disrupt our
business and increase our costs. In the event that any of our existing relationships or our future relationships fails to provide services
to us in accordance with the terms of our arrangement, or at all, and we are not able to find suitable alternatives, this could impact
our ability to attract consumers cost effectively and harm our business, financial condition, results of operations and prospects.
Our growth prospects may suffer if we are
unable to develop successful offerings or if we fail to pursue additional offerings. In addition, if we fail to make the right investment
decisions in our offerings and technology, we may not attract and retain key users and our revenue and results of operations may decline.
DraftKings was founded in
2011 with a singular focus on the DFS industry and initially focused its efforts on growing the DFS product offering. In 2018, DraftKings
expanded its product offerings to include its Sportsbook and iGaming offerings. DraftKings has rapidly expanded and we anticipate expanding
further as new product offerings mature and as we pursue our growth strategies.
The industries in which we
operate are subject to rapid and frequent changes in standards, technologies, products and service offerings, as well as in customer demands
and expectations and regulations. We must continuously make decisions regarding in which offerings and technology we should invest to
meet customer demand in compliance with evolving industry standards and regulatory requirements and must continually introduce and successfully
market new and innovative technologies, offerings and enhancements to remain competitive and effectively stimulate customer demand, acceptance
and engagement. Our ability to engage, retain, and increase our user base and to increase our revenue will depend heavily on our ability
to successfully create new offerings, both independently and together with third parties. We may introduce significant changes to our
existing technology and offerings or develop and introduce new and unproven products and services, with which we have little or no prior
development or operating experience. The process of developing new offerings and systems is inherently complex and uncertain, and new
offerings may not be well received by users, even if well-reviewed and of high quality. If we are unable to develop technology and products
that address users’ needs or enhance and improve our existing technology and offerings in a timely manner, that could have a material
adverse effect on our business, financial condition, results of operations and prospects.
Although we intend to continue
investing in our research and development efforts, if new or enhanced offerings fail to engage our users or partners, we may fail to attract
or retain users or to generate sufficient revenue, operating margin, or other value to justify our investments, any of which may seriously
harm our business. In addition, management may not properly ascertain or assess the risks of new initiatives, and subsequent events may
alter the risks that were evaluated at the time we decided to execute any new initiative. Creating additional offerings can also divert
our management’s attention from other business issues and opportunities. Even if our new offerings attain market acceptance, those
new offerings could exploit the market share of our existing product offerings or share of our users’ wallets in a manner that could
negatively impact their ecosystem. Furthermore, such expansion of our business increases the complexity of our business and places an
additional burden on our management, operations, technical systems and financial resources and we may not recover the often-substantial
up-front costs of developing and marketing new offerings, or recover the opportunity cost of diverting management and financial resources
away from other offerings. In the event of continued growth of our operations, products or in the number of third-party relationships,
we may not have adequate resources, operationally, technologically or otherwise to support such growth and the quality of our technology,
offerings or our relationships with third parties could suffer. In addition, failure to effectively identify, pursue and execute new business
initiatives, or to efficiently adapt our processes and infrastructure to meet the needs of our innovations, may adversely affect our business,
financial condition, results of operations and prospects.
Any new offerings may also
require our users to utilize new skills to use our offerings. This could create a lag in adoption of new offerings and new user additions
related to any new offerings. To date, new offerings and enhancements of our existing technology have not hindered our user growth or
engagement, but that may be the result of a large portion of our user base being in a younger demographic and more willing to invest the
time to learn to use our products most effectively. To the extent that future users, including those in older demographics, are less willing
to invest the time to learn to use our products, and if we are unable to make our products easier to learn to use, our user growth or
engagement could be affected, and our business could be harmed. We may develop new products that increase user engagement and costs without
increasing revenue.
Additionally, we may make
bad or unprofitable decisions regarding these investments. If new or existing competitors offer more attractive offerings, we may lose
users or users may decrease their spending on our offerings. New customer demands, superior competitive offerings, new industry standards
or changes in the regulatory environment could render our existing offerings unattractive, unmarketable or obsolete and require us to
make substantial unanticipated changes to our technology or business model. Our failure to adapt to a rapidly changing market or evolving
customer demands could harm our business, financial condition, results of operations and prospects.
Our growth will depend on our ability to
attract and retain users, and the loss of our users, failure to attract new users in a cost-effective manner, or failure to effectively
manage our growth could adversely affect our business, financial condition, results of operations and prospects.
Our ability to achieve growth
in revenue in the future will depend, in large part, upon our ability to attract new users to our offerings, retain existing users of
our offerings and reactivate users in a cost-effective manner. Achieving growth in our community of users may require us to increasingly
engage in sophisticated and costly sales and marketing efforts, which may not make sense in terms of return on investment. We have used
and expect to continue to use a variety of free and paid marketing channels, in combination with compelling offers and exciting games
to achieve our objectives. For paid marketing, we intend to leverage a broad array of advertising channels, including television, radio,
social media platforms, such as Facebook, Instagram, Twitter and Snap, affiliates and paid and organic search, and other digital
channels, such as mobile display. If the search engines on which we rely modify their algorithms, change their terms around gaming, or
if the prices at which we may purchase listings increase, then our costs could increase, and fewer users may click through to our website.
If links to our website are not displayed prominently in online search results, if fewer users click through to our website, if our other
digital marketing campaigns are not effective, of it the costs of attracting users using any of our current methods significantly increase,
then our ability to efficiently attract new users could be reduced, our revenue could decline and our business, financial condition and
results of operations could be harmed.
In addition, our ability
to increase the number of users of our offerings will depend on continued user adoption of DFS, Sportsbook and iGaming. Growth in the
DFS, Sportsbook and iGaming industries and the level of demand for and market acceptance of our product offerings will be subject to a
high degree of uncertainty. We cannot assure that consumer adoption of our product offerings will continue or exceed current growth rates,
or that the industry will achieve more widespread acceptance.
Additionally, as technological
or regulatory standards change and we modify our offerings to comply with those standards, we may need users to take certain actions to
continue playing, such as performing age verification checks or accepting new terms and conditions. Users may stop using our offerings
at any time, including if the quality of the user experience, including our support capabilities in the event of a problem, does not meet
their expectations or keep pace with the quality of the customer experience generally offered by competitive offerings.
Our core values of focusing on our users
first and acting for the long term may conflict with the short-term interests of our business.
One of our operating principles
is to put our users first, which we believe is essential to our success and serves the best, long-term interests of our company and our
stakeholders. Therefore, we have made in the past and we may make in the future, certain investments or changes in strategy that we think
will benefit our users, even if our decision negatively impacts our operating results in the short term.
Our business model depends upon the continued
compatibility between our app and the major mobile operating systems and upon third-party platforms for the distribution of our product
offerings. If Google Play or the Apple App Store prevent users from downloading our apps or block advertising from being delivered to
our users, our ability to grow our revenue, profitability and prospects may be adversely affected.
The substantial majority
of our users access our DFS, Sportsbook and iGaming product offerings primarily on mobile devices, and we believe that this will continue
to be increasingly important to our long-term success. Our business model depends upon the continued compatibility between our app and
the major mobile operating systems. Third parties with whom we do not have any formal relationships control the design of mobile devices
and operating systems. These parties frequently introduce new devices, and from time to time they may introduce new operating systems
or modify existing ones. Network carriers may also impact the ability to download apps or access specified content on mobile devices.
In addition, we rely upon
third-party platforms for distribution of our product offerings. The DFS product offering is delivered as a free application through both
the Apple App Store and the Google Play Store and is also accessible via mobile and traditional websites. The Sportsbook and iGaming product
offerings are primarily distributed through the Apple App Store and a traditional website. The Google Play store and Apple App Store are
global application distribution platforms and the main distribution channels for our app. As such, the promotion, distribution and operation
of our app are subject to the respective distribution platforms’ standard terms and policies for application developers, which are
very broad and subject to frequent changes and interpretation. Furthermore, the distribution platforms may not enforce their standard
terms and policies for application developers consistently and uniformly across all applications and with all publishers.
There is no guarantee that
popular mobile devices will start or continue to support or feature our product offerings, or that mobile device users will continue to
use our product offerings rather than competing products. We are dependent on the interoperability of our technology with popular mobile
operating systems, technologies, networks and standards that we do not control, such as the Android and iOS operating systems, and any
changes, bugs, technical or regulatory issues in such systems, our relationships with mobile manufacturers and carriers, or in their terms
of service or policies that degrade our offerings’ functionality, reduce or eliminate our ability to distribute our offerings, give
preferential treatment to competitive products, limit our ability to deliver high quality offerings, or impose fees or other charges related
to delivering our offerings, could adversely affect our product usage and monetization on mobile devices.
