This prospectus supplement is being filed
to update and supplement the information contained in the prospectus dated April 23, 2020 (as supplemented or amended from time
to time, the “Prospectus”), with the information contained in our Quarterly Report on Form 10-Q, which was filed with
the Securities and Exchange Commission (“SEC”) on November 13, 2020 (the “Quarterly Report”). Accordingly,
we have attached the Quarterly Report to this prospectus supplement.
The Prospectus and this prospectus supplement
relate to the offer and sale, from time to time, by the selling securityholders identified in the Prospectus, or their permitted
transferees, of (i) 30,471,352 shares of Class A common stock that were issued to certain institutions in connection with the closing
of the Business Combination (as defined in the Prospectus) (the “Private Placement”), (ii) 3,000,000 shares of Class
A common stock underlying the warrants to purchase shares of Class A common stock that were issued in the Private Placement (the
“PIPE Warrants”) and (iii) 11,254,479 shares of Class A common stock to be issued to the holders of the subordinated
convertible promissory notes of DK (as defined in the Prospectus) (the “Convertible Notes”). The Prospectus had also
related to the offer and sale of 3,000,000 PIPE Warrants, all of which have been exercised or redeemed.
This prospectus supplement updates and supplements
the information in the Prospectus and is not complete without, and may not be delivered or utilized except in combination with,
the Prospectus, including any amendments or supplements thereto. This prospectus supplement should be read in conjunction with
the Prospectus and if there is any inconsistency between the information in the Prospectus and this prospectus supplement, you
should rely on the information in this prospectus supplement.
Our Class A common stock is traded on The
Nasdaq Global Select Market under the symbol “DKNG.” The PIPE Warrants were previously traded on The Nasdaq Global
Select Market, but all PIPE Warrants were exercised or redeemed in full as of July 2, 2020. On November 12, 2020, the closing price
of our Class A common stock was $41.25 per share.
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company
or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer,” “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
As of November 11,
2020, there were 391,713,826 shares of the registrant’s Class A common stock, par value $0.0001 per share, and 393,013,951
shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding.
PART I. — FINANCIAL
INFORMATION
Item 1. Financial Statements.
DRAFTKINGS INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(Amounts in thousands, except
par value)
|
|
September 30, 2020
(Unaudited)
|
|
|
December
31, 2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,140,907
|
|
|
$
|
76,533
|
|
Cash reserved for users
|
|
|
257,432
|
|
|
|
144,000
|
|
Receivables reserved for users
|
|
|
29,099
|
|
|
|
19,828
|
|
Accounts receivable
|
|
|
46,084
|
|
|
|
10,016
|
|
Prepaid expenses and other current assets
|
|
|
12,334
|
|
|
|
10,771
|
|
Total current assets
|
|
|
1,485,856
|
|
|
|
261,148
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
39,482
|
|
|
|
25,945
|
|
Intangible assets, net
|
|
|
549,252
|
|
|
|
33,939
|
|
Goodwill
|
|
|
486,327
|
|
|
|
4,738
|
|
Equity method investment
|
|
|
2,141
|
|
|
|
2,521
|
|
Deposits and other non-current assets
|
|
|
3,601
|
|
|
|
2,434
|
|
Total assets
|
|
$
|
2,566,659
|
|
|
$
|
330,725
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ equity (deficit)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
226,322
|
|
|
$
|
85,295
|
|
Liabilities to users
|
|
|
286,506
|
|
|
|
163,035
|
|
Revolving credit line
|
|
|
–
|
|
|
|
6,750
|
|
Total current liabilities
|
|
|
512,828
|
|
|
|
255,080
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory notes
|
|
|
–
|
|
|
|
68,363
|
|
Other long-term liabilities
|
|
|
59,088
|
|
|
|
56,862
|
|
Total liabilities
|
|
$
|
571,916
|
|
|
$
|
380,305
|
|
Commitments and contingent liabilities (Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit):
|
|
|
|
|
|
|
|
|
Class A common stock, $0.0001 par value; 900,000 and 735,000 shares authorized as of September 30, 2020 and December 31, 2019, respectively; 357,347 and 184,626 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively
|
|
|
35
|
|
|
|
18
|
|
Class B common stock, $0.0001 par value; 900,000 shares authorized as of September 30, 2020; 393,014 shares issued and outstanding at September 30, 2020
|
|
|
39
|
|
|
|
–
|
|
Additional paid-in capital
|
|
|
3,517,200
|
|
|
|
949,186
|
|
Accumulated deficit
|
|
|
(1,576,654
|
)
|
|
|
(998,784
|
)
|
Accumulated other comprehensive income
|
|
|
54,123
|
|
|
|
–
|
|
Total stockholders’ equity (deficit)
|
|
|
1,994,743
|
|
|
|
(49,580
|
)
|
Total liabilities and stockholders’ equity (deficit)
|
|
$
|
2,566,659
|
|
|
$
|
330,725
|
|
See accompanying notes to unaudited condensed
consolidated financial statements.
Due to the timing of the Business Combination,
the December 31, 2019 balances exclude B2B/SBTech.
DRAFTKINGS INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except
loss per share data)
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
$
|
132,836
|
|
|
$
|
67,014
|
|
|
$
|
292,309
|
|
|
$
|
192,496
|
|
Cost of revenue
|
|
|
96,569
|
|
|
|
25,332
|
|
|
|
187,315
|
|
|
|
64,718
|
|
Sales and marketing
|
|
|
203,339
|
|
|
|
58,351
|
|
|
|
303,233
|
|
|
|
124,867
|
|
Product and technology
|
|
|
53,909
|
|
|
|
14,323
|
|
|
|
102,499
|
|
|
|
39,645
|
|
General and administrative
|
|
|
127,376
|
|
|
|
25,185
|
|
|
|
274,180
|
|
|
|
78,181
|
|
Loss from operations
|
|
|
(348,357
|
)
|
|
|
(56,177
|
)
|
|
|
(574,918
|
)
|
|
|
(114,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
686
|
|
|
|
277
|
|
|
|
(2,253
|
)
|
|
|
1,364
|
|
Loss before income tax benefit (provision)
|
|
|
(347,671
|
)
|
|
|
(55,900
|
)
|
|
|
(577,171
|
)
|
|
|
(113,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (provision)
|
|
|
13
|
|
|
|
(19
|
)
|
|
|
(319
|
)
|
|
|
(35
|
)
|
Loss from equity method investment
|
|
|
(95
|
)
|
|
|
–
|
|
|
|
(380
|
)
|
|
|
–
|
|
Net loss attributable to common stockholders
|
|
$
|
(347,753
|
)
|
|
$
|
(55,919
|
)
|
|
$
|
(577,870
|
)
|
|
$
|
(113,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.98
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(2.08
|
)
|
|
$
|
(0.61
|
)
|
See accompanying notes to unaudited condensed
consolidated financial statements.
Due to the timing of
the Business Combination, the above periods, to the extent applicable, exclude B2B/SBTech activity which occurred prior to April
24, 2020.
DRAFTKINGS INC.
CONDENSED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(Amounts in thousands)
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net loss
|
|
$
|
(347,753
|
)
|
|
$
|
(55,919
|
)
|
|
$
|
(577,870
|
)
|
|
$
|
(113,586
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments arising during period
|
|
|
29,137
|
|
|
|
–
|
|
|
|
54,123
|
|
|
|
–
|
|
Comprehensive loss
|
|
$
|
(318,616
|
)
|
|
$
|
(55,919
|
)
|
|
$
|
(523,747
|
)
|
|
$
|
(113,586
|
)
|
See accompanying notes to unaudited condensed
consolidated financial statements.
Due to the timing of
the Business Combination, the above periods, to the extent applicable, exclude B2B/SBTech activity which occurred prior to April
24, 2020.
DRAFTKINGS INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
(Amounts in thousands)
|
|
Convertible
Redeemable
Preferred Stock
|
|
|
Class A Common
Stock
|
|
|
Class B Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholder’s
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
(Deficit)/Equity
|
|
Balances at December 31, 2019
(as previously reported)
|
|
|
110,250
|
|
|
$
|
258,371
|
|
|
|
389,610
|
|
|
$
|
390
|
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
690,443
|
|
|
$
|
(998,784
|
)
|
|
$
|
–
|
|
|
$
|
(307,951
|
)
|
Conversion of shares
due to merger recapitalization
|
|
|
(110,250
|
)
|
|
|
(258,371
|
)
|
|
|
(204,984
|
)
|
|
|
(372
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
258,743
|
|
|
|
–
|
|
|
|
–
|
|
|
|
258,371
|
|
Balances at December
31, 2019, effect of reverse acquisition (refer to Note 2)
|
|
|
–
|
|
|
$
|
–
|
|
|
|
184,626
|
|
|
$
|
18
|
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
949,186
|
|
|
$
|
(998,784
|
)
|
|
$
|
|
|
|
$
|
(49,580
|
)
|
Issuance of Series F preferred stock
|
|
|
|
|
|
|
|
|
|
|
1,526
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
11,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
11,000
|
|
Exercise of stock options
|
|
|
–
|
|
|
|
–
|
|
|
|
456
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
467
|
|
|
|
–
|
|
|
|
–
|
|
|
|
467
|
|
Stock-based compensation expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,842
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,842
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(68,680
|
)
|
|
|
–
|
|
|
|
(68,680
|
)
|
Balances
at March 31, 2020
|
|
|
–
|
|
|
$
|
–
|
|
|
|
186,608
|
|
|
$
|
18
|
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
965,495
|
|
|
$
|
(1,067,464
|
)
|
|
$
|
–
|
|
|
$
|
(101,951
|
)
|
Merger recapitalization, net repurchase of
$7,192 and issuance costs of $11,564
|
|
|
–
|
|
|
|
–
|
|
|
|
(278
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(18,756
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(18,756
|
)
|
Conversion of Convertible Notes to common
shares
|
|
|
–
|
|
|
|
–
|
|
|
|
11,254
|
|
|
|
1
|
|
|
|
–
|
|
|
|
–
|
|
|
|
112,544
|
|
|
|
–
|
|
|
|
–
|
|
|
|
112,545
|
|
DEAC shares recapitalized, net of redemptions
and equity issuance costs of $10,631
|
|
|
–
|
|
|
|
–
|
|
|
|
74,122
|
|
|
|
7
|
|
|
|
–
|
|
|
|
–
|
|
|
|
665,478
|
|
|
|
–
|
|
|
|
–
|
|
|
|
665,485
|
|
Equity consideration issued to acquire SBTech
|
|
|
–
|
|
|
|
–
|
|
|
|
40,739
|
|
|
|
4
|
|
|
|
–
|
|
|
|
–
|
|
|
|
789,060
|
|
|
|
–
|
|
|
|
–
|
|
|
|
789,064
|
|
Shares issued for earn outs – SBTech
|
|
|
–
|
|
|
|
–
|
|
|
|
720
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Shares issued for earn outs – DEAC
and DK
|
|
|
–
|
|
|
|
–
|
|
|
|
5,280
|
|
|
|
1
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(1
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Shares issued for exercise of warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
17,519
|
|
|
|
2
|
|
|
|
–
|
|
|
|
–
|
|
|
|
200,465
|
|
|
|
–
|
|
|
|
–
|
|
|
|
200,467
|
|
Shares issued in Offering, net of issuance
costs of $19,200
|
|
|
–
|
|
|
|
–
|
|
|
|
16,000
|
|
|
|
2
|
|
|
|
–
|
|
|
|
–
|
|
|
|
620,798
|
|
|
|
–
|
|
|
|
–
|
|
|
|
620,800
|
|
Exercise of stock options
|
|
|
–
|
|
|
|
–
|
|
|
|
2,287
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,599
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,599
|
|
Stock-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
393,014
|
|
|
|
39
|
|
|
|
54,447
|
|
|
|
–
|
|
|
|
–
|
|
|
|
54,486
|
|
Foreign currency translation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
24,986
|
|
|
|
24,986
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(161,437
|
)
|
|
|
–
|
|
|
|
(161,437
|
)
|
Balances at June 30,
2020
|
|
|
–
|
|
|
$
|
–
|
|
|
|
354,251
|
|
|
$
|
35
|
|
|
|
393,014
|
|
|
$
|
39
|
|
|
$
|
3,395,129
|
|
|
$
|
(1,228,901
|
)
|
|
$
|
24,986
|
|
|
$
|
2,191,288
|
|
Shares Issued for Exercise of Warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
91
|
|
|
|
0
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,041
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,041
|
|
Exercise of stock options
|
|
|
–
|
|
|
|
–
|
|
|
|
3,006
|
|
|
|
0
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,996
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,996
|
|
Stock-based compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
117,034
|
|
|
|
–
|
|
|
|
–
|
|
|
|
117,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
29,137
|
|
|
|
29,137
|
|
Net loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(347,753
|
)
|
|
|
–
|
|
|
|
(347,753)
|
|
Balances at September
30, 2020
|
|
|
–
|
|
|
$
|
–
|
|
|
|
357,348
|
|
|
$
|
35
|
|
|
|
393,014
|
|
|
$
|
39
|
|
|
$
|
3,517,200
|
|
|
$
|
(1,576,654
|
)
|
|
$
|
54,123
|
|
|
$
|
1,994,743
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
Due to the timing
of the Business Combination, the above periods, to the extent applicable, exclude B2B/SBTech activity which occurred prior to
April 24, 2020.