Moreover, our products require
high-bandwidth data capabilities in order to place time-sensitive bets. If the growth of high-bandwidth capabilities, particularly for
mobile devices, is slower than we expect, our user growth, retention, and engagement may be seriously harmed. Additionally, to deliver
high-quality content over mobile cellular networks, our product offerings must work well with a range of mobile technologies, systems,
networks, regulations, and standards that we do not control. In particular, any future changes to the iOS or Android operating systems
may impact the accessibility, speed, functionality, and other performance aspects of our offerings, which issues are likely to occur in
the future from time to time. In addition, the adoption of any laws or regulations that adversely affect the growth, popularity, or use
of the Internet, including laws governing Internet neutrality, could decrease the demand for our products and increase our cost of doing
business. Specifically, any laws that would allow mobile providers in the United States to impede access to content, or otherwise discriminate
against content providers like us, such as providing for faster or better access to our competitors, over their data networks, could have
a material adverse effect on our business, financial condition, results of operations and prospects.
Furthermore, we may not successfully
cultivate relationships with key industry participants or develop product offerings that operate effectively with these technologies,
systems, networks, regulations, or standards. If it becomes more difficult for our users to access and use our offerings on their mobile
devices, if our users choose not to access or use our offerings on their mobile devices, or if our users choose to use mobile products
that do not offer access to our offerings, our user growth, retention, and engagement could be seriously harmed.
In addition, if any of the
third-party platforms used for distribution of our product offerings were to limit or disable advertising on their platforms, either because
of technological constraints or because the owner of these distribution platforms wished to impair our ability to serve ads on them, our
ability to generate revenue could be harmed. Also, technologies may be developed that can block the display of our ads. These changes
could materially impact the way we do business, and if we or our advertising partners are unable to quickly and effectively adjust to
those changes, there could be an adverse effect on our business, financial condition, results of operations or prospects.
We may require additional capital to support
our growth plans, and such capital may not be available on terms acceptable to us, if at all. This could hamper our growth and adversely
affect our business.
We intend to make significant
investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop
new offerings and features or enhance our existing offerings and features, improve our operating infrastructure or acquire complementary
businesses, personnel and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. Our
ability to obtain additional capital, if and when required, will depend on our business plans, investor demand, our operating performance,
capital markets conditions and other factors. If we raise additional funds by issuing equity, equity-linked or debt securities, those
securities may have rights, preferences or privileges senior to the rights of our currently issued and outstanding equity or debt, and
our existing shareholders may experience dilution. If we are unable to obtain additional capital when required, or on satisfactory terms,
our ability to continue to support our business growth or to respond to business opportunities, challenges or unforeseen circumstances
could be adversely affected, and our business may be harmed.
We may invest in or acquire other businesses,
and our business may suffer if we are unable to successfully integrate acquired businesses into our company or otherwise manage the growth
associated with multiple acquisitions.
As part of our business strategy,
we have made, and we intend to continue to make, acquisitions as opportunities arise to add new or complementary businesses, products,
brands or technologies. In some cases, the costs of such acquisitions may be substantial, including as a result of professional fees and
due diligence efforts. There is no assurance that the time and resources expended on pursuing a particular acquisition will result in
a completed transaction, or that any completed transaction will ultimately be successful. In addition, we may be unable to identify suitable
acquisition or strategic investment opportunities, or may be unable to obtain any required financing or regulatory approvals, and therefore
may be unable to complete such acquisitions or strategic investments on favorable terms, if at all. We may decide to pursue acquisitions
with which our investors may not agree and we cannot assure investors that any acquisition or investment will be successful or otherwise
provide a favorable return on investment. In addition, acquisitions and the integration thereof require significant time and resources
and place significant demands on our management, as well as on our operational and financial infrastructure. In addition, if we fail to
successfully close transactions or integrate new teams, or integrate the products and technologies associated with these acquisitions
into our company, our business could be seriously harmed. Acquisitions may expose us to operational challenges and risks, including:
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the ability to profitably manage acquired businesses or successfully integrate the acquired businesses’ operations, personnel, financial reporting, accounting and internal controls, technologies and products into our business;
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increased indebtedness and the expense of integrating acquired businesses, including significant administrative, operational, economic, geographic or cultural challenges in managing and integrating the expanded or combined operations;
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entry into jurisdictions or acquisition of products or technologies with which we have limited or no prior experience, and the potential of increased competition with new or existing competitors as a result of such acquisitions;
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diversion of management’s attention and the over-extension of our operating infrastructure and our management systems, information technology systems, and internal controls and procedures, which may be inadequate to support growth;
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the ability to fund our capital needs and any cash flow shortages that may occur if anticipated revenue is not realized or is delayed, whether by general economic or market conditions, or unforeseen internal difficulties; and
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the ability to retain or hire qualified personnel required for expanded operations.
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Our acquisition strategy
may not succeed if we are unable to remain attractive to target companies or expeditiously close transactions. Issuing shares of Class A
common stock to fund an acquisition would cause economic dilution to existing stockholders. If we develop a reputation for being a difficult
acquirer or having an unfavorable work environment, or target companies view our Class A common stock unfavorably, we may be unable
to consummate key acquisition transactions essential to our corporate strategy and our business may be seriously harmed.
We are party to pending litigation in various
jurisdictions and with various plaintiffs and we may be subject to future litigation in the operation of our business. An adverse outcome
in one or more proceedings could adversely affect our business.
In the past we have been
party to, and we may in the future increasingly face the risk of, claims, lawsuits, and other proceedings involving competition and antitrust,
intellectual property, privacy, consumer protection, accessibility claims, securities, tax, labor and employment, commercial disputes,
services and other matters. See “Business — Legal Proceedings.” Litigation to defend us against claims by third parties,
or to enforce any rights that we may have against third parties, may be necessary, which could result in substantial costs and diversion
of our resources, causing a material adverse effect on our business, financial condition, results of operations and prospects.
Any litigation to which we
are a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal, or in payments of substantial monetary
damages or fines, the posting of bonds requiring significant collateral, letters of credit or similar instruments, or we may decide to
settle lawsuits on similarly unfavorable terms. These proceedings could also result in reputational harm, criminal sanctions, consent
decrees or orders preventing us from offering certain products or requiring a change in our business practices in costly ways or requiring
development of non-infringing or otherwise altered products or technologies. Litigation and other claims and regulatory proceedings against
us could result in unexpected disciplinary actions, expenses and liabilities, which could have a material adverse effect on our business,
financial condition, results of operations and prospects.
Our business is subject to a variety of
U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.
Any change in existing regulations or their interpretation, or the regulatory climate applicable to our products and services, or changes
in tax rules and regulations or interpretation thereof related to our products and services, could adversely impact our ability to
operate our business as currently conducted or as we seek to operate in the future, which could have a material adverse effect on our
financial condition and results of operations.
We are generally subject
to laws and regulations relating to fantasy sports, sports betting and iGaming in the jurisdictions in which we conduct our business or
in some circumstances, of those jurisdictions in which we offer our services or those are available, as well as the general laws and regulations
that apply to all e-commerce businesses, such as those related to privacy and personal information, tax and consumer protection. These
laws and regulations vary from one jurisdiction to another and future legislative and regulatory action, court decisions or other governmental
action, which may be affected by, among other things, political pressures, attitudes and climates, as well as personal biases, may have
a material impact on our operations and financial results. In particular, some jurisdictions have introduced regulations attempting to
restrict or prohibit online gaming, while others have taken the position that online gaming should be licensed and regulated and have
adopted or are in the process of considering legislation and regulations to enable that to happen. Additionally, some jurisdictions in
which we may operate could presently be unregulated or partially regulated and therefore more susceptible to the enactment or change of
laws and regulations.
We offer our DFS product
offering in 22 states that have adopted legislation permitting online fantasy sports. In those states that currently require a license
or registration, we have either obtained the appropriate license or registration, have obtained a provisional license, or are operating
pursuant to a grandfathering clause that allows operation pending the availability of licensing applications and subsequent grant of a
license. We also have three foreign licenses and operates under those licenses in eight countries.
We operate in 21 states and
one country, Canada, that do not have fantasy sports-specific laws or regulations. In those jurisdictions, our business may be subject
to future legislative and regulatory action, court decisions or other governmental action that could alter or eliminate our ability to
operate. On February 6, 2020, a state intermediate appellate court in New York determined in a split decision that a law specifically
authorizing paid fantasy sports contests in New York violated the New York constitution. This decision is currently stayed and has been
appealed to the New York Court of Appeals (the highest court in New York). If upheld, it could jeopardize our ability to operate our DFS
offering in New York. In addition, in certain states in which DraftKings operates, including Texas and Florida, the applicable office
of the Attorney General has issued an adverse legal opinion regarding DFS. In the event that one of those Attorneys General decides to
take action on the opinion from their office, we may have to withdraw our operations from such state, which could have a material adverse
effect on our business, financial condition and results of operations.
In May 2018, the U.S.
Supreme Court struck down PASPA as unconstitutional. This decision has the effect of lifting federal restrictions on sports betting and
thus allowing states to determine the legality of sports betting for themselves. Since the repeal of PASPA, several states (and Washington
D.C.) have legalized online sports betting. To the extent new real money gaming or sports betting jurisdictions are established or expanded,
we cannot guarantee that we will be successful in penetrating such new jurisdictions or expanding our business or user base in line with
the growth of existing jurisdictions. If we are unable to effectively develop and operate directly or indirectly within these new jurisdictions
or if our competitors are able to successfully penetrate geographic jurisdictions that we cannot access or where we face other restrictions,
there could be a material adverse effect on our business, operating results and financial condition. Our failure to obtain or maintain
the necessary regulatory approvals in jurisdictions, whether individually or collectively, would have a material adverse effect on our
business. See “Business — Government Regulation.” To expand into new jurisdictions, we may need to be licensed and obtain
approvals of our product offerings. This is a time-consuming process that can be costly. Any delays in obtaining or difficulty in maintaining
regulatory approvals needed for expansion within existing jurisdictions or into new jurisdictions can negatively affect our opportunities
for growth, including the growth of our customer base, or delay our ability to recognize revenue from our offerings in any such jurisdictions.
Future legislative and regulatory
action, and court decisions or other governmental action, may have a material impact on our operations and financial results. Governmental
authorities could view us as having violated local laws, despite our efforts to obtain all applicable licenses or approvals. There is
also a risk that civil and criminal proceedings, including class actions, brought by or on behalf of prosecutors or public entities or
incumbent monopoly providers, or private individuals, could be initiated against us, Internet service providers, credit card and
other payment processors, advertisers and others involved in the DFS, sports betting and iGaming industries. Such potential proceedings
could involve substantial litigation expense, penalties, fines, seizure of assets, injunctions or other restrictions being imposed upon
us or our licensees or other business partners, while diverting the attention of key executives. Such proceedings could have a material
adverse effect on our business, financial condition, results of operations and prospects, as well as impact our reputation.
There can be no assurance
that legally enforceable legislation will not be proposed and passed in jurisdictions relevant or potentially relevant to our business
to prohibit, legislate or regulate various aspects of the DFS, iGaming and sports betting industries (or that existing laws in those jurisdictions
will not be interpreted negatively). Compliance with any such legislation may have a material adverse effect on our business, financial
condition and results of operations, either as a result of our determination that a jurisdiction should be blocked, or because a local
license or approval may be costly for us or our business partners to obtain and/or such licenses or approvals may contain other commercially
undesirable conditions.
In the context of our EU-facing operations,
we may be subject to specific compliance obligations under the General Data Protection Regulation (EU) 2016/679 (the “GDPR”)
and associated laws and regulations in different EU Member States in which we operate. In addition, portions of our business established
outside the EU may be required to comply with the requirements of the GDPR and associated EU legislation with respect to the offering
of products or services to, or the monitoring of, individuals in the EU. We may also be subject to the local privacy and data protection
laws of the EU Member States in which we offer products or services. Failure to comply with these EU data protection and privacy laws,
can carry penalties and potential criminal sanctions, as well as the risk of litigation. In addition, Directive 2002/58/EC (as amended
by Directive 2009/136/EC) (together, the “e-Privacy Directive”) governs, among other things, the use of cookies and the sending
of electronic direct marketing within the European Union and, as such, will apply to our marketing activities within the EU. Following
Brexit, the UK has adopted its own data protection and direct marketing laws (the "UK data protection laws") which are currently
based on the corresponding EU legislation. Our UK-facing operations may therefore be subject to specific compliance obligations under
the UK data protection laws.
In our efforts to comply
with these requirements, we rely on positions and interpretations of the law that have yet to be fully tested before the relevant courts
and regulators. While the UK data protection laws are currently similar to the corresponding EU laws, it is possible that those laws will
diverge in the future; to the extent that those laws do diverge, then that may increase the costs of maintaining regulatory compliance.
There is also a risk that it may become more difficult to make cross-border transfers of personal data, as a result of diverging data
protection regimes in the territories where our customers are located and the territories where our operations are based. If a regulator
or court of competent jurisdiction determined that one or more of our compliance efforts does not satisfy the applicable requirements
of the GDPR or the e-Privacy Directive, or the UK data protection laws, or if any party brought a claim in this regard, there could be
potential governmental or regulatory investigations, enforcement actions, regulatory fines, compliance orders, litigation or public statements
against us by consumer advocacy groups or others, and that could cause customers to lose trust in us and damage our reputation. Likewise,
a change in guidance could be costly and have an adverse effect on our business.
Our growth prospects depend on the legal
status of real-money gaming in various jurisdictions, predominantly within the United States, and legalization may not occur in as many
states as we expect, or may occur at a slower pace than we anticipate. Additionally, even if jurisdictions legalize real money gaming,
this may be accompanied by legislative or regulatory restrictions and/or taxes that make it impracticable or less attractive to operate
in those jurisdictions, or the process of implementing regulations or securing the necessary licenses to operate in a particular jurisdiction
may take longer than we anticipate, which could adversely affect our future results of operations and make it more difficult to meet our
expectations for financial performance.
A number of states have legalized,
or are currently considering legalizing, real money gaming, and our business, financial condition, results of operations and prospects
are significantly dependent upon legalization of real money gaming. Our business plan is partially based upon the legalization of real
money gaming for a specific percent of the population on a yearly basis and the legalization may not occur as we have anticipated. Additionally,
if a large number of additional states or the federal government enact real money gaming legislation and we are unable to obtain, or are
otherwise delayed in obtaining the necessary licenses to operate online sports betting or iGaming websites in U.S. jurisdictions where
such games are legalized, our future growth in online sports betting and iGaming could be materially impaired.
As we enter into new jurisdictions,
states or the federal government may legalize real money gaming in a manner that is unfavorable to us. As a result, we may encounter legal,
regulatory and political challenges that are difficult or impossible to foresee and which could result in an unforeseen adverse impact
on planned revenues or costs associated with the new opportunity. For example, certain states require us to have a relationship with a
retail operator for online Sportsbook access, which tends to increase our costs of revenue. States that have established state-run monopolies
may limit opportunities for private sector participants like us. States also impose substantial tax rates on online sports betting and
iGaming revenue, in addition to the federal excise tax of 25 basis points on the amount of each wager. As most state product taxes apply
to various measures of modified gross profit, tax rates, whether federal- or state-based, that are higher than we expect will make it
more costly and less desirable for us to launch in a given jurisdiction, while tax increases in any of our existing jurisdictions may
adversely impact our profitability.
Therefore, even in cases
in which a jurisdiction purports to license and regulate DFS, sports betting or iGaming, the licensing and regulatory regimes can vary
considerably in terms of their business-friendliness and at times may be intended to provide incumbent operators with advantages over
new licensees. Therefore, some “liberalized” regulatory regimes are considerably more commercially attractive than others.
Failure to comply with regulatory requirements
in a particular jurisdiction, or the failure to successfully obtain a license or permit applied for in a particular jurisdiction, could
impact our ability to comply with licensing and regulatory requirements in other jurisdictions, or could cause the rejection of license
applications or cancelation of existing licenses in other jurisdictions, or could cause financial institutions, online and mobile platforms,
advertisers and distributors to stop providing services to us which we rely upon to receive payments from, or distribute amounts to, our
users, or otherwise to deliver and promote our services.
Compliance with the various
regulations applicable to fantasy sports and real money gaming is costly and time-consuming. Regulatory authorities at the non-U.S., U.S.
federal, state and local levels have broad powers with respect to the regulation and licensing of fantasy sports and real money gaming
operations and may revoke, suspend, condition or limit our fantasy sports or real money gaming licenses, impose substantial fines on us
and take other actions, any one of which could have a material adverse effect on our business, financial condition, results of operations
and prospects. These laws and regulations are dynamic and subject to potentially differing interpretations, and various legislative and
regulatory bodies may expand current laws or regulations or enact new laws and regulations regarding these matters. We will strive to
comply with all applicable laws and regulations relating to our business. It is possible, however, that these requirements may be interpreted
and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules. Non-compliance with any
such law or regulations could expose us to claims, proceedings, litigation and investigations by private parties and regulatory authorities,
as well as substantial fines and negative publicity, each of which may materially and adversely affect our business.
Any fantasy sports or real
money gaming license could be revoked, suspended or conditioned at any time. The loss of a license in one jurisdiction could trigger the
loss of a license or affect our eligibility for such a license in another jurisdiction, and any of such losses, or potential for such
loss, could cause us to cease offering some or all of our offerings in the impacted jurisdictions. We may be unable to obtain or maintain
all necessary registrations, licenses, permits or approvals, and could incur fines or experience delays related to the licensing process,
which could adversely affect our operations. Our delay or failure to obtain or maintain licenses in any jurisdiction may prevent us from
distributing our offerings, increasing our customer base and/or generating revenues. We cannot assure you that we will be able to obtain
and maintain the licenses and related approvals necessary to conduct our DFS, Sportsbook and iGaming operations. Any failure to maintain
or renew our existing licenses, registrations, permits or approvals could have a material adverse effect on our business, financial condition,
results of operations and prospects.