DRAFTKINGS INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY
(Amounts in thousands)
|
|
Convertible
Redeemable
Preferred Stock
|
|
|
Class
A Common Stock
|
|
|
Class
B Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Accumulated
Other
Comprehensive
|
|
|
Total
Stockholder’s
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
(loss)
|
|
|
(Deficit)/Equity
|
|
Balances
at December 31, 2018 (as previously reported)
|
|
|
111,969
|
|
|
$
|
261,277
|
|
|
|
384,009
|
|
|
$
|
384
|
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
670,439
|
|
|
$
|
(856,050
|
)
|
|
$
|
–
|
|
|
$
|
(185,227
|
)
|
Conversion
of shares
|
|
|
(111,969
|
)
|
|
|
(261,277
|
)
|
|
|
(200,756
|
)
|
|
|
(366
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
261,643
|
|
|
|
–
|
|
|
|
–
|
|
|
|
261,277
|
|
Balances
at December 31, 2018, effect of reverse acquisition (refer to Note 2)
|
|
|
–
|
|
|
$
|
–
|
|
|
|
183,253
|
|
|
$
|
18
|
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
932,082
|
|
|
$
|
(856,050
|
)
|
|
$
|
–
|
|
|
$
|
76,050
|
|
Issuance
of Series F preferred stock
|
|
|
|
|
|
|
–
|
|
|
|
1,018
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
7,245
|
|
|
|
–
|
|
|
|
–
|
|
|
|
7,245
|
|
Exercise of stock options
|
|
|
–
|
|
|
|
–
|
|
|
|
110
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
126
|
|
|
|
–
|
|
|
|
–
|
|
|
|
126
|
|
Stock-based
compensation expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,831
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,831
|
|
Net
loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(29,554
|
)
|
|
|
–
|
|
|
|
(29,554
|
)
|
Balances
at March 31, 2019
|
|
|
–
|
|
|
$
|
–
|
|
|
|
184,381
|
|
|
$
|
18
|
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
944,284
|
|
|
$
|
(885,604
|
)
|
|
$
|
–
|
|
|
$
|
58,698
|
|
Issuance
of Series F Preferred Stock
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
559
|
|
|
|
–
|
|
|
|
–
|
|
|
|
559
|
|
Issuance
of Common Stock
|
|
|
–
|
|
|
|
–
|
|
|
|
674
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
438
|
|
|
|
–
|
|
|
|
–
|
|
|
|
438
|
|
Issuance
of Common Stock for In-kind Transfer
|
|
|
–
|
|
|
|
–
|
|
|
|
124
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
535
|
|
|
|
–
|
|
|
|
–
|
|
|
|
535
|
|
Warrants
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
537
|
|
|
|
–
|
|
|
|
–
|
|
|
|
537
|
|
Exercise of Stock Options
|
|
|
–
|
|
|
|
–
|
|
|
|
527
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
407
|
|
|
|
–
|
|
|
|
–
|
|
|
|
407
|
|
Stock-based
compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,844
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,844
|
|
Net
loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(28,113
|
)
|
|
|
–
|
|
|
|
(28,113
|
)
|
Balances
at June 30, 2019
|
|
|
–
|
|
|
$
|
–
|
|
|
|
185,706
|
|
|
$
|
18
|
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
948,604
|
|
|
$
|
(913,717
|
)
|
|
$
|
–
|
|
|
$
|
34,905
|
|
Issuance
of Common Stock for In-kind Transfer
|
|
|
–
|
|
|
|
–
|
|
|
|
125
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
633
|
|
|
|
–
|
|
|
|
–
|
|
|
|
633
|
|
Exercise of Stock Options
|
|
|
–
|
|
|
|
–
|
|
|
|
122
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
95
|
|
|
|
–
|
|
|
|
–
|
|
|
|
95
|
|
Repurchase
of Series F Preferred Stock
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,626
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(11,722
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(11,722
|
)
|
Stock-based
compensation
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,844
|
|
|
|
–
|
|
|
|
–
|
|
|
|
1,844
|
|
Net
loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(55,919
|
)
|
|
|
–
|
|
|
|
(55,919
|
)
|
Balances
at September 30, 2019
|
|
|
–
|
|
|
$
|
–
|
|
|
|
184,327
|
|
|
$
|
18
|
|
|
|
–
|
|
|
$
|
–
|
|
|
$
|
939,454
|
|
|
$
|
(969,636
|
)
|
|
$
|
–
|
|
|
$
|
(30,164)
|
|
See accompanying notes to unaudited condensed
consolidated financial statements.
Due to the timing of
the Business Combination, the above periods, to the extent applicable, exclude B2B/SBTech activity which occurred prior to April
24, 2020.
DRAFTKINGS INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
Nine months ended September 30,
|
|
|
|
2020
(Unaudited)
|
|
|
2019
(Unaudited)
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(577,870
|
)
|
|
$
|
(113,586
|
)
|
Adjustments to reconcile net loss to net cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
49,967
|
|
|
|
9,629
|
|
Non-cash interest expense
|
|
|
3,114
|
|
|
|
16
|
|
Stock-based compensation expense, including value of Class B common shares
|
|
|
176,362
|
|
|
|
8,519
|
|
Loss from equity method investment
|
|
|
380
|
|
|
|
–
|
|
Deferred income taxes
|
|
|
(544
|
)
|
|
|
27
|
|
Other non-cash expenses
|
|
|
–
|
|
|
|
2,614
|
|
Change in operating assets and liabilities, net of effect of Business Combination:
|
|
|
|
|
|
|
|
|
Cash reserved for users
|
|
|
(113,432
|
)
|
|
|
(25,467
|
)
|
Receivables reserved for users
|
|
|
(9,271
|
)
|
|
|
(450
|
)
|
Accounts receivable
|
|
|
(15,427
|
)
|
|
|
908
|
|
Prepaid expenses and other current assets
|
|
|
534
|
|
|
|
(1,132
|
)
|
Deposits and other non-current assets
|
|
|
(64
|
)
|
|
|
(150
|
)
|
Accounts payable and accrued expenses
|
|
|
112,260
|
|
|
|
11,841
|
|
Settlement liability
|
|
|
–
|
|
|
|
(295
|
)
|
Other long-term liabilities
|
|
|
9,229
|
|
|
|
18,291
|
|
Liabilities to users
|
|
|
123,471
|
|
|
|
25,601
|
|
Net cash flows used in operating activities
|
|
|
(241,291
|
)
|
|
|
(63,634
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(8,233
|
)
|
|
|
(15,892
|
)
|
Cash paid for internally developed software costs
|
|
|
(18,821
|
)
|
|
|
(10,079
|
)
|
Acquisition of gaming licenses
|
|
|
(7,760
|
)
|
|
|
(437
|
)
|
Cash paid for Business Combination, net of cash acquired
|
|
|
(176,819
|
)
|
|
|
–
|
|
Net cash flows used in investing activities
|
|
|
(211,633
|
)
|
|
|
(26,408
|
)
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Cash buyout of unaccredited investors
|
|
|
(7,192
|
)
|
|
|
–
|
|
Issuance costs related to merger recapitalization
|
|
|
(11,564
|
)
|
|
|
–
|
|
Net proceeds from issuance of convertible promissory notes
|
|
|
41,077
|
|
|
|
–
|
|
Proceeds from recapitalization of DEAC shares, net of issuance costs
|
|
|
667,999
|
|
|
|
–
|
|
Proceeds from shares issued for warrants
|
|
|
201,508
|
|
|
|
–
|
|
Proceeds from issuance of Class A common stock, net of issuance costs
|
|
|
620,800
|
|
|
|
439
|
|
Proceeds from exercise of stock options
|
|
|
10,062
|
|
|
|
628
|
|
Net payment of revolving credit line
|
|
|
(6,750
|
)
|
|
|
–
|
|
Net proceeds from issuance of redeemable convertible preferred stock
|
|
|
–
|
|
|
|
7,804
|
|
Repurchase of preferred stock
|
|
|
–
|
|
|
|
(722
|
)
|
Net cash flows provided by financing activities
|
|
|
1,515,940
|
|
|
|
8,149
|
|
Effect of foreign exchange rates on cash and cash equivalents
|
|
|
1,358
|
|
|
|
–
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
|
1,064,374
|
|
|
|
(81,893
|
)
|
Cash and cash equivalents at the beginning of period
|
|
|
76,533
|
|
|
|
117,908
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,140,907
|
|
|
$
|
36,015
|
|
Supplemental Disclosure of Noncash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Conversion of convertible notes and accrued interest to common shares
|
|
$
|
112,545
|
|
|
$
|
–
|
|
Increase in net liabilities acquired from DEAC
|
|
|
2,514
|
|
|
|
–
|
|
Equity consideration issued to acquire SBTech
|
|
|
789,064
|
|
|
|
–
|
|
Non-cash Redemption of Series F redeemable convertible preferred to stock through issuance of Promissory Note
|
|
|
–
|
|
|
|
11,000
|
|
Decrease of accounts payable and accrued expenses from gaming licenses
|
|
|
(1,000
|
)
|
|
|
–
|
|
Supplemental Disclosure of Cash Activities
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
417
|
|
|
$
|
184
|
|
Due to the timing of
the Business Combination, the above periods, to the extent applicable, exclude B2B/SBTech activity which occurred prior to April
24, 2020.
|
1.
|
Description of Business
|
DraftKings Inc., a
Nevada corporation (the “Company”, “DraftKings”, “we” or “us”), was 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 Business Combination Agreement (the “Business
Combination”) dated December 22, 2019, as amended on April 7, 2020 and, in connection therewith, (i) DEAC merged with and
into us, whereby we survived the merger and became the successor issuer to DEAC by operation of Rule 12g-3(a) promulgated under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (ii) we changed our name to “DraftKings
Inc.,” (iii) we acquired DraftKings Inc., a Delaware corporation (“Old DK”), by way of a merger and (iv) we acquired
all of the issued and outstanding share capital of SBTech (Global) Limited (“SBTech”). Upon consummation of the preceding
transactions, Old DK and SBTech became wholly owned subsidiaries of the Company.
DraftKings is a digital
sports entertainment and gaming company. The Company’s business-to-consumer (“B2C”) segment provides users with
daily fantasy sports (“DFS”), sports betting (“Sportsbook”) and online casino (“iGaming”) products.
The Company’s business-to-business (“B2B”) segment is involved in the design, development and licensing of sports
betting and casino gaming software for its Sportsbook and casino gaming products.
In May 2018, the Supreme
Court (the “Court”) struck down on constitutional grounds the Professional and Amateur Sports Protection Act of 1992
(“PASPA”), a law that prohibited most states from authorizing and regulating sports betting. Since the Court’s
decision, many states have legalized sports betting. The U.S. jurisdictions with statutes legalizing online sports betting as of
September 30, 2020 are Colorado, Illinois, Indiana, Iowa, Michigan, Nevada, New Hampshire, New Jersey, Oregon, Pennsylvania, Puerto
Rico, Rhode Island, Tennessee, Virginia, Washington, D.C and West Virginia. The jurisdictions with statutes legalizing sports betting
at certain land-based retail locations are Arkansas, Colorado, Delaware, Illinois, Indiana, Iowa, Michigan, Mississippi, Montana,
Nevada, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Puerto Rico, Rhode Island, Washington, Washington, D.C
and West Virginia. The jurisdictions with statutes legalizing online casinos are Michigan, New Jersey, Pennsylvania and West Virginia.
Several of the aforementioned jurisdictions have enacted laws authorizing sports betting online or in retail locations, but such
operations have not yet begun.
As of September 30,
2020, the Company operates online Sportsbooks in Colorado, Illinois, Indiana, Iowa, New Hampshire, New Jersey, Oregon (B2B), Pennsylvania,
and West Virginia, has retail Sportsbooks in Colorado, Illinois, Iowa, Mississippi, New Hampshire, New Jersey and New York and
has iGaming products in New Jersey, Pennsylvania and West Virginia. The Company also has arrangements in place with land-based
casinos to expand operations into additional states upon the passing of the relevant legislation and the issuance of related regulations
and the receipt of required licenses.
The novel coronavirus
(“COVID-19”) has adversely impacted global commercial activity and contributed to significant volatility in financial
markets. The COVID-19 pandemic has disrupted global supply chains and adversely impacted many different industries for most of
2020. COVID-19 could have a continued material adverse impact on economic and market conditions and trigger a period of continued
global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the extent and the
duration of the economic impact of COVID-19. COVID-19 therefore presents material uncertainty and risk with respect to the Company
and its performance and could affect the Company’s financial results in a materially adverse way.
The direct impact
of COVID-19 on the business of DraftKings beyond disruptions to normal business operations in several offices primarily results
from the suspension and cancellation of sports seasons and sporting events. During the July to September time period, major professional
sports leagues including the NBA and the NHL resumed their seasons, MLB began its season after a three month delay, and the NFL
season began as originally planned. The return of major sports and events, as well as the unique and concentrated sports calendar
in this time period, generated significant user interest and activity in the Company’s Sportsbook and DFS product offerings.
However, it remains possible that sports seasons and sporting events may be suspended or cancelled due to COVID-19 outbreaks. The
suspension and alteration of sports seasons and sporting events earlier in the year reduced customers’ use of, and spending
on, the Company’s Sportsbook and DFS product offerings and has caused the Company to issue refunds for canceled events. Additionally,
while retail casinos where the Company has branded Sportsbooks and DFS have reopened, they continue to operate with reduced capacity.