Our growth prospects and market potential
will depend on our ability to obtain licenses to operate in a number of jurisdictions and if we fail to obtain such licenses our business,
financial condition, results of operations and prospects could be impaired.
Our ability to grow our business
will depend on our ability to obtain and maintain licenses to offer our product offerings in a large number of jurisdictions or in heavily
populated jurisdictions. If we fail to obtain and maintain licenses in large jurisdictions or in a greater number of mid-market jurisdictions,
this may prevent us from expanding the footprint of our product offerings, increasing our user base and/or generating revenues. We cannot
be certain that we will be able to obtain and maintain licenses and related approvals necessary to conduct our DFS, Sportsbook and iGaming
operations. Any failure to obtain and maintain licenses, registrations, permits or approvals could have a material adverse effect on our
business, financial condition, results of operations and prospects.
We have been, and continue to be, the subject
of governmental investigations and inquiries with respect to the operation of our businesses and we could be subject to future governmental
investigations and inquiries, legal proceedings and enforcement actions. Any such investigation, inquiry, proceeding or action, could
adversely affect our business.
We have received formal and
informal inquiries from time to time, from government authorities and regulators, including tax authorities and gaming regulators, regarding
compliance with laws and other matters, and we may receive such inquiries in the future, particularly as we grow and expand our operations.
Violation of existing or future regulations, regulatory orders or consent decrees could subject us to substantial monetary fines and other
penalties that could negatively affect our financial condition and results of operations. In addition, it is possible that future orders
issued by, or inquiries or enforcement actions initiated by, government or regulatory authorities could cause us to incur substantial
costs, expose us to unanticipated liability or penalties, or require us to change our business practices in a manner materially adverse
to our business.
Participation in the sports betting industry
exposes us to trading, liability management and pricing risk. We may experience lower than expected profitability and potentially significant
losses as a result of a failure to determine accurately the odds in relation to any particular event and/or any failure of its sports
risk management processes.
Our fixed-odds betting products
involve betting where winnings are paid on the basis of the stake placed and the odds quoted. Odds are determined with the objective of
providing an average return to the bookmaker over a large number of events and therefore, over the long term, our gross win percentage
has remained fairly constant. However, there can be significant variation in gross win percentage event- by-event and day-by-day. We have
systems and controls that seek to reduce the risk of daily losses occurring on a gross-win basis, but there can be no assurance that these
will be effective in reducing our exposure, and consequently our exposure to this risk in the future. As a result, in the short term,
there is less certainty of generating a positive gross win, and we may experience (and we have from time to time experienced) significant
losses with respect to individual events or betting outcomes, in particular if large individual bets are placed on an event or betting
outcome or series of events or betting outcomes. Odds compilers and risk managers are capable of human error, thus even allowing for the
fact that a number of betting products are subject to capped pay-outs, significant volatility can occur. In addition, it is possible that
there may be such a high volume of trading during any particular period that even automated systems would be unable to address and eradicate
all risks. Any significant losses on a gross- win basis could have a material adverse effect on our business, financial condition and
results of operations. In addition, if a jurisdiction where we hold or wish to apply for a license imposes a high turnover tax for betting
(as opposed to a gross-win tax), this too would impact profitability, particularly with high value/low margin bets, and likewise have
a material adverse effect on our business.
Palpable (obvious) errors in Sportsbook
odds making may occasionally occur in the normal course of business, sometimes for large liabilities. While it is a worldwide standard
business practice to void bets associated with palpable errors or to correct the odds, there is no guarantee regulators will approve voiding
palpable errors in every case.
Our Sportsbook offers a huge
spectrum of betting markets across dozens of sports, and the odds are set through a combination of algorithmic and manual odds making.
Bet acceptance is also a combination of automatic and manual acceptance. In some cases, the odds offered on the website constitute an
obvious error. Examples of such errors are inverted lines between teams, or odds that are significantly different from the true odds of
the outcome in a way that all reasonable persons would agree is an error. It is commonplace virtually worldwide for operators to void
bets associated with such palpable errors, and in most mature jurisdictions these bets can be voided without regulatory approval at operator
discretion. In the U.S., it is unclear long term if state-by-state regulators will consistently approve voids or re-setting odds to correct
odds on such bets. In some cases, we require regulatory approval to void palpable errors ahead of time. If regulators were to not allow
voiding of bets associated with large obvious errors in odds making, we could be subject to covering significant liabilities.
We follow the industry practice of restricting
and managing betting limits at the individual customer level based on individual customer profiles and risk level to the enterprise; however
there is no guarantee that states will allow operators such as us to limit on the individual customer level.
Similar to a credit card
company managing individual risk on the customer level through credit limits, it is customary for sports betting operators to manage customer
betting limits at the individual level to manage enterprise risk levels. We believe this practice is beneficial overall, because if it
were not possible, the betting options would be restricted globally and limits available to customers would be much lower to insulate
overall risk due to the existence of a very small segment of highly sophisticated syndicates and algorithmic bettors, or bettors looking
to take advantage of site errors and omissions. We believe virtually all operators balance taking reasonable action from all customers
against the risk of individual customers significantly harming the business viability. We cannot assure you that all state legislation
and regulators will always allow operators to execute limits at the individual customer level, or at their sole discretion.
Negative events or negative media coverage
relating to, or a declining popularity of, daily fantasy sports, sports betting, the underlying sports or athletes, online sports betting
or iGaming in particular, or other negative coverage may adversely impact our ability to retain or attract users, which could have an
adverse impact on our business.
Public opinion can significantly
influence our business. Unfavorable publicity regarding us, for example, our product changes, product quality, litigation, or regulatory
activity, or regarding the actions of third parties with whom we have relationships or the underlying sports (including declining popularity
of the sports or athletes) could seriously harm our reputation. In addition, a negative shift in the perception of sports betting and
iGaming by the public or by politicians, lobbyists or others could affect future legislation of sports betting and iGaming, which could
cause jurisdictions to abandon proposals to legalize sports betting and iGaming, thereby limiting the number of jurisdictions in which
we can operate. Furthermore, illegal betting activity by athletes could result in negative publicity for our industry and could harm our
brand reputation. Negative public perception could also lead to new restrictions on or to the prohibition of iGaming or sports betting
in jurisdictions in which we currently operate. Such negative publicity could also adversely affect the size, demographics, engagement,
and loyalty of our customer base and result in decreased revenue or slower user growth rates, which could seriously harm our business.
We may have difficulty accessing the service
of banks, credit card issuers and payment processing services providers, which may make it difficult to sell our products and services.
Although financial institutions
and payment processors are permitted to provide services to us and others in our industry, banks, credit card issuers and payment processing
service providers may be hesitant to offer banking and payment processing services to real money gaming and fantasy sports businesses.
Consequently, those businesses involved in our industry, including our own, may encounter difficulties in establishing and maintaining
banking and payment processing relationships with a full scope of services and generating market rate interest. If we were unable to maintain
our bank accounts or our users were unable to use their credit cards, bank accounts or e-wallets to make deposits and withdrawals from
our offerings it would make it difficult for us to operate our business, increase our operating costs, and pose additional operational,
logistical and security challenges which could result in an inability to implement our business plan.
The requirements of being a public company
may strain our resources and divert management’s attention, and the increases in legal, accounting and compliance expenses may be
greater than we anticipate.
We became a public company
following the Closing of the Business Combination, and as such, have incurred, and will continue to incur, significant legal, accounting
and other expenses that DraftKings and SBT did not incur as private companies. We are subject to the reporting requirements of the Exchange
Act, and are required to comply with the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer
Protection Act, as well as the rules and regulations subsequently implemented by the SEC and the listing standards of The Nasdaq
Stock Market, including changes in corporate governance practices and the establishment and maintenance of effective disclosure and financial
controls. Compliance with these rules and regulations can be burdensome. Our management and other personnel need to devote a substantial
amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our historical legal and financial
compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations
may make it more difficult and more expensive for us to attract and retain qualified members of our Board as compared to DraftKings and
SBT as private companies. Additionally, as we are no longer an “emerging growth company”, we have incurred significant expenses
and devoted substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act
and expect to continue to do so in the future. We will need to continue to hire additional accounting and financial staff, and engage
outside consultants, all with appropriate public company experience and technical accounting knowledge and maintain an internal audit
function, which will increase our operating expenses. Moreover, we could incur additional compensation costs in the event that we decide
to pay cash compensation closer to that of other publicly-listed companies, which would increase our general and administrative expenses
and could materially and adversely affect our profitability. We are evaluating these rules and regulations, and cannot predict or
estimate the amount of additional costs we may incur or the timing of such costs.
Failure
to maintain adequate financial, information technology and management processes and controls could result in material weaknesses which
could lead to errors in our financial reporting, which could adversely affect our business now that we are a public company.
Maintaining effective internal
control over financial reporting is necessary for us to produce reliable financial reports and is important in helping to prevent financial
fraud. If we are unable to maintain adequate internal controls over financial reporting, our business and operating results could be harmed.
Effective December 31, 2020, we are no longer an “emerging growth company”, and therefore under applicable SEC rules we
must maintain internal controls over financial reporting to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of
2002 (“Sarbanes-Oxley”) and the related rules of the SEC, which require, among other things, our management to assess
annually the effectiveness of our internal control over financial reporting and our independent registered public accounting firm to issue
a report on the effectiveness of internal control over financial reporting with our Annual Report.
The internal control assessment
required by Section 404 of Sarbanes-Oxley may divert internal resources and we may experience higher operating expenses, higher independent
auditor and consulting fees during the implementation of these changes. We may not be able to complete our evaluation, testing and any
required remediation in a timely fashion. In addition, our current controls and any new controls that we develop may become inadequate
because of poor design and changes in our business, including increased complexity resulting from any international expansion. Any failure
to implement and maintain effective internal controls over financial reporting could adversely affect the results of assessments by our
independent registered public accounting firm and their attestation reports.
If we are unable to certify
the effectiveness of our internal controls, or if our internal controls have a material weakness, we may not detect errors timely, our
consolidated financial statements could be misstated, we could be subject to regulatory scrutiny and a loss of confidence by stakeholders,
which could harm our business and adversely affect the market price of our common stock. Failure to comply with Section 404 of Sarbanes-Oxley
could potentially subject us to sanctions or investigations by the SEC, FINRA or other regulatory authorities, as well as increase the
risk of liability arising from litigation based on securities law.
Continued growth and success will depend
on the performance of our current and future employees, including certain key employees. Recruitment and retention of these individuals
is vital to growing our business and meeting our business plans. The loss of any of our key executives or other key employees could harm
our business.
We depend on a limited number
of key personnel to manage and operate our business, including DraftKings’ co-founders, our Chief Financial Officer and our Chief
Legal Officer. The leadership of these key personnel was a critical element of Old DK’s success and we expect that such leadership
will continue to be a critical element of DraftKings’ future success. The departure, death or disability of any one of our executive
officers or other extended or permanent loss of any of their services, or any negative market or industry perception with respect to any
of them or their loss, could have a material adverse effect on our business. We are the beneficiary of a $2 million key man insurance
policy covering our Chief Executive Officer, but we are not protected by key man or similar life insurance covering other executive officers
or members of senior management.
In addition, certain of our
other employees have made significant contributions to our growth and success. We believe our success and our ability to compete and grow
will depend in large part on the efforts and talents of our employees and on our ability to retain highly skilled personnel. The competition
for these types of personnel is intense and we compete with other potential employers for the services of our employees. As a result,
we may not succeed in retaining the executives and other key employees that we need. Employees, particularly analysts and engineers, are
in high demand, and we devote significant resources to identifying, hiring, training, successfully integrating and retaining these employees.
We cannot provide assurance that we will be able to attract or retain such highly qualified personnel in the future. In addition, the
loss of employees or the inability to hire additional skilled employees as necessary could result in significant disruptions to our business,
and the integration of replacement personnel could be time-consuming and expensive and cause additional disruptions to our business.
All of our named executive
officers are employees-at-will. The unexpected loss of services of one or more of these key employees could have a material adverse effect
on our business, financial condition, results of operations and prospects.
Additionally, as we grow
and develop the infrastructure as a public company, we may find it difficult to maintain our entrepreneurial, innovative and team-based
culture. Our retention and recruiting may require significant increases in compensation expense as we transition to a public company,
which would adversely affect our results of operation. Moreover, there may also be disparities of wealth between those of our employees
who were employees of DraftKings or SBT prior to the Business Combination and those who join us after the Closing, which may harm our
culture and relations among employees.
If we do not succeed in attracting,
hiring, and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively and
our business could be seriously harmed.
In some jurisdictions our key executives,
certain employees or other individuals related to the business will be subject to licensing or compliance requirements. Failure by such
individuals to obtain the necessary licenses or comply with individual regulatory obligations, could cause the business to be non-compliant
with its obligations, or imperil its ability to obtain or maintain licenses necessary for the conduct of the business. In some cases,
the remedy to such situation may require the removal of a key executive or employee and the mandatory redemption or transfer of such person’s
equity securities.
As part of obtaining real
money gaming licenses, the responsible gaming authority will generally determine suitability of certain directors, officers and employees
and, in some instances, significant shareholders. The criteria used by gaming authorities to make determinations as to who requires a
finding of suitability or the suitability of an applicant to conduct gaming operations varies among jurisdictions, but generally requires
extensive and detailed application disclosures followed by a thorough investigation. If any gaming authority with jurisdiction over our
business were to find an applicable officer, director, employee or significant shareholder of ours unsuitable for licensing or unsuitable
to continue having a relationship with us, we would be required to sever our relationship with that person. Furthermore, such gaming authorities
may require us to terminate the employment of any person who refuses to file required applications. Either result could have a material
adverse effect on our business, operations and prospects.
In addition, our amended
and restated articles of incorporation provides that any of our common stock or other equity securities owned or controlled by any stockholder
whom the Board determines in good faith (following consultation with reputable outside gaming regulatory counsel), pursuant to a resolution
adopted by the unanimous affirmative vote of all of the disinterested members of the Board, is an unsuitable person, will be subject to
mandatory sale and transfer to either us or one or more third-party transferees.
Additionally, a gaming regulatory
body may refuse to issue or renew a gaming license or restrict or condition the same, based on our present activities or the past activities
of DraftKings or SBT, or the past or present activities of their or our current or former directors, officers, employees, shareholders
or third parties with whom we have relationships, which could adversely affect our operations or financial condition. If additional gaming
regulations are adopted in a jurisdiction in which we operate, such regulations could impose restrictions or costs that could have a significant
adverse effect on us. From time to time, various proposals are introduced in the legislatures of some of the jurisdictions in which we
have existing or planned operations that, if enacted, could adversely affect our directors, officers, key employees, or other aspects
of our operations. To date, we have obtained all governmental licenses, findings of suitability, registrations, permits and approvals
necessary for our operations. However, we can give no assurance that any additional licenses, permits and approvals that may be required
will be given or that existing ones will be renewed or will not be revoked. Renewal is subject to, among other things, continued satisfaction
of suitability requirements of our directors, officers, key employees and shareholders. Any failure to renew or maintain our licenses
or to receive new licenses when necessary would have a material adverse effect on us.
Due to the nature of our business, we are
subject to taxation in a number of jurisdictions and changes in, or new interpretations of, tax laws, tax rulings or their application
by tax authorities could result in additional tax liabilities and could materially affect our financial condition and results of operations.
We are also subject to periodic audits and examinations by the IRS, as well as state and local taxing authorities, the results of which
may materially impact our financial statements in the period in which the audit or examination occurs.
Our tax obligations will
be varied and include U.S. federal, state and international taxes due to the nature of our business. The tax laws that will be applicable
to our business are subject to interpretation, and significant judgment will be required in determining our worldwide provision for income
taxes. In the course of our business, there will be many transactions and calculations where the ultimate tax determination is uncertain.
For example, compliance with the 2017 United States Tax Cuts and Jobs Act (“TCJA”) may require the collection of information
not regularly produced within our Company, the use of estimates in our consolidated financial statements, and the exercise of significant
judgment in accounting for its provisions. As regulations and guidance evolve with respect to the TCJA, and as we gather more information
and perform more analysis, our results may differ from previous estimates and may materially affect our consolidated financial statements.
The gaming industry represents
a significant source of tax revenue to the jurisdictions in which we will operate. Gaming companies and business-to-business providers
in the gaming industry (directly and/or indirectly by way of their commercial relationships with operators) are currently subject to significant
taxes and fees in addition to normal corporate income taxes, and such taxes and fees are subject to increase at any time. From time to
time, various legislators and other government officials have proposed and adopted changes in tax laws, or in the administration or interpretation
of such laws, affecting the gaming industry. In addition, any worsening of economic conditions and the large number of jurisdictions with
significant current or projected budget deficits could intensify the efforts of governments to raise revenues through increases in gaming
taxes and/or other taxes. It is not possible to determine with certainty the likelihood of changes in tax laws or in the administration
or interpretation or enforcement of such laws. Any material increase, or the adoption of additional taxes or fees, could have a material
adverse effect on our business, financial condition, results of operations and prospects.
Additionally, tax authorities
may impose indirect taxes on Internet-related commercial activity based on existing statutes and regulations which, in some cases, were
established prior to the advent of the Internet. Tax authorities may interpret laws originally enacted for mature industries and apply
it to newer industries, such as DraftKings. The application of such laws may be inconsistent from jurisdiction to jurisdiction. Our in-jurisdiction
activities may vary from period to period which could result in differences in nexus from period to period.