The Company’s revenues vary based on sports seasons and sporting events amongst other things, and cancellations, suspensions
or alterations resulting from COVID-19 are likely to adversely affect the Company’s revenue, possibly materially. However,
the Company’s product offerings that do not rely on sports seasons and sporting events, such as iGaming, may partially offset
this adverse impact on revenue. DraftKings is also innovating to generate more products that do not rely on traditional sports
seasons and sporting events, for example, products that permit wagering and contests on events such as eSports, simulated NASCAR
and League of Legends.
A significant or prolonged
decrease in consumer spending on entertainment or leisure activities would likely adversely affect demand for the Company’s
product offerings, reducing cash flows and revenues, and thereby materially harming our business, financial condition and results
of operations. As steps taken to mitigate the spread of COVID-19 have necessitated a shift away from a traditional office environment
for many employees, the Company has business continuity programs in place to ensure that employees are safe and that the business
continues to function while its employees work remotely.
|
2.
|
Summary of Significant Accounting Policies and Practices
|
Basis of Presentation
and Principles of Consolidation
These unaudited condensed
consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange
Commission and accounting principles generally accepted in the United States (“U.S. GAAP”) for interim reporting. Accordingly,
certain notes or other information that are normally required by U.S. GAAP have been omitted if they substantially duplicate the
disclosures contained in the Company’s annual audited consolidated financial statements. Accordingly, the unaudited condensed
consolidated financial statements should be read in connection with the Company’s audited financial statements and related
notes as of and for the year ended December 31, 2019. The accompanying unaudited condensed consolidated financial statements are
unaudited; however, in the opinion of management, they include all normal and recurring adjustments necessary for a fair presentation
of the Company’s unaudited condensed consolidated financial statements for the periods presented. Results of operations reported
for interim periods are not necessarily indicative of results for the entire year, due to seasonal fluctuations in the Company’s
revenue as a result of timing of various sports seasons, sporting events and other factors.
Pursuant to the Business
Combination, the merger between a subsidiary of DEAC and Old DK was accounted for as a reverse recapitalization in accordance with
U.S. GAAP (the “Reverse Recapitalization”). Under this method of accounting, DEAC was treated as the “acquired”
company for financial reporting purposes. Accordingly, for accounting purposes, the Reverse Recapitalization was treated as the
equivalent of Old DK issuing stock for the net assets of DEAC, accompanied by a recapitalization. The net assets of DEAC are stated
at historical cost, with no goodwill or other intangible assets recorded. The consolidated assets, liabilities and results of operations
prior to the Reverse Recapitalization are those of Old DK. The shares and corresponding capital amounts and earnings per share
available for common stockholders, prior to the Business Combination, have been retroactively restated as shares reflecting the
exchange ratio established in the Business Combination. Further, Old DK was determined to be the accounting acquirer in the SBTech
Acquisition, as such, the acquisition is considered a business combination under ASC 805, and was accounted for using the acquisition
method of accounting. DraftKings recorded the fair value of assets acquired and liabilities assumed from SBTech. The presented
financial information for the three months and nine months ended September 30, 2020 includes the financial information and activities
for SBTech for the period from April 24, 2020 to (and including) September 30, 2020 (160 days).
The accompanying unaudited
condensed consolidated financial statements include the accounts and operations of the Company. All intercompany balances and transactions
have been eliminated. Certain amounts from a prior period, which are not material, have been reclassified to conform with the current
period presentation.
Comprehensive Income (Loss)
Comprehensive
income (loss) consists of foreign currency translation adjustments related to the effect of foreign exchange on the value of our
assets and liabilities denominated in Euros. The cumulative net translation gain or loss is included in the unaudited condensed
consolidated statements of comprehensive loss.
Foreign Currency
Our reporting currency
is the U.S. dollar while the functional currency of the Company’s non-U.S. subsidiaries is the Euro. The financial statements
of the Company’s non-U.S. subsidiaries are translated into United States dollars in accordance with ASC 830, using period-end
rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and
historical rates for equity. Translation adjustments resulting from translating the local currency financial statements into U.S.
dollars are contemplated when determining other comprehensive income (loss).
Use of Estimates
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant
estimates and assumptions reflected in the financial statements relate to and include, but are not limited to, the valuation and
expensing of equity awards; accounting for contingencies and uncertainties; fair value estimates of embedded derivatives; purchase
price allocations, including fair value estimates of intangible assets; the estimated useful lives of fixed assets and intangible
assets, including internally developed software costs; and accrued expenses.
Going Concern
Based on anticipated
spend and cash received from the Business Combination, exercise of certain warrants, the June 2020 and October 2020 follow-on equity
offerings and the timing of expenditure assumptions, the Company currently expects that its cash will be sufficient to fund its
operating expenses and capital expenditure requirements for at least 12 months after November 13, 2020. The Company has experienced
operating losses and negative operating cash flows for the year ended December 31, 2019 and for the three and nine-month periods
ended September 30, 2020. While certain geographies may experience improved cash flow, the Company expects to continue to incur
annual operating losses and annual negative operating cash flow for the foreseeable future.
Emerging Growth Company
Section 102(b)(1)
of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards
until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not
have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting
standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements
that apply to non-emerging growth companies, but any such election to opt out is irrevocable. The Company has elected not to opt
out of such extended transition period, which means that when a standard is issued or revised and it has different application
dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the
time private companies adopt the new or revised standard. This may make comparison of the Company’s consolidated financial
statements with another public company which is neither an emerging growth company nor an emerging growth company that has opted
out of using the extended transition period difficult or impossible because of the potential differences in accounting standards
used. The Company expects to lose its emerging growth company status on December 31, 2020. As a result, the Company will adopt
all accounting pronouncements currently deferred based on private company standards for purposes of the 2020 Form 10-K filing.
Concentrations of
Credit Risk
Financial instruments
that potentially subject the Company to concentrations of credit risk consist primarily of operating cash and cash equivalents
and cash reserved for users. The Company maintains separate accounts for cash and cash reserved for users primarily across four
financial institutions. Some amounts exceed federally insured limits with the majority of cash held in one financial institution.
Management believes all financial institutions holding its cash are of high credit quality and does not believe the Company is
subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Acquisitions
The Company accounts
for business combinations under the acquisition method of accounting, in accordance with Accounting Standards Codification (“ASC”)
Topic 805, Business Combinations, which requires assets acquired and liabilities assumed to be recognized at their fair
values as of the acquisition date. Any fair value of purchase consideration in excess of the fair value of the assets acquired
less liabilities assumed is recorded as goodwill. The fair values of the assets acquired, and liabilities assumed are determined
based upon the valuation of the acquired business and involve management making significant estimates and assumptions.
Cash and cash equivalents
Cash and cash equivalents
consist of highly liquid, unrestricted savings, checking and other bank accounts. The Company also utilizes short-term certificates
of deposit, each with a duration of three months or less.
Cash Reserved for Users
The Company maintains
separate bank accounts to segregate users’ funds from operational funds. In certain regulated jurisdictions, user funds are
held by DK Player Reserve, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company, which was organized
for the purpose of protecting users’ funds in the event of creditor claims.
Receivables Reserved for Users
Receivables
for user deposits not yet received are stated at the amount the Company expects to collect from a payment processor, which includes
an allowance for doubtful accounts if appropriate. These receivables arise, primarily, due to process timing between when a user
deposits and when the Company receives that deposit from the payment processor. Receivables also arise due to the securitization
policies of certain payment processors. The allowance for doubtful accounts is determined based on the Company’s assessment
of the probability of the non-payment of the receivable. This provision is netted against the receivable balance with the loss
being recognized within general and administrative expenses in the unaudited condensed consolidated statements of operations. On
assessment that the receivable will not be collected, the associated amount is written off with no impact to the unaudited condensed
consolidated statements of operations. The provision at September 30, 2020 and December 31, 2019 was $110 and $0, respectively.
Accounts Receivables
Accounts receivables
are recorded at amortized cost, less any allowance for doubtful accounts. The allowance for doubtful accounts is determined based
on probability of the Company’s assessment of the probability of non-payment of the receivable. This provision is netted
against the receivable balance with the loss being recognized within general and administrative expenses in the unaudited condensed
consolidated statements of operations. On assessment that the receivable will not be collected, the
associated amount is written off with no impact to the unaudited condensed consolidated statements of operations. The provision at September 30, 2020 and December 31,
2019 was $233 and $0, respectively.
Property and Equipment, Net
Property and equipment
are carried at cost, net of accumulated depreciation. Depreciation is computed utilizing the straight-line method over the estimated
useful life of the asset. Leasehold improvements depreciation is computed over the shorter of the lease term or estimated useful
life of the asset. Additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. Useful lives
of each asset class are as follows:
Computer equipment and software
|
3 years
|
Furniture and fixtures
|
7 years
|
Leasehold improvements
|
Lesser of the lease terms or the estimated useful lives of the improvements, generally 1-10 years
|
Intangible Assets, Net
The Company’s
intangible assets consist of Developed Technology, Customer Relationships, Internally-Developed Software, Gaming Licenses and Trademarks
and Tradenames. The related amortization expense is classified as cost of revenue in the unaudited condensed consolidated
statements of operations.
Developed Technology
Developed technology
relates to the design and development of sports betting and casino gaming software for online and retail sportsbook and
casino gaming products acquired from SBTech and recorded at fair value. Capitalized development costs are amortized on a straight-line
basis over their estimated useful life of eight years once the development is completed and the assets are in use. All other expenditures,
including those incurred in order to maintain an intangible asset’s current level of performance, are expensed as incurred.
Customer Relationships
Customer (or “user”)
relationships are finite-lived intangible assets which are amortized over their estimated useful lives of five years. Customer
relationships are generally recognized as the result of business combinations.
Internally Developed Software
Software that is developed
for internal use is accounted for pursuant to ASC Topic 350-40, Intangibles, Goodwill and Other — Internal-Use
Software. Qualifying costs incurred to develop internal-use software are capitalized when (i) the preliminary project stage
is completed, (ii) management has authorized further funding for the completion of the project and (iii) it is probable that the
project will be completed and perform as intended. These capitalized costs include compensation for employees who develop internal-use
software and external costs related to development of internal use software. Capitalization of these costs ceases once the project
is substantially complete and the software is ready for its intended purpose. Internally developed software is amortized using
the straight-line method over an estimated useful life of three to four years. All other expenditures, including those incurred
in order to maintain an intangible asset’s current level of performance, are expensed as incurred.
Gaming Licenses
The Company
incurs fees in connection with applying for and maintaining good standing in jurisdictions via business licenses. Fees
incurred in connection with the application and subsequent renewals are capitalized and amortized using the straight-line
method over an estimated useful life. In certain arrangements, the Company enters into agreements to operate on a business
partner’s license in exchange for upfront fees. These fees are capitalized and amortized over the shorter of their
expected benefit under the partnership agreement or estimated useful life. Refer to footnote 5 for detail on amortization
period.
Trademarks and Tradenames
The Company incurs
fees in connection with applying for and maintaining trademarks and tradenames. Fees incurred in connection with the application
and subsequent renewals are capitalized and amortized using the straight-line method over an estimated useful life of three years.
Goodwill
The Company performs
its annual impairment testing on October 1 of each year and when circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying value. The Company’s business is classified into three reporting units:
B2C, Media and B2B. In testing goodwill for impairment, the Company has the option to begin with a qualitative assessment, commonly
referred to as “Step 0,” to determine whether it is more likely than not that the fair value of a reporting unit containing
goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such
as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other
events, such as changes in the Company’s management, strategy and primary user base. If the Company determines that it is
more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative
goodwill impairment analysis by comparing the carrying amount to the fair value of the reporting unit. If the carrying amount exceeds
the fair value, goodwill will be written down to the fair value and recorded as impairment expense in the unaudited condensed consolidated
statements of operations. The Company performed its annual impairment assessment of goodwill as of December 31, 2019 and concluded
that goodwill was not impaired. The Company identified a triggering event during the quarter ended March 31, 2020 and as a result
performed a quantitative assessment that concluded that goodwill was not impaired. As of September 30, 2020, the Company did not
identify any indicators of impairment.
Impairment of Long-Lived Assets
Long-lived assets,
except for goodwill, consist of property and equipment and finite-lived acquired intangible assets, such as internal-use software,
developed software, gaming licenses, trademarks, tradenames and customer relationships. Long-lived assets, except for goodwill,
are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the asset
may not be fully recoverable. Impairment expense is recognized to the extent an asset’s expected undiscounted future cash
flows are less than the asset’s carrying amount. There was immaterial impairment related to internally developed software
on abandoned projects during the year ended December 31, 2019. As of March 31, 2020, June 30, 2020 and September 30, 2020, the
Company determined that long-lived assets were not impaired.
Equity Method Investment
The Company has a
46% membership interest in DKFS, LLC, also known as DRIVE by DraftKings. The Company uses the equity method to account for investments
in which the Company has the ability to exercise significant influence over the operating and financial policies of the investee,
but does not exercise control. The Company’s carrying value in the equity method investee is reflected in the caption “Equity
method investment” on the consolidated balance sheets. Changes in value of DKFS, LLC are recorded in “Loss from equity
method investment” on the consolidated statements of operations. The Company’s judgment regarding its level of influence
over the equity method investee includes considering key factors, such as ownership interest, representation on the board of directors,
and participation in policy-making decisions.
Under the equity method,
the Company’s investment is initially measured at cost and subsequently increased or decreased to recognize the Company’s
share of income and losses of the investee, capital contributions and distributions and impairment losses. The Company performs
a qualitative assessment annually and recognizes an impairment if there are sufficient indicators that the fair value of the investment
is less than carrying value.