We are subject to periodic
review and audit by domestic and foreign tax authorities. Tax authorities may disagree with certain positions DraftKings or SBT has taken
or that we will take, and any adverse outcome of such a review or audit could have a negative effect on our business, financial condition
and results of operations. Although we believe that our tax provisions, positions and estimates are reasonable and appropriate, tax authorities
may disagree with certain positions we have taken. In addition, economic and political pressures to increase tax revenue in various jurisdictions
may make resolving tax disputes favorably more difficult. We are currently under IRS audit for prior tax years, with the primary unresolved
issues relating to excise taxation of fantasy sports contests and informational reporting and withholding. The final resolution of that
audit, and other audits or litigation, may differ from the amounts recorded in Old DK’s consolidated financial statements included
herein and may materially affect our consolidated financial statements in the period or periods in which that determination is made.
Although SBT’s corporate
and tax structure resulted in relatively low effective corporate tax rate for the business, we cannot guarantee the same tax efficiency
due to the change in corporate structures, as well as developments in the cross-border taxation of international businesses with particular
focus on the digital economy, as contemplated under The Organization for Economic Cooperation and Development’s Base Erosion and
Profit Shifting initiative and transfer pricing legislation. Further, in light of such structure, we may be exposed to a substantial tax
liability if the relevant authorities raise claims with regards to SBT’s tax status in various jurisdictions, including in particular
the manner in which it allocated or allocates profit amongst relevant jurisdictions for tax purposes.
Failure to protect or enforce our intellectual
property rights or the costs involved in such enforcement could harm our business, financial condition and results of operations.
We rely on trademark, copyright,
patent, trade secret, and domain-name-protection laws to protect our proprietary rights. In the United States and internationally, we
have filed various applications to protect aspects of our intellectual property, and currently hold a number of issued patents in multiple
jurisdictions. In the future we may acquire additional patents or patent portfolios, which could require significant cash expenditures.
However, third parties may knowingly or unknowingly infringe our proprietary rights, third parties may challenge proprietary rights held
by us, and pending and future trademark and patent applications may not be approved. In addition, effective intellectual property protection
may not be available in every country in which we operate or intend to operate our business. In any of these cases, we may be required
to expend significant time and expense to prevent infringement or to enforce our rights. There can be no assurance that others will not
offer products or services that are substantially similar to ours and compete with our business.
Circumstances outside our
control could pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available
in the United States or other countries from which our DFS, Sportsbook and iGaming product offerings are accessible. Also, the efforts
we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property
rights could harm our business or our ability to compete. Also, protecting our intellectual property rights is costly and time-consuming.
Any unauthorized disclosure or use of our intellectual property could make it more expensive to do business, thereby harming our operating
results. Furthermore, if we are unable to protect our proprietary rights or prevent unauthorized use or appropriation by third parties,
the value of our brand and other intangible assets may be diminished, and competitors may be able to more effectively mimic our offerings
and service. Any of these events could seriously harm our business.
We rely on licenses to use the intellectual
property rights of third parties which are incorporated into our products and services. Failure to renew or expand existing licenses may
require us to modify, limit or discontinue certain offerings, which could materially affect our business, financial condition and results
of operations.
We rely on products, technologies
and intellectual property that we license from third parties, for use in our business-to-business and business-to-consumers offerings.
Substantially all of our offerings and services use intellectual property licensed from third parties. The future success of our business
may depend, in part, on our ability to obtain, retain and/or expand licenses for popular technologies and games in a competitive market.
We cannot assure that these third-party licenses, or support for such licensed products and technologies, will continue to be available
to us on commercially reasonable terms, if at all. In the event that we cannot renew and/or expand existing licenses, we may be required
to discontinue or limit our use of the products that include or incorporate the licensed intellectual property.
Some of our license agreements
contain minimum guaranteed royalty payments to the third party. If we are unable to generate sufficient revenue to offset the minimum
guaranteed royalty payments, it could have a material adverse effect on our results of operations, cash flows and financial condition.
Our license agreements generally allow for assignment in the event of a strategic transaction but contain some limited termination rights
post-assignment. Certain of our license agreements grant the licensor rights to audit our use of their intellectual property. Disputes
with licensors over uses or terms could result in the payment of additional royalties or penalties by us, cancellation or non-renewal
of the underlying license or litigation.
The regulatory review process
and licensing requirements also may preclude us from using technologies owned or developed by third parties if those parties are unwilling
to subject themselves to regulatory review or do not meet regulatory requirements. Some gaming authorities require gaming manufacturers
to obtain approval before engaging in certain transactions, such as acquisitions, mergers, reorganizations, financings, stock offerings
and share repurchases. Obtaining such approvals can be costly and time consuming, and we cannot assure that such approvals will be granted
or that the approval process will not result in delays or disruptions to our strategic objectives.
Our insurance may not provide adequate levels of coverage against
claims.
We maintain insurance that
we believe is customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against
or that we believe are not economically reasonable to insure. Moreover, any loss incurred could exceed policy limits and policy payments
made to us may not be made on a timely basis. Such losses could adversely affect our business prospects, results of operations, cash flows
and financial condition.
Risk Factors Relating to the Integration of
DraftKings’ and SBTech’s Businesses
While we work to integrate the DraftKings
and SBT businesses and operations, management’s focus and resources may be diverted from operational matters and other strategic
opportunities.
Successful integration of
SBT’s operations, sports betting and gaming technology and personnel into those of DraftKings places an additional burden on management
and other internal resources. The diversion of management’s attention and any difficulties encountered in the transition and integration
process could harm our business, financial condition, results of operations and prospects. In addition, uncertainty about the effect of
the Business Combination on our systems, employees, customers, partners, and other third parties, including regulators, may have an adverse
effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel for some time after the Business
Combination.
Furthermore, the overall
integration of the businesses may result in material unanticipated problems, expenses, liabilities, competitive responses, and loss of
customers and other relationships. The difficulties of combining the operations of the companies include, among others, difficulties in
integrating operations and systems; conforming standards, controls, procedures and accounting and other policies, business cultures and
compensation structures; assimilating employees, including possible culture conflicts and different opinions on technical decisions and
product roadmaps; managing the expanded operations of a larger and more complex company, including coordinating a geographically dispersed
organization; and keeping existing customers and obtaining new customers. Many of these factors will be outside our control and any one
of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy,
which could materially impact our business, financial condition and results of operations.
We may incur successor liabilities due to
conduct arising prior to the completion of the Business Combination.
We may be subject to certain
liabilities of DraftKings and SBT. DraftKings and SBT at times may each become subject to litigation claims in the operation of its business,
including, but not limited to, with respect to employee matters and contract matters. From time to time, we may also face intellectual
property infringement, misappropriation, or invalidity/non-infringement claims from third parties, and some of these claims may lead to
litigation. We may initiate claims to assert or defend their own intellectual property against third parties. Any litigation may be expensive
and time-consuming and could divert management’s attention from its business and negatively affect its operating results or financial
condition. The outcome of any litigation cannot be guaranteed, and adverse outcomes can affect us negatively.
We may also face inquiry
and investigation by governmental authorities, which could in turn lead to fines, as the regulatory landscape of sport betting and iGaming
changes.
Although we expect that the Business Combination
will produce substantial synergies, the integration of the two companies, incorporated in different countries, with geographically dispersed
operations, and with different business cultures and compensation structures, presents management challenges. There can be no assurance
that this integration, and the synergies expected to result from that integration, will be achieved as rapidly or to the extent currently
anticipated.
The Business Combination
involved the integration of two businesses that previously operated as independent businesses. We are devoting management attention and
resources to integrating the businesses. We may encounter potential difficulties in the integration process including the following:
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the inability to successfully integrate the two businesses, including operations, technologies, products and services, in a manner that permits us to achieve the cost savings and operating synergies anticipated to result from the Business Combination, which could result in the anticipated benefits of the Business Combination not being realized partly or wholly in the time frame currently anticipated or at all;
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the loss of customers as a result of certain customers of either or both of the businesses deciding not to continue to do business with us, or deciding to decrease their amount of business in order to reduce their reliance on a single company;
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the necessity of coordinating geographically separated organizations, systems and facilities;
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potential unknown liabilities and unforeseen expenses associated with the Business Combination;
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the integration of personnel with diverse business backgrounds and business cultures, while maintaining focus on providing consistent, high-quality products and services;
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the consolidation and rationalization of information technology and administrative infrastructures as well as accounting systems and related financial reporting activities;
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the potential weakening of relationships with regulators; and
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the challenge of preserving important relationships and resolving potential conflicts that may arise.
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Furthermore, it is possible
that the integration process could result in the loss of talented employees or skilled workers. The loss of talented employees and skilled
workers could adversely affect our ability to successfully conduct our businesses because of such employees’ experience and knowledge
of the respective business. In addition, we could be adversely affected by the diversion of management’s attention and any delays
or difficulties encountered in connection with the integration of DraftKings and SBT. The process of integrating operations could cause
an interruption of, or loss of momentum in, the activities of the businesses. If we experience difficulties with the integration process,
the anticipated benefits of the Business Combination may not be realized fully or at all, or may take longer to realize than expected.
These integration matters could have an adverse effect on our business, results of operations, financial condition or prospects during
this transition period and for an undetermined period after completion of the Business Combination.
Our business now includes a B2B business
model, primarily in international jurisdictions, which business depends on the underlying financial performance of our direct operators
and its resellers. As a material part of SBT’s revenue has been generated through resellers and direct sales to operators, a decline
in such resellers’ or direct operators’ financial performance or a termination of some or all of the agreements with such
resellers or operators could have a material adverse effect on our business.
SBT historically offered
its services directly to operators in Europe and through a reseller model in Asia. SBT’s historical financial performance depended
on the underlying financial performance of its direct operators and its resellers. For example, SBT relied primarily on one reseller for
approximately 52% of SBT’s revenue in the year ended December 31, 2020 (excludes SBT activity that occurred prior to the Business
Combination on April 23, 2020). An adverse decline in the underlying financial performance of key SBT operators or resellers, or
a termination of some or all of the agreements with such resellers or operators, could have a material adverse effect on our business.
Given the increased number of jurisdictions
in which we operate, we may experience delays in the licensing application and approval process, depending on the regulatory requirements
in each relevant jurisdiction.
Regulated gaming license
applications frequently involve an in-depth suitability review of the applicant’s business and associated individuals including
certain officers, directors, key employees and significant shareholders. These applications take substantial time to prepare and submit,
often requiring the production of multiple years’ worth of business and personal financial records and disclosures which take considerable
time to compile, followed by the regulator’s investigatory process which may take months or even years to complete. Due to the increased
number of jurisdictions in which we now operate, as well as additional jurisdictions which may pass laws authorizing and requiring licensure
to operate sports betting, iGaming or daily fantasy sports, we may experience delays in the licensing application and approval process
due to the volume of application materials we must prepare and submit and the number of jurisdictions for which information is required.
Many jurisdictions in which we are already licensed will require additional applications and disclosures as a result of the Business Combination
which may also contribute to delays in the licensing application and approval process in additional jurisdictions.
SBT has historically relied on a less formal
financial reporting system and only began integrating a group-wide consistent financial reporting system in 2018, which may affect our
ability to report historical financial performance accurately.
In January 2018, SBT
implemented a global enterprise resource planning system which produces periodic consolidated financial reports. Prior to January 2018,
SBT relied on internally generated financial reporting which was an amalgamation of several financial booking systems. It is possible
that historical financial information was not fully aligned from the less formal system to the new system, which could affect the accuracy
of historical financial information.
SBT’s business, which includes significant
international operations, is likely to expose us to foreign currency transaction and translation risks. As a result, changes in the valuation
of the U.S. dollar in relation to other currencies could have positive or negative effects on our profit and financial position.
SBT’s global operations
are likely to expose us to foreign currency transaction and translation risks. Currency transaction risk occurs in conjunction with purchases
and sales of products and services that are made in currencies other than the local currency of the subsidiary involved, for example if
the parent company pays, or transfers U.S. dollars to a subsidiary in order to fund its expenses in local currencies. Currency translation
risks occurs when the income statement and balance sheet of a foreign subsidiary is converted into currencies other than the local currency
of the company involved, for example when the results of these subsidiaries are consolidated in the results of a parent company with a
different reporting currency. As a result, SBT historically was, and we are expected to be, exposed to adverse movements in foreign currency
exchange rates, which may adversely impact our financial positions and results of operations.
Our functional currency is
the U.S. dollar, and as a result, we will be subject to foreign currency fluctuation due to SBT’s global presence and the fact that
a significant majority of its revenues, operating expenses and assets and liabilities were non-U.S. dollar denominated. For example, an
increase in the value of non-U.S. dollar currencies against the U.S. dollar could increase costs for delivery of products, services and
also increase cost of local operating expenses and procurement of materials or services that we must purchase in foreign currencies by
increasing labor and other costs that are denominated in such local currencies. These risks related to exchange rate fluctuations may
increase in future periods as our operations outside of the United States expand.
Our foreign currency exposure
reflects SBT’s historical operations, which have been primarily in Euro (reflecting nearly over 85% of its revenue in all reporting
periods), which was SBT’s functional and reporting currency, and the British pound (which accounted for 7.0%, 10.2% and 5.0% of
SBT’s revenue in the years ended December 31, 2020, 2019 and 2018, respectively). SBT historically did not hedge its foreign
currency transaction or translation exposure, though we may consider doing so in the future. Foreign currency exchange rate volatility,
as well as the cost of any hedging arrangements entered into in the future, may negatively affect our financial position and results of
operations, and may adversely impact the comparability of results between periods.
We currently depend on the Kambi platform
to operate our Sportsbook, and we intend to transition these operations to the SBT technology over time. As we plan and implement this
transition, we may face a range of issues including the possibility that we may suffer service disruptions or impediments that make it
more difficult for our customers to access our product offerings, all which could have a material adverse effect on our business, financial
condition and results of operations.
We currently depend on Kambi
and its platform to operate our Sportsbook product offering; however, we intend to transition Sportsbook to SBT technology over time.
Any transition of Sportsbook technology currently provided by Kambi to that of SBT will be difficult to implement and could cause us to
incur significant time and expense. Pursuant to an addendum entered into on July 23, 2020, we committed to pay Kambi for use of its
platform until September 30, 2021. Until such time, any significant disruption of, or interference with, our use of Kambi would negatively
impact our operations and our business could be seriously harmed. If our users are not able to access Sportsbook or encounter difficulties
in doing so, we may lose users, and our business, financial condition and results of operations could be adversely affected.
In addition, Kambi may take
actions beyond our control that could seriously harm our business, including discontinuing or limiting our access to its sports betting
platform; increasing pricing terms; terminating or seeking to terminate our contractual relationship altogether; establishing more favorable
relationships with one or more of our competitors; or modifying or interpreting its terms of service or other policies in a manner that
impacts our ability to run our business and operations.
Risk Factors Relating to Our Common Stock
The trading price of our Class A common
stock has been, and will likely continue to be, volatile and you could lose all or part of your investment.
The trading price of our
Class A common stock has been, and will likely continue to be, volatile and subject to wide fluctuations in response to various factors,
some of which are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our Class A
common stock and our Class A common stock may trade at prices significantly below the price you paid for them. In such circumstances,
the trading price of our securities may not recover and may experience a further decline.
Factors affecting the trading price of our Class A
common stock may include:
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actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
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changes in the market’s expectations about our operating results;
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success of competitors;
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lack of adjacent competitors;
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our operating results failing to meet the expectation of securities analysts or investors in a particular period;
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changes in financial estimates and recommendations by securities analysts concerning DraftKings or the industries in which we operate in general;
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operating and stock price performance of other companies that investors deem comparable to us;
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our ability to market new and enhanced products and services on a timely basis;
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changes in laws and regulations affecting our business;
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commencement of, or involvement in, litigation involving us;
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changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
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the volume of shares of our Class A common stock available for public sale;
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any major change in our board or management;
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sales of substantial amounts of our Class A common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
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general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
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Broad market and industry
factors may materially harm the market price of our Class A common stock irrespective of our operating performance. The stock market
in general, and The Nasdaq Stock Market, have experienced price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of the affected companies. The trading prices and valuations of these stocks, and of our Class A common
stock, may not be predictable. A loss of investor confidence in the market for the stocks of other companies which investors perceive
to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of operations.
A decline in the market price of our Class A common stock also could adversely affect our ability to issue additional securities
and our ability to obtain additional financing in the future.
Sales of substantial amounts of Class A
common stock in the public market, or the perception that such sales may occur, could cause the market price for our Class A common
stock to decline.
The sale of shares of our
Class A common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price
of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult
for us to sell equity securities in the future at a time and at a price that we deem appropriate.
There were a total of 396.3
million shares of our Class A common stock outstanding as of December 31, 2020. In addition, we have reserved a total of 52.2
million shares of Class A common stock for issuance under the DraftKings Inc. 2020 Incentive Plan (the “Incentive Plan”)
and 5.8 million shares under the DraftKings Employee Stock Purchase Plan (the “ESPP”). Additionally, each of our Incentive
Plan and ESPP currently provide for an automatic increase in the number of shares that will be reserved for issuance. Any shares of Class A
common stock that we issue under our Incentive Plan, ESPP or other equity incentive plans that we may adopt in the future would dilute
the percentage ownership held by holders of Class A common stock.
In connection with the Business
Combination and equity offerings by the Company, we, our executive officers and directors and selling stockholders entered into agreements
restricting their ability to sell their shares of Class A common stock. As restrictions on resale have ended or if these stockholders
exercise their sale, exchange or registration rights and sell shares or are perceived by the market as intending to sell shares, the market
price of our shares of Class A common stock could drop significantly. These factors could also make it more difficult for us to raise
additional funds through future offerings of our shares of Class A common stock or other securities.