Leases
The Company accounts
for leases under the provisions of ASC Topic 840, Leases, which requires that leases be evaluated and classified as operating
or capital leases for financial reporting purposes. The terms used for the evaluation include renewal option periods in instances
in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic
penalty. Leases are classified as capital leases whenever the terms of the lease substantially transfer all of the risks and rewards
of ownership to the lessee. All other leases are recorded as operating leases. As of September 30, 2020 and December 31, 2019,
all of the Company’s leases were operating leases.
The Company recognizes
rent expense on operating leases on a straight-line basis over the non-cancellable lease term. Operating leases with landlord-funded
leasehold improvements are considered tenant allowances and are amortized as a reduction of rent expense over the non-cancellable
lease term. Deferred rent liability, which is calculated as the difference between contractual lease payments and the rent expense,
is recorded in accounts payable and accrued expenses and other long-term liabilities in the unaudited condensed consolidated balance
sheets.
Liabilities to Users
The Company records liabilities for user
account balances. User account balances consist of user deposits, most promotional awards and user winnings less user withdrawals,
tax withholdings and user losses. Cash reserved for users and receivables reserved for users equal or exceed the Company’s
liabilities to users at all times.
Loss
Contingencies
Our loss contingencies,
which are included within other long-term liabilities in the unaudited condensed consolidated balance sheets, are uncertain
by nature and their estimation requires significant management judgment as to the probability of loss and estimation of the amount
of such loss. These contingencies include, but may not be limited to, litigation, indirect taxes, regulatory investigations and
proceedings and management’s evaluation of complex laws and regulations, including those relating to indirect taxes, and
the extent to which they may apply to our business and industry.
We regularly review our contingencies to
determine whether the likelihood of loss is probable and to assess whether a reasonable estimate of the loss can be made. Determination
of whether a loss estimate can be made is a complex undertaking that considers the judgement of management, third-party research,
the prospect of negotiation and interpretations by regulators and courts, among other information. When a loss is determined to
be probable, and the amount of the loss can be reasonably estimated, an estimated contingent liability is recorded.
Revenue Recognition
Effective January
1, 2019, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, using the modified retrospective method for
all contracts not completed as of the date of adoption. ASC 606 requires companies to recognize revenue in a way that depicts the
transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. In addition, the standard requires more detailed disclosures to enable readers
of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers. The cumulative effect of the adoption was immaterial to the unaudited condensed consolidated financial statements.
See Note 9 – Revenue Recognition for further details.
The Company determines
revenue recognition through the following steps:
|
·
|
Identify the contract, or contracts, with the customer;
|
|
·
|
Identify the performance obligations in the contract;
|
|
·
|
Determine the transaction price;
|
|
·
|
Allocate the transaction price to performance obligations in the contract; and
|
|
·
|
Recognize revenue when, or as, the Company satisfies performance obligations by transferring the promised good or services.
|
The Company is
currently engaged in the business of digital sports entertainment and gaming and provides its users with online gaming
opportunities. The Company also provides online sportsbook and casino operators with technical infrastructure and with
respect to its direct customers related services. The following is a description of the Company’s revenue streams:
Online Gaming
DFS is a peer-to-peer
platform in which users compete against one another for prizes. Users pay an entry fee (ranging from $0 to $10,000 per user) to
join a DFS contest and compete for prizes, which are distributed to the highest performing competitors in each contest as defined
by each contest’s prize table. DFS revenue is generated from contest entry fees from users, net of prizes and customer incentives
awarded to users.
Sportsbook or sports
betting involves a user wagering money on an outcome or series of outcomes occurring. When a user’s wager wins, the Company
pays the user a pre-determined amount known as fixed odds. Sportsbook revenue is generated by setting odds such that there is a
built-in theoretical margin in each sports wagering opportunity offered to users. Sportsbook revenue is generated from users’
wagers net of payouts made on users’ winning wagers and incentives awarded to users.
iGaming, or online
casino, typically includes digital versions of wagering games available in land-based casinos, such as blackjack, roulette and
slot machines. For these offerings, the Company functions similarly to land-based casinos, generating revenue through hold, as
users play against the house. iGaming revenue is generated from user wagers net of payouts made on users’ winning wagers
and incentives awarded to users. Online gaming is a platform and incentives can be used across products.
DFS, Sportsbook and
iGaming, each as described above, create a single performance obligation for the Company to operate contests or games and award
prizes or payouts to users based on results. Revenue is recognized at the conclusion of each contest, wager, or wagering game hand.
Additionally, certain incentives given to customers create material rights and represent separate performance obligations. User
incentives in certain cases create liabilities when awarded to players and in those cases are generally recognized as revenue upon
redemption.
Gaming software
The Company contracts
with business customers to provide sports and casino betting software solutions. Gaming software revenue is recognized when control
of the solutions is transferred to the customer in an amount that reflects the consideration to which the Company expects to be
entitled to in exchange for providing control of the sports betting and casino software.
The Company’s
direct customer contract revenue is generally calculated as a percentage of the wagering revenue generated by the business customer
using our software and is recognized in the periods in which those wagering and related activities conclude. In contrast, the Company
provides distributors with the right to resell the Company’s software-as-a-service offering to their clients, using their
own infrastructure. In reseller arrangements, revenue is generally calculated via a fixed monthly fee and an additional monthly
fee which varies based on the number of gaming operators to whom each reseller sub-licenses the Company’s software. Our direct
customer arrangements do not provide the customers with the right to take possession of our software, but only the right to purchase
access to the Company’s sports and casino wagering software for a defined contractual period. In reseller arrangements, as
opposed to direct customer arrangements, the resellers purchase a software license which enables them to install, host, and serve
their operators’ base using the Company’s software.
Transaction Price Considerations
Variable Consideration
Variability in the
transaction price arises primarily due to market-based pricing, cash discounts, revenue sharing and usage-based fees. DraftKings
offers loyalty programs, free plays, deposit bonuses, discounts, rebates and other rewards and incentives to its customers. Revenue
for DFS, Sportsbook and iGaming is collected prior to the contest or event and is fixed once the outcome is known. Prizes paid
and payouts made to users are recognized when awarded to the player.
Allocation of transaction price to performance
obligations
Contracts with customers
may include multiple performance obligations. For such arrangements, the transaction price is allocated to performance obligations
on a relative standalone selling price basis. Standalone selling prices are estimated based on observable data of the Company’s
sales of such products and services to similar customers and in similar circumstances on a standalone basis. For Online Gaming
(DFS, Sportsbook and iGaming), the Company allocates a portion of the transaction price to certain customer incentives that create
material future customer rights. In addition, in the event of a multi-stage contest, the Company will allocate transaction price
ratably from contest start to the contest’s final stage.
Certain costs to obtain or fulfill
contracts
Under ASC 606, certain
costs to obtain or fulfill a contract with a customer must be capitalized, to the extent recoverable from the associated contract
margin, and subsequently amortized as the products or services are delivered to the customer. These costs are capitalized as contract
acquisition costs and are amortized over the period of benefit to the customer. For the Company, the period of benefit is typically
less than or equal to 1 year. As such, the Company applied the practical expedient and contract acquisition costs are expensed
immediately. Customer contract costs which do not qualify for capitalization as contract fulfillment costs are expensed as incurred.
Contract balances
Contract assets and
liabilities represent the differences in the timing of revenue recognition from the receipt of cash from the Company’s customers
and billings to those customers. Contract assets reflect revenue recognized and performance obligations satisfied in advance of
customer billing.
Deferred revenue relates
to payments received in advance of the satisfaction of performance under the contract. The Company maintains various programs to
incentivize user behaviors, which allows users to earn awards. Incentive awards generally represent a material right to the user,
and awards may be redeemed for future services. Incentive awards earned by users, but not yet redeemed, are generally recognized
as a reduction to revenue and included within liabilities to users on the consolidated balance sheets. When a user redeems most
types of awards, the Company recognizes revenue on the condensed consolidated statements of operations.
Certain player awards
are not subject to expiration or have not been expired historically, on such awards the Company recognizes breakage (for amounts
not expected to be redeemed) to the extent there is no requirement for remitting such balances to regulatory agencies.
Cost of Revenue
Cost of revenue consists
primarily of variable costs. These include mainly (i) payment processing fees and chargebacks, (ii) product taxes, (iii) platform
costs, (iv) revenue share / market access arrangements, and (v) feed / provider services. The Company incurs payment processing
fees on user deposits, withdrawals and deposit reversals from payment processors (“chargebacks”). Chargebacks have
not been material to date. Cost of revenue also includes expenses related to the distribution of our services, amortization of
intangible assets and compensation of revenue associated personnel.
Sales and Marketing
Sales and marketing
expenses consist primarily of expenses associated with advertising and related software, conferences, strategic league and team
partnerships and costs related to free to play contests, rent and facilities maintenance and the compensation of sales and marketing
personnel, including stock-based compensation expenses.
Product and Technology
Product and technology
expenses consist primarily of expenses which are not subject to capitalization or otherwise classified within Cost of Revenue.
Product and Technology expenses include software licenses, rent and facilities maintenance and depreciation of hardware and software
and costs related to the compensation of product and technology personnel, including stock-based compensation.
General and Administrative
General and administrative
expenses consist of costs not related to Sales and Marketing, Product and Technology or Revenue. General and administrative costs
include professional services (including legal, regulatory, audit, accounting, lobbying and services related to the Business Combination),
rent and facilities maintenance, contingencies, insurance, allowance for doubtful accounts receivable and depreciation of leasehold
improvements and furniture and fixtures and costs related to the compensation of executive and non-executive personnel, including
stock-based compensation.
Stock-based Compensation
The Company measures
compensation expense for stock options and other stock awards in accordance with ASC Topic 718, Compensation — Stock
Compensation. Stock-based compensation is measured at fair value on grant date and recognized as compensation expense over
the requisite service period. Generally, the Company issues stock options and other stock awards to employees with service-based
and/or performance-based vesting conditions. For awards with only service-based vesting conditions, the Company records compensation
cost for these awards using the straight-line method less an assumed forfeiture rate. For awards with performance-based vesting
conditions, the Company recognizes compensation cost on a tranche-by-tranche basis (the accelerated attribution method) less an
assumed forfeiture rate.
Under the provisions
of ASC Topic 505-50, Equity-Based Payments to Non-Employees, the Company measures stock-based awards granted to non-employees
based on the fair value of the award on the date on which the related service is completed. Compensation expense is recognized
over the period during which services are rendered by non-employees until service is completed. At the end of each financial reporting
period, for share based payments issued in lieu of cash prior to completion of the service, the fair value of these awards is remeasured
using the then-current fair value of the Company’s common stock.
Income Taxes
The Company accounts
for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been recognized in the unaudited condensed consolidated financial statements
or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between
U.S. GAAP treatment and tax treatment of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company
assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes,
based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will
not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred
tax assets is evaluated by considering taxable income in carryback years, existing taxable temporary differences, prudent and feasible
tax planning strategies and estimated future taxable profits.
The Company accounts
for uncertainty in income taxes recognized in the unaudited condensed consolidated financial statements by applying a two-step
process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood
that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more-likely-than-not
to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the unaudited condensed consolidated
financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood
of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves,
or unrecognized tax benefits, that are considered appropriate, as well as the related net interest and penalties.
Fair Value Measurements
Certain assets and
liabilities are carried at fair value under U.S. GAAP. Fair value is defined as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must
maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at
fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first
two are considered observable and the last is considered unobservable:
|
·
|
Level 1 - Quoted prices in active markets for identical assets or liabilities.
|
|
·
|
Level 2 - Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
|
|
·
|
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
|
Earnings (loss) per share
Basic earnings (loss)
per share is calculated using the two-class method. Under the two-class method, basic earnings (loss) is computed by dividing net
income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period excluding
the effects of any potentially dilutive securities. The weighted-average number of common shares outstanding during the period
includes Class A common stock but is exclusive of Class B common stock as these shares have no economic or participating rights.
Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share, except that the denominator is increased
to include the number of additional common shares that would have been outstanding if potential common shares had been issued if
such additional common shares were dilutive. Since the Company had net losses for all the periods presented, basic and diluted
earnings (loss) per share are the same, and additional potential common shares have been excluded, as their effect would be anti-dilutive.
Recently Adopted
Accounting Pronouncements
In June 2018, the
Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) No. 2018-07,
Compensation — Stock Compensation (Topic 718), to simplify the accounting for share-based payments to non-employees by aligning
it with the accounting for share-based payments to employees, with certain exceptions. Under the new standard, equity-classified
non-employee awards are initially measured on the grant date and re-measured only upon modification, rather than at each reporting
period. Measurement is based on an estimate of the fair value of the equity instruments to be issued. The Company adopted this
pronouncement as of January 1, 2020. The adoption of this standard did not have a material impact on the Company.
Recent Accounting Pronouncements
Not Yet Adopted
In February
2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 increases transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2021, and
interim periods beginning after December 15, 2022. Early adoption is still permitted. The Company expects to adopt this
standard as of January 1, 2020 at December 31, 2020. The Company continues to assess all of the effects of the adoption and
believes the most significant impact relates to the recognition of new right-of-use assets and lease liabilities on the
consolidated balance sheets for operating leases. The Company does not expect a material impact to the consolidated
statements of operations.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326). The new guidance replaces the incurred loss impairment methodology in current
U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and
supportable information to inform credit loss estimates. For trade and other receivables, the Company will be required to use a
forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that
are probable. The Company expects to adopt this standard as of January 1, 2020 at December 31, 2020 and is currently in the process
of evaluating the impact of this new standard.
In August 2018, the
FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting
for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the accounting for
implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs
incurred to develop or obtain internal-use software under ASC 350-40, in order to determine which costs to capitalize and recognize
as an asset and which costs to expense. Early adoption is still permitted. The Company expects to adopt this standard as of January
1, 2020 at December 31, 2020 and is currently in the process of evaluating the impact of this standard.
In December 2019,
the FASB issued ASU No. 2019-12, Income Taxes—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles
in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying
and amending existing guidance. ASU 2019-12 is effective for public business entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2020. The Company is currently evaluating the timing of adopting this guidance
and the impact of adoption on its financial position, results of operations and cash flows.
As discussed in Note
1, on April 23, 2020 DEAC consummated the Business Combination dated December 22, 2019 as amended on April 7, 2020 and, in connection
therewith, (i) DEAC merged with and into the Company, whereby we survived the merger (the “DK Merger”) and became the
successor issuer to DEAC by operation of Rule 12g-3(a) promulgated under the Exchange Act, (ii) we changed our name to “DraftKings
Inc.,” (iii) we acquired Old DK by way of a merger and (iv) we acquired all of the issued and outstanding share capital of
SBTech (the “SBTech Acquisition”). Upon consummation of the foregoing transactions, Old DK and SBTech became wholly
owned subsidiaries of the Company. Under ASC 805, Business Combinations, Old DK was deemed the accounting acquirer based
on the following predominant factors: its former owners have the largest portion of voting rights in the Company, the Board and
Management have more individuals coming from Old DK than either DEAC or SBTech, Old DK was the largest entity by revenue and by
assets at the time of the Business Combination, and the headquarters of the Company is Old DK’s headquarters which is located
in Boston, Massachusetts.
The DK Merger was
accounted for as a reverse recapitalization, in accordance with U.S. GAAP. Under this method of accounting, DEAC was treated as
the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Reverse Recapitalization
was treated as the equivalent of Old DK issuing stock for the net assets of DEAC, accompanied by a recapitalization. The net assets
of DEAC are stated at historical cost, with no goodwill or other intangible assets recorded. The consolidated assets, liabilities
and results of operations prior to the Reverse Recapitalization are those of Old DK. Reported shares and earnings per share available
to holders of the Company’s common stock, prior to the Business Combination, have been retroactively restated as shares reflecting
the exchange ratio established in the Business Combination. Further, Old DK was determined to be the accounting acquirer in the
SBTech Acquisition, as such, the SBTech Acquisition was treated as a business combination under ASC 805, and was accounted for
using the acquisition method of accounting. DraftKings recorded the fair value of assets acquired and liabilities assumed from
SBTech.
Operating results
for SBTech are included in the unaudited condensed consolidated statements of operations as of September 30, 2020 from the day
of the acquisition. The unaudited condensed consolidated statements of operations include $29,185 of revenue and $3,731 of net
loss for the three months ended September 30, 2020 related to SBTech. The unaudited condensed consolidated statements of operations
include $44,139 of revenue and $10,669 of net loss for the nine months ended September 30, 2020 related to SBTech, prior
to purchase price accounting.
Preliminary
Purchase Price Accounting for the SBTech Acquisition
The Company
acquired 100% of the equity of SBTech pursuant to the Business Combination Agreement by issuing 45,017 shares, options, and
earnout shares of Class A common stock of the Company at a weighted average fair value of $17.53 to the former stockholders
and option holders of SBTech. This represents an increase from the share consideration valued at $10.17 as of the date of the
Business Combination Agreement. The following summarizes the consideration transferred at Closing for the SBTech Acquisition
(in thousands):
Purchase consideration
|
|
|
|
|
|
|
|
Cash consideration(1)
|
|
$
|
182,862
|
|
Share consideration(2)
|
|
|
789,065
|
|
Other cash consideration(3)
|
|
|
3,614
|
|
Total SBTech consideration
|
|
$
|
975,541
|
|
|
(1)
|
Includes
the cash consideration, adjusted for the Net Debt Amount, the Working Capital Adjustment, and the Aggregate Strike Price Amount,
as stipulated by the Business Combination Agreement, resulting in cash consideration of $182,862.
|
|
(2)
|
Includes
$776,524 for the share consideration for SBTech equity of 40,739 shares and SBTech employees’ vested options of 3,558 options,
and $12,541 of contingent consideration for the 720 earnout shares issued to former stockholders of SBTech as part of the Business
Combination, recognized at their Acquisition Date fair value.
|
|
(3)
|
Includes
transaction costs incurred by SBTech shareholders to be borne by DraftKings, costs related to the SBTech restructuring transaction
that were paid by DraftKings, and the tail liability insurance for SBTech’s directors and officers, as specified in the
Business Combination Agreement.
|
The acquired assets
and assumed liabilities of SBTech were recorded at their estimated fair values. The purchase price allocation for the Business
Combination is preliminary and subject to change within the respective measurement period which will not extend beyond one year
from the acquisition date. Measurement period adjustments will be recognized in the reporting period in which the adjustment amounts
are determined. Any such adjustments may be material.
The following table
summarizes the consideration paid for SBTech and the preliminary fair value of the assets acquired and liabilities assumed at the
acquisition date on April 23, 2020. These values are considered preliminary pending finalization of valuation analyses pertaining
to intangible assets acquired and tax liabilities assumed including the calculation of deferred tax assets and liabilities:
Cash and cash equivalents
|
|
$
|
9,639
|
|
Trade receivables
|
|
|
18,741
|
|
Other current assets
|
|
|
1,848
|
|
Property and equipment
|
|
|
10,677
|
|
Intangible assets
|
|
|
490,513
|
|
Other non-current assets
|
|
|
1,017
|
|
Total identifiable assets acquired
|
|
|
532,435
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
23,613
|
|
Other long-term liabilities
|
|
|
4,226
|
|
Total liabilities assumed
|
|
|
27,839
|
|
Net assets acquired (a)
|
|
|
504,596
|
|
Estimated purchase consideration
(b)
|
|
|
975,541
|
|
Estimated goodwill (b) – (a)
|
|
$
|
470,945
|
|
Goodwill
represents the excess of the gross considerations transferred over the fair value of the underlying net assets acquired and liabilities
assumed. Qualitative factors that contribute to the recognition of goodwill include certain intangible assets that are not recognized
as separate identifiable intangible assets apart from goodwill. Intangible assets not recognized apart from goodwill consist primarily
of benefits from securing buyer-specific synergies that increase revenue and profits and are not otherwise available to
a marketplace participant, as well as acquiring a talented workforce and cost savings opportunities. The
amount allocated to goodwill and intangible assets is subject to final adjustment to reflect the final valuations. Goodwill associated
with the SBTech Acquisition is preliminarily assigned as of the acquisition date to the Company’s B2C and B2B segments in
the amounts of $348,345 and $122,600 respectively, which include the Company’s reporting units that are expected to benefit
from the synergies of the combination. Goodwill recognized is not expected to be deductible for local tax purposes.
Intangible Assets
|
|
Fair Value
|
|
|
Weighted-Average
Useful Life (in years)
|
|
Developed Technology
|
|
$
|
392,028
|
|
|
8
|
|
Customer relationships
|
|
|
93,699
|
|
|
5
|
|
Trademarks and trade names
|
|
|
4,308
|
|
|
3
|
|
Gaming License
|
|
|
478
|
|
|
2-3
|
|
Total
|
|
$
|
490,513
|
|
|
|
|
The fair value of
the developed technology was determined using the Multi-Period Excess Earnings Method (“MPEEM”), a form of the Income
Approach. The MPEEM is a specific application of the Discounted Cash Flow Method. The principle behind the MPEEM is that the value
of an intangible asset is equal to the present value of the incremental after-tax cash flows attributable only to the subject intangible
asset after deducting contributory asset charges (“CAC”). The principle behind a CAC is that an intangible asset ‘rents’
or ‘leases’ from a hypothetical third party all the assets it requires to produce the cash flows resulting from its
development, that each project rents only those assets it needs (including elements of goodwill) and not the ones that it does
not need, and that each project pays the owner of the assets a fair return on (and of, when appropriate) the value of the rented
assets. The fair value of the customer relationships was determined by using the With and Without Method, a form of the Income
Approach. In this method, the present value of the after-tax cash flows of the business assuming that the intangible asset is in
place is compared to the present value of the after-tax cash flows of the business assuming the absence of the intangible asset.
This method isolates the impact of the intangible asset and provides the basis for an estimation of value. The fair value of the
trademark and tradename was determined by using the Relief-from-Royalty Method, a form of the Income Approach. The basic tenet
of the Relief-from-Royalty Method is that without ownership of the subject intangible asset, the user of that intangible asset
would have to make a stream of payments to the owner of the asset in return for the rights to use that asset. By acquiring the
intangible asset, the user avoids these payments.
Transaction Costs
The Company incurred
$0 and $30,906, respectively, for the three and nine months ended September 30, 2020, in advisory, legal, accounting and management
fees in conjunction with the Business Combination, which are included in general and administrative expenses on the consolidated
statement of comprehensive loss.
Direct and incremental
transaction costs related to the Business Combination and additional equity offerings that would not otherwise have been incurred
are treated as a reduction of the cash proceeds and are deducted from the Company’s additional paid-in capital. Accordingly,
$41,378 was incurred related to equity issuance costs for the nine months ended as of September 30, 2020.
Unaudited Pro-Forma
Information
The financial information
in the table below summarizes the combined results of operations of Old DK and SBTech, on a pro forma basis, as though the companies
had been combined as of the beginning of the periods presented. The pro forma financial information is presented for informational
purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place
on January 1, 2019 or of results that may occur in the future.
The following unaudited
pro forma financial information for the three and nine month periods ended September 30, 2020 and September 30, 2019, combines
the historical results for Old DK for the periods ended September 30, 2020 and September 30, 2019 and the historical results of
SBTech, as converted to U.S. GAAP, for the respective periods:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
Revenue
|
|
$
|
132,836
|
|
|
$
|
93,318
|
|
|
$
|
321,279
|
|
|
$
|
269,259
|
|
Net loss
|
|
$
|
(347,753
|
)
|
|
$
|
(62,574
|
)
|
|
$
|
(578,979
|
)
|
|
$
|
(187,710
|
)
|
These pro forma results
were based on estimates and assumptions, which the Company believes are reasonable. The pro forma results include adjustments primarily
related to purchase accounting adjustments. Acquisition costs and other non-recurring charges incurred are included in the earliest
period presented.
|
4.
|
Property and Equipment
|
Property and equipment,
net consists of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Computer equipment and software
|
|
$
|
23,661
|
|
|
$
|
9,685
|
|
Furniture and fixtures
|
|
|
7,664
|
|
|
|
5,891
|
|
Leasehold improvements
|
|
|
22,267
|
|
|
|
17,373
|
|
Property and Equipment
|
|
|
53,592
|
|
|
|
32,949
|
|
Accumulated depreciation
|
|
|
(14,110
|
)
|
|
|
(7,004
|
)
|
Property and Equipment, net
|
|
$
|
39,482
|
|
|
$
|
25,945
|
|
During the three and
nine months ended September 30, 2020, the Company recorded depreciation expense on property and equipment of $2,749 and $6,489,
respectively. Depreciation expense on property and equipment was $1,249 and $3,225 for the three and nine months ended September
30, 2019, respectively.
|
5.
|
Intangible Assets and Goodwill
|
Intangible Assets
The Company has the
following intangible assets, net at September 30, 2020:
|
|
Weighted-
Average
Remaining
Amortization
Period
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Developed Technology
|
|
|
7.57 years
|
|
|
$
|
426,062
|
|
|
$
|
(23,226
|
)
|
|
$
|
402,836
|
|
Internally developed software
|
|
|
2.33 years
|
|
|
|
63,464
|
|
|
|
(29,652
|
)
|
|
|
33,812
|
|
Gaming Licenses
|
|
|
4.31 years
|
|
|
|
19,450
|
|
|
|
(3,798
|
)
|
|
|
15,652
|
|
Trademarks and tradenames
|
|
|
2.57 years
|
|
|
|
4,682
|
|
|
|
(681
|
)
|
|
|
4,001
|
|
Customer relationships
|
|
|
4.57 years
|
|
|
|
101,833
|
|
|
|
(8,882
|
)
|
|
|
92,951
|
|
Intangible Assets, net
|
|
|
|
|
|
$
|
615,491
|
|
|
$
|
(66,239
|
)
|
|
$
|
549,252
|
|
The Company has the
following intangible assets, net at December 31, 2019:
|
|
Weighted-
Average
Remaining
Amortization
Period
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Internally developed software
|
|
|
2.35 years
|
|
|
$
|
43,753
|
|
|
$
|
(21,188
|
)
|
|
$
|
22,565
|
|
Gaming Licenses
|
|
|
4.86 years
|
|
|
|
12,003
|
|
|
|
(629
|
)
|
|
|
11,374
|
|
Intangible Assets, net
|
|
|
|
|
|
$
|
55,756
|
|
|
$
|
(21,817
|
)
|
|
$
|
33,939
|
|
Amortization expense
was $23,846 and $43,478 for the three and nine months ended September 30, 2020 and $2,181 and $6,404 for the three and nine months
ended September 30, 2019, respectively.