In the future, we may also
issue securities in connection with investments, acquisitions or capital raising activities. In particular, the number of shares of our
Class A common stock issued in connection with an investment or acquisition, or to raise additional equity capital, could constitute
a material portion of our then-outstanding shares of our Class A common stock. Any such issuance of additional securities in the
future may result in additional dilution to you or may adversely impact the price of our Class A common stock.
We may be required to take write-downs or
write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results
of operations and stock price, which could cause you to lose some or all of your investment.
We may be forced to write-down
or write-off assets, restructure our operations, or incur impairment or other charges that could result in losses. Even though these charges
may be non-cash items and not have an immediate impact on our liquidity, the fact that we report charges of this nature could contribute
to negative market perceptions about us or our securities. In addition, charges of this nature may cause us to violate net worth or other
covenants to which we may be subject. Accordingly, a stockholder could suffer a reduction in the value of their shares.
The coverage of our business or our Class A
common stock by securities or industry analysts or the absence thereof could adversely affect our securities and trading volume.
The trading market for our
Class A common stock is influenced in part by the research and other reports that industry or securities analysts publish about us
or our business or industry from time to time. We do not control these analysts, or the content and opinions included in their reports.
Analysts who publish information about our securities may have had relatively little experience with our company given our history, which
could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. If analysts
do cover us and one or more of them downgrade our securities, or if they issue other unfavorable commentary about us or our industry or
inaccurate research, our stock price would likely decline. Furthermore, if one or more of these analysts cease coverage or fail to regularly
publish reports on us, we could lose visibility in the financial markets. Any of the foregoing would likely cause our stock price and
trading volume to decline.
Because we are a “controlled company”
under The Nasdaq Stock Market listing standards, our stockholders may not have certain corporate governance protections that are available
to stockholders of companies that are not controlled companies.
So long as more than 50%
of the voting power for the election of directors of DraftKings is held by an individual, a group or another company, we will qualify
as a “controlled company” under The Nasdaq Stock Market listing requirements. Mr. Robins controls a majority of the voting
power of our outstanding capital stock. As a result, we are a “controlled company” under The Nasdaq Stock Market listing standards
and are not subject to the requirements that would otherwise require us to have: (i) a majority of independent directors; (ii) a
nominating committee comprised solely of independent directors; (iii) compensation of our executive officers determined by a majority
of the independent directors or a compensation committee comprised solely of independent directors; and (iv) director nominees selected,
or recommended for the Board’s selection, either by a majority of the independent directors or a nominating committee comprised
solely of independent directors.
Mr. Robins may have
his interest in DraftKings diluted due to future equity issuances or his own actions in selling shares of Class A common stock, in
each case, which could result in a loss of the “controlled company” exemption under The Nasdaq Stock Market listing rules.
We would then be required to comply with those provisions of The Nasdaq Stock Market listing requirements.
Our dual class structure has the effect
of concentrating voting power with our Chief Executive Officer and Co-Founder, which limits an investor’s ability to influence the
outcome of important transactions, including a change in control.
Shares of our Class B
common stock have 10 votes per share, while shares of our Class A common stock have one vote per share. Mr. Robins, one of the
founders of DraftKings, holds all of the issued and outstanding shares of our Class B common stock. Accordingly, Mr. Robins
holds approximately 90% of the voting power of our capital stock on a fully-diluted basis and will be able to control matters submitted
to our stockholders for approval, including the election of directors, amendments of our organizational documents and any merger, consolidation,
sale of all or substantially all of our assets or other major corporate transactions. Mr. Robins may have interests that differ from
yours and may vote in a way with which you disagree, and which may be adverse to your interests. This concentrated control may have the
effect of delaying, preventing or deterring a change in control of DraftKings, could deprive our stockholders of an opportunity to receive
a premium for their capital stock as part of a sale of DraftKings, and might ultimately affect the market price of shares of our Class A
common stock.
Our dual class structure may affect the
trading price of our Class A common stock.
Our dual class structure
may result in volatility in the market price of our Class A common stock whether due to adverse publicity or reaction from institutional
or other investors or proxy advisory firms. For example, certain index providers have announced restrictions on including companies with
multiple- class share structures in certain of their indices. In July 2017, FTSE Russell and S&P Dow Jones announced that they
would cease to allow most newly public companies with dual or multi-class capital structures to be included in their indices. Affected
indices include the Russell 2000 and the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up the S&P
Composite 1500. Beginning in 2017, MSCI, a leading stock index provider, opened public consultations on their treatment of no-vote and
multi-class structures and temporarily barred new multi-class listings from certain of its indices; however, in October 2018, MSCI
announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new index
that specifically includes voting rights in its eligibility criteria. Under the announced policies, our dual class capital structure would
make us ineligible for inclusion in certain indices, and as a result, mutual funds, exchange-traded funds and other investment vehicles
that attempt to passively track those indices will not be investing in our stock. These policies are still fairly new and it is as of
yet unclear what effect, if any, they will have on the valuations of publicly traded companies excluded from the indices, but it is possible
that they may depress these valuations compared to those of other similar companies that are included. Because of our dual class structure,
we have been and will likely continue to be excluded from certain of these indexes and we cannot assure you that other stock indexes will
not take similar actions. Given the sustained flow of investment funds into passive strategies that seek to track certain indexes, exclusion
from stock indexes would likely preclude investment by many of these funds and could make shares of our Class A common stock less
attractive to other investors. As a result, the market price of shares of our Class A common stock could be adversely affected.
Nevada law and provisions our amended and
restated articles of incorporation and bylaws could make a takeover proposal more difficult.
Our organizational documents
are governed by Nevada law. Certain provisions of Nevada law and of our amended and restated articles of incorporation and bylaws could
discourage, delay, defer or prevent a merger, tender offer, proxy contest or other change of control transaction that a stockholder might
consider in its best interest, including those attempts that might result in a premium over the market price for the shares of Class A
common stock held by our stockholders. These provisions provide for, among other things:
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the ability of our Board to issue one or more series of preferred stock;
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stockholder action by written consent only until the first time when Mr. Robins ceases to beneficially own a majority of the voting power of our capital stock;
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certain limitations on convening special stockholder meetings;
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advance notice for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;
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amendment of certain provisions of the organizational documents only by the affirmative vote of (i) a majority of the voting power of our capital stock so long as Mr. Robins beneficially owns shares representing a majority of the voting power of our capital stock and (ii) at least two-thirds of the voting power of the capital stock from and after the time that Mr. Robins ceases to beneficially own shares representing a majority of the voting power of our voting stock; and
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a dual class common stock structure, which provides Mr. Robins with the ability to control the outcome of matters requiring stockholder approval, even though Mr. Robins owns less than a majority of the outstanding shares of our capital stock.
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These anti-takeover provisions
as well as certain provisions of Nevada law could make it more difficult for a third party to acquire DraftKings, even if the third party’s
offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain
a premium for their shares. If prospective takeovers are not consummated for any reason, we may experience negative reactions from the
financial markets, including negative impacts on the price of our common stock. These provisions could also discourage proxy contests
and make it more difficult for our stockholders to elect directors of their choosing and to cause us to take other corporate actions.
Our amended and restated articles of incorporation
designate the Eighth Judicial District Court of Clark County, Nevada as the exclusive forum for certain types of actions and proceedings
that may be initiated by our stockholders, which could limit stockholders’ ability to obtain a favorable judicial forum for disputes
with us or our directors, officers, employees or agents.
Our amended and restated
articles of incorporation require that, to the fullest extent permitted by law, and unless we otherwise consent in writing to the selection
of an alternative forum, the Eighth Judicial District Court of Clark County, Nevada (or if the Eighth Judicial District Court of Clark
County, Nevada does not have jurisdiction, any other state district court located in the State of Nevada, and if no state district court
in the State of Nevada has jurisdiction, any federal court located in the State of Nevada), will be the exclusive forum for each of the
following:
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any action or proceeding brought in the name or right of DraftKings or on its behalf;
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any action asserting a claim for breach of any fiduciary duty owed by any director, officer, employee or agent of DraftKings to DraftKings or its stockholders;
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any action asserting a claim arising pursuant to any provision of NRS Chapters 78 or 92A, our amended and restated articles of incorporation or our bylaws;
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any action to interpret, apply, enforce or determine the validity of our amended and restated articles of incorporation or our bylaws; or
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any action asserting a claim governed by the internal affairs doctrine.
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The exclusive forum provision
provides federal courts located in the State of Nevada as the forum for suits brought to enforce any duty or liability for which Section 27
of the Exchange Act establishes exclusive jurisdiction with the federal courts, or any other claim for which the federal courts have exclusive
jurisdiction. In addition, Section 22 of the Securities Act provides that federal and state courts have concurrent jurisdiction over
lawsuits brought the Securities Act or the rules and regulations thereunder. To the extent the exclusive forum provision restricts
the courts in which claims arising under the Securities Act may be brought, there is uncertainty as to whether a court would enforce such
a provision. We note that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder.
Although we believe this provision will benefit DraftKings by providing increased consistency in the application of Nevada law in the
types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.