Goodwill
The changes in the
carrying amount of goodwill for the nine months ended September 30, 2020 by segment (refer to Note 12 for segment definitions)
are:
|
|
B2C
|
|
|
B2B
|
|
|
Total
|
|
Balance as of December 31, 2019
|
|
$
|
4,738
|
|
|
$
|
–
|
|
|
$
|
4,738
|
|
Goodwill acquired in SBTech Acquisition*
|
|
|
348,345
|
|
|
|
122,600
|
|
|
|
470,945
|
|
Cumulative Translation Adjustment
|
|
|
–
|
|
|
|
10,644
|
|
|
|
10,644
|
|
Balance as of September 30, 2020
|
|
$
|
353,083
|
|
|
$
|
133,244
|
|
|
$
|
486,327
|
|
* = Preliminary allocation.
|
6.
|
Accounts Payable and Accrued Expenses
|
Accounts payable and
accrued expenses consist of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Accounts payable
|
|
$
|
24,401
|
|
|
$
|
16,618
|
|
Accrued compensation and related expenses
|
|
|
27,843
|
|
|
|
17,770
|
|
Accrued marketing
|
|
|
97,788
|
|
|
|
11,855
|
|
Accrued professional fees
|
|
|
13,299
|
|
|
|
10,344
|
|
Accrued operating taxes
|
|
|
14,050
|
|
|
|
5,745
|
|
Accrued partnership fees
|
|
|
12,000
|
|
|
|
7,868
|
|
Accrued other expenses
|
|
|
36,941
|
|
|
|
15,095
|
|
Total
|
|
$
|
226,322
|
|
|
$
|
85,295
|
|
|
7.
|
Current and Long-term Liabilities
|
Term Note
In October 2016, the Company entered
into an amended and restated loan and security agreement with Pacific Western Bank, which was most recently amended in September
2020 (as amended, the “Credit Agreement”). The Credit Agreement provides a revolving line of credit of up to $60,000.
The Credit Agreement has a maturity date of March 1, 2022. As of September 30, 2020 and December 31, 2019, the Credit Agreement
provided a revolving line of credit of up to $60,000 and $50,000, respectively. There was no principal outstanding as of September
30, 2020. The principal amount outstanding under the Credit Agreement totaled $6,750 as of December 31, 2019. Net facility
available from the Credit Agreement as of September 30, 2020 and December 31, 2019 totaled $54,947 and $38,769, respectively, which
exclude the letters of credit outlined in Note 15.
Indirect Taxes
Taxation of e-commerce
is becoming more prevalent and could negatively affect the Company’s business as it pertains to DFS and its users. The ultimate
impact of indirect taxes on the Company’s business is uncertain, as is the period required to resolve this uncertainty. The
Company’s estimated contingent liability for indirect taxes represents the Company’s best estimate of tax liability
in jurisdictions in which the Company believes taxation is probable. The Company frequently reevaluates its tax positions for appropriateness.
Indirect tax statutes
and regulations are complex and subject to differences in application and interpretation. Tax authorities may impose indirect taxes
on Internet-delivered activities based on statutes and regulations which, in some cases, were established prior to the advent of
the Internet and do not apply with certainty to the Company’s business. The Company’s estimated contingent liability
for indirect taxes may be materially impacted by future audit results, litigation and settlements, should they occur. The Company’s
activities by jurisdiction may vary from period to period, which could result in differences in the applicability of indirect taxes
from period to period.
As of September 30,
2020, and December 31, 2019, the Company’s estimated contingent liability for indirect taxes was $43,771 and $35,899,
respectively. The estimated contingent liability for indirect taxes is recorded within other long-term liabilities on the unaudited
condensed consolidated balance sheets and general and administrative expenses on the unaudited condensed consolidated statements
of operations.
Deferred
Rent
In conjunction with
certain leased office facilities, the Company has received cash payments from landlords to fund tenant directed leasehold improvements.
These payments are recorded as deferred rent and reported in accounts payable and accrued expenses and other long-term liabilities
within the unaudited condensed consolidated balance sheets. These amounts are released ratably over the lease term, with an offset
to rent expense. At September 30, 2020, the short-term and long-term deferred rent liabilities were $1,328 and $11,025, respectively.
At December 31, 2019, the short-term and long-term deferred rent liabilities were $1,125 and $9,747, respectively.
The unaudited condensed
consolidated statements of change in equity reflect the Reverse Recapitalization and SBTech Acquisition as defined in Note 1 as
of April 23, 2020. As Old DK was deemed the accounting acquirer in the Reverse Recapitalization with DEAC, all periods prior to
the consummation date reflect the balances and activity of Old DK. The consolidated balances as of December 31, 2019 and 2018 from
the audited consolidated financial statements of Old DK as of that date, share activity (convertible redeemable preferred stock
and common stock) and per share amounts in these unaudited condensed consolidated statements of equity were retroactively adjusted,
where applicable, using the recapitalization exchange ratio of 0.353628. All convertible redeemable preferred stock classified
as mezzanine was retroactively adjusted, converted into Class A common stock, and reclassified to permanent as a result of the
Reverse Recapitalization. Redeemable convertible preferred Series E-1 stock converted into shares of Old DK common stock at a share
conversion factor of 1.40 whereas Series F converted into shares of Old DK common stock at a share conversion factor of 1 and both
were immediately exchanged for Class A common stock of the Company using the recapitalization exchange ratio of 0.353628 as a result
of the Reverse Recapitalization.
Immediately
prior to the Business Combination, Old DK issued 393,014 shares of Class B common stock to Jason Robins (the Chief Executive Officer
of Old DK and of the Company) which converted into 393,014 shares of Class B common stock of the Company as a result of the Business
Combination and is recorded as stock-based compensation for the three and nine months ended September 30, 2020. Such shares carry
10 votes per share and allow Jason Robins to have as of the closing of the Business Combination, approximately 90% of the voting
power of the capital stock of DraftKings on a fully-diluted basis. As these shares have no economic rights and are non-participating,
they are allocated no earnings or losses when calculating earnings per share pursuant to the two-class method.
Upon the consummation
of the Business Combination, the mandatory conversion feature was triggered for the Company’s convertible notes. All outstanding
principal of $109,165 and unpaid accrued interest of $3,380 was collectively converted to equity securities at $10 per share.
The noteholders received 11,254 shares of Class A common stock in New DraftKings as result of the conversion.
As part of the Business
Combination $665,485 of Class A common stock and Additional Paid in Capital was recorded, net of transaction costs of $10,631,
in relation to DEAC shares being recapitalized. The Company then used $186,477 as cash consideration in its acquisition of SBTech
and $7,192 for the buyout of unaccredited investors. Net cash proceeds to the Company were $484,962.
In June 2020, we issued
16,000 new shares of our Class A common stock in a public offering for net proceeds (net of underwriting fees) of $620,800.
As of September 30,
2020, the Company had 300,000 shares authorized of preferred stock, $0.0001 par value, of which none were issued and outstanding
as of September 30, 2020 or December 31, 2019.
Deferred Revenue
The Company included
deferred revenue within accounts payable and accrued expenses and liabilities to users in the unaudited condensed consolidated
balance sheets. The deferred revenue balances were as follows:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Deferred revenue, beginning of the period
|
|
$
|
24,759
|
|
|
$
|
13,280
|
|
|
$
|
20,760
|
|
|
$
|
13,581
|
|
Deferred revenue, end of the period
|
|
|
33,464
|
|
|
|
15,986
|
|
|
|
33,464
|
|
|
|
15,986
|
|
Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period
|
|
|
6,632
|
|
|
|
5,966
|
|
|
|
10,505
|
|
|
|
9,819
|
|
Deferred revenue primarily
represents contract liabilities related to the Company’s obligation to transfer future value in relation to in period transactions
in which the Company has received consideration. Such obligations are recognized as liabilities when awarded to users and are recognized
as revenue when those liabilities are later resolved. The Company included deferred revenue within accounts payable and accrued
expenses and liabilities to users on the unaudited condensed consolidated balance sheets.
Revenue Disaggregation
Disaggregation of
revenue for the three and nine months ended September 30, 2020 and 2019 is as follows:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Online gaming
|
|
$
|
99,477
|
|
|
$
|
62,475
|
|
|
$
|
238,591
|
|
|
$
|
183,877
|
|
Gaming software
|
|
|
29,185
|
|
|
|
–
|
|
|
|
44,139
|
|
|
|
–
|
|
Other
|
|
|
4,174
|
|
|
|
4,539
|
|
|
|
9,579
|
|
|
|
8,619
|
|
Total Revenue
|
|
$
|
132,836
|
|
|
$
|
67,014
|
|
|
$
|
292,309
|
|
|
$
|
192,496
|
|
Online gaming includes
DFS, iGaming and Sportsbook which have certain similar attributes and pattern of recognition. Gaming
software and Other also have similar attributes and pattern of recognition.
The following table
presents the Company’s revenue by geographic region for the periods indicated:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
106,938
|
|
|
$
|
67,249
|
|
|
$
|
254,325
|
|
|
$
|
189,539
|
|
International
|
|
|
25,898
|
|
|
|
(235
|
)
|
|
|
37,984
|
|
|
|
2,957
|
|
Total Revenue
|
|
$
|
132,836
|
|
|
$
|
67,014
|
|
|
$
|
292,309
|
|
|
$
|
192,496
|
|
|
10.
|
Stock-Based Compensation
|
The Company,
historically, has issued three types of stock-based compensation: Time-Based awards, Long Term Incentive Plan
(“LTIP”) awards and Performance-Based Stock Compensation Plan (“PSP”) awards. Time-Based awards are
options which generally vest over a 4-year period. LTIP awards are performance-based equity awards that are used to establish
longer-term performance objectives and incentivize management to meet those objectives. PSP awards are short-term
performance-based equity awards which establish performance objectives related to one or two particular fiscal years. LTIP
awards generally vest when longer-term revenue, adjusted EBITDA or share price targets are achieved amongst other conditions,
while PSP awards generally vest upon achievement of revenue or adjusted EBITDA targets amongst other conditions. All
stock-based compensation grants expire ten years after the grant date.
The following table shows stock option activity for the nine
months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Exercise
|
|
|
Weighted-
Average
Remaining
Term
|
|
|
Aggregate
Intrinsic
|
|
|
|
Time
Based
|
|
|
PSP(3)
|
|
|
LTIP
(3)
|
|
|
Price
|
|
|
(in
Years)
|
|
|
Value
|
|
|
|
Options
|
|
|
RSUs
|
|
|
Options
|
|
|
RSUs
|
|
|
Options
|
|
|
RSUs
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2018
|
|
|
66,527
|
|
|
|
–
|
|
|
|
5,161
|
|
|
|
–
|
|
|
|
40,189
|
|
|
|
–
|
|
|
|
111,877
|
|
|
$
|
0.84
|
|
|
|
8.15
|
|
|
$
|
69,765
|
|
Recapitalization Impact
|
|
|
(43,003
|
)
|
|
|
–
|
|
|
|
(3,336
|
)
|
|
|
–
|
|
|
|
(25,978
|
)
|
|
|
–
|
|
|
|
(72,317
|
)
|
|
|
1.54
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31,
2018
|
|
|
23,524
|
|
|
|
–
|
|
|
|
1,825
|
|
|
|
–
|
|
|
|
14,211
|
|
|
|
–
|
|
|
|
39,560
|
|
|
|
2.38
|
|
|
|
8.15
|
|
|
$
|
69,765
|
|
Granted
|
|
|
5,479
|
|
|
|
–
|
|
|
|
2,214
|
|
|
|
–
|
|
|
|
1,990
|
|
|
|
–
|
|
|
|
9,683
|
|
|
|
4.70
|
|
|
|
–
|
|
|
|
–
|
|
Exercised options / vested RSUs
|
|
|
(754
|
)
|
|
|
–
|
|
|
|
(16
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(770
|
)
|
|
|
1.14
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
(355
|
)
|
|
|
–
|
|
|
|
(19
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(374
|
)
|
|
|
3.39
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at September 30,
2019
|
|
|
27,894
|
|
|
|
–
|
|
|
|
4,004
|
|
|
|
–
|
|
|
|
16,201
|
|
|
|
–
|
|
|
|
48,099
|
|
|
$
|
2.85
|
|
|
|
7.88
|
|
|
$
|
90,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
78,772
|
|
|
|
–
|
|
|
|
11,233
|
|
|
|
–
|
|
|
|
45,817
|
|
|
|
–
|
|
|
|
135,822
|
|
|
$
|
1.01
|
|
|
|
7.64
|
|
|
$
|
203,431
|
|
Recapitalization Impact
|
|
|
(50,919
|
)
|
|
|
–
|
|
|
|
(7,261
|
)
|
|
|
–
|
|
|
|
(29,616
|
)
|
|
|
–
|
|
|
|
(87,796
|
)
|
|
|
1.85
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding at December 31, 2019
|
|
|
27,853
|
|
|
|
–
|
|
|
|
3,972
|
|
|
|
–
|
|
|
|
16,201
|
|
|
|
–
|
|
|
|
48,026
|
|
|
|
2.86
|
|
|
|
7.64
|
|
|
$
|
203,431
|
|
Granted
|
|
|
4,781
|
|
|
|
3,696
|
|
|
|
–
|
|
|
|
907
|
|
|
|
–
|
|
|
|
15,554
|
|
|
|
24,938
|
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
Exercised options / vested
RSUs
|
|
|
(4,695
|
)
|
|
|
(73
|
)
|
|
|
(618
|
)
|
|
|
–
|
|
|
|
(638
|
)
|
|
|
–
|
|
|
|
(6,024
|
)
|
|
|
1.69
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(684
|
)
|
|
|
(8
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(692
|
)
|
|
|
4.13
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2020
|
|
|
27,255
|
|
|
|
3,615
|
|
|
|
3,354
|
|
|
|
907
|
|
|
|
15,563
|
|
|
|
15,554
|
|
|
|
66,248
|
|
|
$
|
2.16
|
|
|
|
7.34
|
|
|
$
|
3,754,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested as of September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Based
|
|
|
20,387
|
|
|
|
14
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
20,401
|
|
|
$
|
2.10
|
|
|
|
–
|
|
|
|
–
|
|
PSP
|
|
|
–
|
|
|
|
–
|
|
|
|
3,354
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,354
|
|
|
|
4.18
|
|
|
|
–
|
|
|
|
–
|
|
LTIP
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
15,563
|
|
|
|
–
|
|
|
|
15,563
|
|
|
|
3.43
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
20,387
|
|
|
|
14
|
|
|
|
3,354
|
|
|
|
–
|
|
|
|
15,563
|
|
|
|
–
|
|
|
|
39,318
|
|
|
$
|
2.80
|
|
|
|
7.18
|
|
|
$
|
2,191,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimate of Expected to Vest(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020(2)
|
|
|
947
|
|
|
|
122
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
15,554
|
|
|
|
16,623
|
|
|
$
|
0.27
|
|
|
|
–
|
|
|
|
–
|
|
2021
|
|
|
3,401
|
|
|
|
1,240
|
|
|
|
–
|
|
|
|
865
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,506
|
|
|
|
2.97
|
|
|
|
–
|
|
|
|
–
|
|
2022+
|
|
|
2,205
|
|
|
|
2,074
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,279
|
|
|
|
2.48
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
6,553
|
|
|
|
3,436
|
|
|
|
–
|
|
|
|
865
|
|
|
|
–
|
|
|
|
15,554
|
|
|
|
26,408
|
|
|
$
|
1.19
|
|
|
|
7.56
|
|
|
$
|
1,533,542
|
|
Effect
of estimated forfeitures
|
|
|
315
|
|
|
|
165
|
|
|
|
–
|
|
|
|
42
|
|
|
|
–
|
|
|
|
–
|
|
|
|
522
|
|
|
$
|
2.91
|
|
|
|
8.26
|
|
|
$
|
29,675
|
|
(1)
Contemplates the impact of estimated forfeitures.
(2)
For remainder of 2020 period.
(3)
Performance based instruments.
As of September 30,
2020, total unrecognized stock-based compensation expense of $289,665 related to granted and unvested share-based compensation
arrangements is expected to be recognized over a weighted-average period of 1.62 years. The following table shows stock compensation
expense for the three and nine months ended September 30, 2020 and 2019:
|
|
Three months ended
September 30, 2020
|
|
|
Nine months ended
September 30, 2020
|
|
|
|
Options
|
|
|
RSUs
|
|
|
Total
|
|
|
Options
|
|
|
RSUs
|
|
|
Total
|
|
Time Based
|
|
$
|
2,054
|
|
|
$
|
8,867
|
|
|
$
|
10,921
|
|
|
$
|
5,223
|
|
|
$
|
9,047
|
|
|
$
|
14,270
|
|
PSP
|
|
|
–
|
|
|
|
3,479
|
|
|
|
3,479
|
|
|
|
1,633
|
|
|
|
3,479
|
|
|
|
5,112
|
|
LTIP (1)
|
|
|
–
|
|
|
|
102,634
|
|
|
|
102,634
|
|
|
|
9,552
|
|
|
|
139,428
|
|
|
|
148,980
|
|
B Shares (2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
8,000
|
|
|
|
–
|
|
|
|
8,000
|
|
Total
|
|
$
|
2,054
|
|
|
$
|
114,980
|
|
|
$
|
117,034
|
|
|
$
|
24,408
|
|
|
$
|
151,954
|
|
|
$
|
176,362
|
|
|
|
Three months ended
September 30, 2019
|
|
|
Nine months ended
September 30, 2019
|
|
|
|
Options
|
|
|
RSUs
|
|
|
Total
|
|
|
Options
|
|
|
RSUs
|
|
|
Total
|
|
Time Based
|
|
$
|
1,844
|
|
|
$
|
–
|
|
|
$
|
1,844
|
|
|
$
|
5,455
|
|
|
$
|
–
|
|
|
$
|
5,455
|
|
PSP
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,064
|
|
|
|
–
|
|
|
|
3,064
|
|
LTIP (1)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
B Shares (2)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
$
|
1,844
|
|
|
$
|
–
|
|
|
$
|
1,844
|
|
|
$
|
8,519
|
|
|
$
|
–
|
|
|
$
|
8,519
|
|
(1) Resulting from amortization of stock-based compensation expense
and anticipated achievement of share price targets
(2)
Related to the Business Combination; Class B shares have no economic rights.
Three and nine months
ended September 30, 2020 and September 30, 2019 is as follows:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Provision (benefit) for income taxes
|
|
$
|
(13
|
)
|
|
$
|
19
|
|
|
$
|
319
|
|
|
$
|
35
|
|
The effective tax
rates for the three and nine months ended September 30, 2020 were .00% and (.06)%, respectively, and the effective tax rates for
the three and nine months ended September 30, 2019 were (.03)% and (.03)%, respectively. The difference between the Company’s
effective tax rates for the 2020 and 2019 periods and the U.S. statutory tax rate of 21% was primarily due to a full valuation
allowance related to the Company’s net U.S. deferred tax assets, offset partially by current state tax and current foreign
tax. The Company regularly evaluates the realizability of its deferred tax assets and establishes a valuation allowance if it is
more likely than not that some or all the deferred tax assets will not be realized.
On March 27, 2020,
the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act
is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund
a nationwide effort to curtail the effect of COVID-19. As of September 30, 2020, the Company has analyzed the provisions of the
CARES Act and determined it did not have a significant impact to the Company.
Prior to the second
quarter of fiscal year 2020, the Company operated its business and reported its results through a single reportable segment. As
a result of the acquisition of SBTech on April 23, 2020, the Company began to operate its business and report its results through
two operating and reportable segments: B2C and B2B, in accordance with ASC Topic 280, Segment Reporting. The B2C segment
is comprised of the Old DK business and the B2B segment is comprised of SBTech in its entirety. The B2C segment primarily provides
users with DFS, Sportsbook and iGaming products while the B2B segment is involved in the design, development and licensing of sports
betting and casino gaming software for its sportsbook and casino gaming products.
The reportable segments
are segments of the Company for which separate discrete financial information is available to and evaluated regularly by the chief
operating decision maker (“CODM”), who is the Company’s Chief Executive Officer, in making decisions regarding
resource allocation and assessing performance. The CODM assesses a combination of metrics such as revenue and Adjusted EBITDA to
evaluate the performance of each reportable segment.
Any intercompany revenues
or expenses are eliminated in consolidation. All of the Company’s operating revenues and expenses, other than those excluded
from Adjusted EBITDA as detailed below, are allocated to the Company’s reportable segments. We define and calculate Adjusted
EBITDA as net loss before the impact of interest income or expense, income tax expense and depreciation and amortization, and further
adjusted for the following items: stock-based compensation, transaction-related costs, litigation, settlement and related costs
and certain other non-recurring, non-cash and non-core items, as described in the reconciliation below.
A measure of segment
assets and liabilities has not been currently provided to the Company’s CODM and therefore is not shown below.
Summarized financial information for the Company’s segments
is shown in the following tables:
|
|
Three months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
B2C
|
|
$
|
103,651
|
|
|
$
|
67,014
|
|
B2B
|
|
|
29,185
|
|
|
|
–
|
|
Total revenue
|
|
|
132,836
|
|
|
|
67,014
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
B2C
|
|
|
(201,455
|
)
|
|
|
(48,421
|
)
|
B2B
|
|
|
4,376
|
|
|
|
–
|
|
Total adjusted EBITDA
|
|
|
(197,079
|
)
|
|
|
(48,421)
|
|
Adjusted for:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
26,595
|
|
|
|
3,430
|
|
Interest (income) expense, net
|
|
|
(686
|
)
|
|
|
(277
|
)
|
Income tax expense
|
|
|
(13
|
)
|
|
|
19
|
|
Stock-based compensation
|
|
|
117,034
|
|
|
|
1,844
|
|
Transaction-related costs
|
|
|
3,585
|
|
|
|
1,328
|
|
Litigation, settlement and related costs
|
|
|
2,419
|
|
|
|
710
|
|
Other non-recurring costs and special project costs
|
|
|
1,645
|
|
|
|
444
|
|
Non-operating costs
|
|
|
95
|
|
|
|
–
|
|
Net Loss attributable to common shareholders
|
|
$
|
(347,753
|
)
|
|
$
|
(55,919
|
)
|
Due to the timing of the Business Combination,
the three-month period ended September 30, 2020 reflects B2B/SBTech activity beginning April 24, 2020 and the three-month period
ended September 30, 2019 does not reflect B2B/SBTech activity.
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
B2C
|
|
$
|
248,170
|
|
|
$
|
192,496
|
|
B2B
|
|
|
44,139
|
|
|
|
–
|
|
Total revenue
|
|
|
292,309
|
|
|
|
192,496
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
B2C
|
|
|
(304,889
|
)
|
|
|
(89,937
|
)
|
B2B
|
|
|
854
|
|
|
|
–
|
|
Total adjusted EBITDA
|
|
|
(304,035
|
)
|
|
|
(89,937
|
)
|
Adjusted for:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
49,967
|
|
|
|
9,629
|
|
Interest (income) expense, net
|
|
|
2,253
|
|
|
|
(1,364
|
)
|
Income tax expense
|
|
|
319
|
|
|
|
35
|
|
Stock-based compensation
|
|
|
176,362
|
|
|
|
8,519
|
|
Transaction-related costs
|
|
|
34,492
|
|
|
|
2,603
|
|
Litigation, settlement and related costs
|
|
|
5,771
|
|
|
|
2,411
|
|
Other non-recurring costs and special project costs
|
|
|
4,291
|
|
|
|
1,816
|
|
Non-operating costs
|
|
|
380
|
|
|
|
–
|
|
Net Loss attributable to common shareholders
|
|
$
|
(577,870
|
)
|
|
$
|
(113,586
|
)
|
Due to the timing of the Business Combination,
the nine -month period ended September 30, 2020 reflects B2B/SBTech activity beginning April 24, 2020 and the nine-month period
ended September 30, 2019 does not reflect B2B/SBTech activity.
The computation of
loss per share and weighted-average shares of the Company’s Class A common stock outstanding for the periods presented are
as follows:
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net loss
|
|
$
|
(347,753
|
)
|
|
$
|
(55,919
|
)
|
|
$
|
(577,870
|
)
|
|
$
|
(113,586
|
)
|
Basic and diluted weighted-average common shares outstanding
|
|
|
355,900
|
|
|
|
185,686
|
|
|
|
277,932
|
|
|
|
184,787
|
|
Loss per share attributable to common
stockholders:
Basic and diluted
|
|
$
|
(0.98
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(2.08
|
)
|
|
$
|
(0.61
|
)
|
There were no preferred
or other dividends declared for the period. For the periods presented, the following securities were not required to be included
in the computation of diluted shares outstanding:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Warrants
|
|
|
2,151
|
|
|
|
182
|
|
Stock options and RSUs
|
|
|
66,248
|
|
|
|
48,099
|
|
Convertible notes
|
|
|
–
|
|
|
|
3,890
|
|
Total
|
|
|
68,399
|
|
|
|
52,171
|
|
|
14.
|
Related-Party Transactions
|
Media Purchase Agreement
(“MPA”)
In
July 2015, Old DK entered into an MPA with a related party for various media placements from 2015 through 2018. The MPA
was amended to extend through 2021. The annual commitment for calendar years 2017 through 2021 was $15,000 per year, plus an additional
contingent commitment of $5,000 per year. The contingent commitment relates to the Company’s allocation of its non-integration
advertising with other advertisers. Effective January 2019, the future minimum commitments related to the MPA were reduced to $15,000
in aggregate through December 31, 2021 ($5,000 per year) and the contingent commitment was removed. If the Company satisfies the
$15,000 commitment prior to December 31, 2021, the MPA will expire unless the Company elects to extend the MPA through the next
NFL season with no required minimum. The Company recorded expense of $7,692 and $11,092 related to the MPA for the three and nine
months ended September 30, 2020 and recorded expense of $2,713 and $4,929 related to the MPA for the three and nine months ended
September 30, 2019, respectively, in sales and marketing expenses in the unaudited condensed consolidated statements of operations.
As of September 30, 2020 and December 31, 2019, $70 and $2,413, respectively, of MPA is included
in accounts payable and accrued expenses in the unaudited condensed consolidated balance sheets.
Private Placement
Agent
Old DK entered into
an engagement letter with a related party (the “Private Placement Agent”) in August 2019, as amended in December 2019.
Pursuant to the engagement letter, the Private Placement Agent has acted as the exclusive financial advisor to Old DK, and Old
DK agreed to pay certain acquisition and financing fees in connection with the Business Combination with SBTech and DEAC. As of
the nine months ended September 30, 2020 and September 30, 2019, Old DK incurred $12,349 and $0, respectively, of fees with the
Private Placement Agent. During the three months ended September 30, 2020 and September 30, 2019, Old DK incurred $0 and $0,
respectively.
Receivables from
Equity Method Investment
The Company provides
office space and general operational support to DKFS, LLC, an equity-method affiliate. The operational support is primarily general
and administrative services. As of September 30, 2020, and December 31, 2019, the Company had $1,084 and $959, respectively, of
receivables from the entity related to those services and expenses to be reimbursed to the Company, which are included within current
assets in the unaudited condensed consolidated balance sheets.
Transactions
with a Shareholder and his Immediate Family Members
The Business Combination Agreement requires
payment to a shareholder in the event certain SBTech accounts receivable are collected. As of September 30, 2020, the Company had
a $2,696 payable to the shareholder included in accounts payable and accrued expenses in the unaudited condensed balance sheet.
In addition, the Company had $1,073 and $1,721 in sales to an entity related to an immediate family member of the shareholder during
the three and nine months ended September 30, 2020 and had an associated accounts receivable balance of $839 as of September 30,
2020 included in accounts receivable in the unaudited condensed balance sheet. There were no related party transactions with the
shareholder or their immediate family members for the three or nine months ended September 30, 2019 and no related accounts receivable
balance as of December 31, 2019.
15.
|
Commitments and Contingencies
|
Leases
The Company rents
its corporate office facilities, data centers, and motor vehicles under lease arrangements. The terms of the leases include scheduled
base rent increases, and obligations to pay for a proportionate share of each property’s operating costs and tax escalations
as defined in each lease. The total amount of rental payments due over each lease term is charged to rent expense ratably over
the life of each lease.
Total
rent expense for the three and nine months ended September 30, 2020 was $5,178 and $12,963, respectively, and
for the three and nine months ended September 30, 2019 was $2,950 and $7,547, respectively.
Future minimum lease
payments are as follows:
Years ending December 31,
|
|
|
|
From October 1, 2020 to December 31, 2020
|
|
$
|
3,699
|
|
2021
|
|
|
16,780
|
|
2022
|
|
|
14,927
|
|
2023
|
|
|
14,310
|
|
2024
|
|
|
12,596
|
|
Thereafter
|
|
|
37,638
|
|
Total
|
|
$
|
99,950
|
|
Other Contractual
Obligations and Contingencies
The Company is a party
to several non-cancelable contracts with vendors where the Company is obligated to make future minimum payments under the terms
of these contracts as follows:
Years ending December 31,
|
|
|
|
From October 1, 2020 to December 31, 2020
|
|
$
|
25,246
|
|
2021
|
|
|
130,512
|
|
2022
|
|
|
121,923
|
|
2023
|
|
|
107,047
|
|
2024
|
|
|
100,976
|
|
Thereafter
|
|
|
378,000
|
|
Total*
|
|
$
|
863,704
|
|
* The above commitments include $443M of
future expected contractual obligations to a media company as part of a multi-year content integration agreement.
Contingencies
From time to time,
and in the ordinary course of business, the Company may be subject to certain claims, charges and litigation concerning matters
arising in connection with the conduct of the Company’s business activities.
In Re: Daily Fantasy Sports Litigation (Multi-District Litigation)
Between late 2015
and early 2016, certain individuals who allegedly registered and competed in daily sports fantasy contests on our and FanDuel’s
websites, and their family members, filed numerous actions (primarily purported class actions) against us, FanDuel, and other related
parties in courts across the United States. In February 2016, these actions were consolidated in a multi-district litigation in
the U.S. District Court for the District of Massachusetts. The plaintiffs asserted 27 claims arising under both state and federal
law against the DFS defendants. The plaintiffs’ claims against us generally fall into four categories: (1) our online daily
fantasy sports contests constitute illegal gambling; (2) we promulgated false or misleading advertisements that emphasized the
ease of play and likelihood of winning; (3) we induced consumers to lose money through a deceptive bonus program; and (4) we allowed
our employees to participate in competitors’ fantasy sports contests using non-public information, which gave such employees
an unfair advantage over other contestants. The plaintiffs seek money damages, equitable relief, and disgorgement of gains against
us. We intend to vigorously defend this case. We have established an accrual for this matter, but we cannot provide any assurance
as to the outcome of this lawsuit.
Despite the potential
for significant damages, we do not believe, based on currently available information, that the outcome of this proceeding will
have a material adverse effect on DraftKings’ financial condition, although the outcome could be material to DraftKings’
operating results for any particular period, depending, in part, upon the operating results for such period.
1,000 Mass Arbitration Demands Filed
by One Law Firm
On October 21, 2019,
a law firm filed 1,000 “mass arbitrations” against us with the American Arbitration Association (“AAA”)
on behalf of purported DraftKings users that assert claims similar to those in the multi-district litigation described above. After
the law firm filed the 1,000 “mass arbitrations,” the AAA informed us in writing that it would close their files on,
and decline to administer, the 1,000 “mass arbitrations” unless we waived two provisions in our terms of use and that
the parties would then be free to bring their claims in court. We elected not to waive the subject terms of use provisions. On
November 6, 2020 the law firm filed a complaint against DraftKings in Massachusetts Superior Court (Suffolk County), entitled Aaron
Abramson, et al. v. DraftKings. In Abramson, the law firm is seeking, among other things, to compel arbitration against
DraftKings on behalf of nine-hundred and ninety-nine (999) individuals.
We intend to vigorously
defend all claims. If the claimants successfully compel arbitration and then obtain a judgment in their favor in these arbitrations,
we could be subject to substantial damages and we could be restricted from offering DFS contests in certain states. Despite the
potential for significant damages, we do not believe, based on currently available information, that the outcome of this proceeding
will have a material adverse effect on DraftKings’ financial condition, although the outcome could be material to DraftKings’
operating results for any particular period, depending, in part, upon the operating results for such period. We cannot predict
with any degree of certainty the outcome of Abramson or determine the extent of any potential liability or damages should
the cases proceed to arbitration. We also cannot provide an estimate of the possible loss or range of loss.
Interactive Games LLC
On June 14, 2019,
Interactive Games LLC (“IG”) filed suit against us in the U.S. District Court for the District of Delaware, alleging
that our Daily Fantasy Sports product offering infringes two patents and our Sportsbook product offering infringes two additional
patents. We intend to vigorously defend this case. In the event that a court ultimately determines that we are infringing the asserted
patents, we may be subject to substantial damages, which may include treble damages and/or an injunction that could require us
to modify certain features that we currently offer. We cannot predict with any degree of certainty the outcome of the suit or determine
the extent of any potential liability or damages. We also cannot provide an estimate of the possible loss or range of loss.
Internal Revenue
Service
We are currently under
Internal Revenue Service 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 these unaudited condensed consolidated financial statements and may materially affect our unaudited
condensed consolidated financial statements in the period or periods in which that determination is made.
Letters of Credit
In
connection with the Credit Agreement with Pacific Western Bank, the Company has entered into several letters of credit totaling
$5,053 and $4,481 as of September 30, 2020 and December 31, 2019, respectively, for the Company’s leases of office space.
The Company considers
events or transactions that occur after the balance sheet date, but before the unaudited condensed consolidated financial statements
are issued, to provide additional evidence relative to certain estimates or identify matters that require additional disclosures.
The Company evaluated subsequent events through November 13, 2020, the date on which the unaudited condensed consolidated financial
statements were available to be issued. The unaudited condensed consolidated financial statements reflect those material items
that arose after the balance sheet date, but prior to this date that would be considered recognized subsequent events.
On October 9, 2020,
the Company completed an underwritten public offering of 36,800 shares of its Class A common stock. Pursuant to the terms of the
offering, DraftKings sold 20,800 shares of its Class A common stock (inclusive of the full exercise of the underwriters’
option to purchase 4,800 shares of Class A common stock) and certain selling stockholders of DraftKings sold 16,000 shares of Class
A common stock, at a public offering price of $52.00 per share for a total offering size of $1,914,000. The Company received proceeds
from the offering of approximately $1.06 billion (net of underwriting discounts and commissions). DraftKings did not receive any
proceeds from the sale of Class A common stock offered by the selling stockholders.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion
and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q (the “Report”) and the section entitled “Risk Factors.” Unless otherwise indicated,
the terms “DraftKings,” “we,” “us,” or “our” refer to DraftKings Inc., a Nevada
corporation, together with its consolidated subsidiaries.
Forward-Looking Statements
This Report contains
forward-looking statements that reflect future plans, estimates, beliefs and expected performance. The forward-looking statements
depend upon events, risks and uncertainties that may be outside of our control. The words “anticipate,” “believe,”
“continue,” “could,” “estimate,” “expect,” “intends,” “may,”
“might,” “plan,” “possible,” “potential,” “predict,” “project,”
“should,” “would” and similar expressions may identify forward-looking statements, but the absence of these
words does not mean that a statement is not forward-looking. Our actual results could differ materially from those discussed in
these forward-looking statements.
Factors that could
cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section
entitled “Risk Factors” included elsewhere in this Report. Any statements contained herein that are not statements
of historical fact may be forward-looking statements.
|
·
|
our success in retaining or recruiting officers, key employees or directors;
|
|
·
|
factors relating to our business, operations and financial performance,
including:
|
|
o
|
our ability to effectively compete in the global entertainment and
gaming industries;
|
|
o
|
our ability to successfully acquire and integrate new operations;
|
|
o
|
our ability to obtain and maintain licenses with gaming authorities;
|
|
o
|
our inability to realize deferred tax assets and tax loss carryforwards;
|
|
·
|
market conditions and global and economic factors beyond our control,
including the potential adverse effects of the ongoing global coronavirus (“COVID-19”) pandemic on capital markets,
general economic conditions, unemployment and our liquidity, operations and personnel;
|
|
·
|
intense competition and competitive pressures from other companies
worldwide in the industries in which we operate; and
|
|
·
|
litigation and the ability to adequately protect our intellectual property rights; and
|
|
·
|
our ability to raise financing in the future.
|
These
risks and other factors include those set forth in our Annual Report on Form 10-K, filed with the SEC on March 12,
2020, or our Definitive Proxy Statement on Schedule 14A relating to the Business Combination, filed with the SEC on April 15,
2020, under the caption “Risk Factors.” Due to the uncertain nature of these factors, management cannot assess
the impact of each factor on the business or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking statements.
Any forward-looking
statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any of these statements
to reflect events or circumstances occurring after the date of this Report. New factors may emerge and it is not possible to predict
all factors that may affect our business and prospects.
Our Business
We are a digital sports
entertainment and gaming company. We provide users with daily fantasy sports (“DFS”), 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 platform that powers millions of contest entries in peer-to-peer competitions every week. We leverage our
technology platform, the scale and density of our user base and insights from over four million cumulative unique paid users
to continuously improve our analytics, marketing and technology to (a) continue to invest in our products and platform, (b)
launch our product offerings in new geographies, (c) effectively integrate SBTech 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. 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 September 30, 2020, we offer our mobile sportsbook, iGaming or
business-to-business (“B2B”) products in nine states as we continue to expand our geographic footprint.
Basis of Presentation
We operate two complementary
business segments: our business-to-consumer (“B2C”) business and our business-to-business (“B2B”) business.
B2C
Our B2C business is
comprised of the legacy DraftKings business, which includes our daily fantasy sports, Sportsbook and iGaming product offerings.
Across these principal offerings, we provide users with a single integrated platform that provides one account, one wallet, a centralized
payment system and responsible gaming controls. Currently, we operate our B2C segment primarily in the United States.
B2B
Our B2B business is
comprised of the entirety of the operations of SBTech (Global) Limited (“SBTech”), which we acquired on April 23, 2020.
Our B2B segment’s principal activities involve the design and development of sports betting and casino gaming software.
Our B2B services are delivered through our proprietary software, and our complementary service offerings include trading and risk
management and support for reporting, customer management and regulatory reporting requirements. The operations of our B2B segment
are concentrated mainly in Europe and Asia, with a growing presence in the United States.
Financial Highlights and Trends
The following table sets forth a summary of our
financial results for the periods indicated:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (1)
|
|
$
|
132,836
|
|
|
$
|
67,014
|
|
|
$
|
292,309
|
|
|
$
|
192,496
|
|
Pro Forma Revenue (2)
|
|
|
132,836
|
|
|
|
93,318
|
|
|
|
321,279
|
|
|
|
269,259
|
|
Net Loss (1)
|
|
|
347,753
|
|
|
|
55,919
|
|
|
|
577,870
|
|
|
|
113,586
|
|
Pro Forma Net Loss (2)
|
|
|
347,753
|
|
|
|
62,624
|
|
|
|
589,091
|
|
|
|
140,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (3)
|
|
|
(197,079
|
)
|
|
|
(48,421
|
)
|
|
|
(304,035
|
)
|
|
|
(89,937
|
)
|
Pro Forma Adjusted EBITDA (3)
|
|
|
(197,079
|
)
|
|
|
(41,026
|
)
|
|
|
(307,956
|
)
|
|
|
(73,266
|
)
|
|
(1)
|
Due to the timing of the Business Combination, the three-month
period ended September 30, 2020 reflects B2B/SBTech activity for the entire period, the nine-month period ended September 30,
2020 reflects B2B/SBTech activity from April 24, 2020 onwards, and the three-month and nine-month periods ended September 30,
2019 do not reflect any B2B/SBTech activity.
|
|
(2)
|
Assumes that the Business Combination was consummated
on January 1, 2019. See “—Comparability of Financial Information” below.
|
|
(3)
|
Adjusted EBITDA and Pro Forma Adjusted EBITDA are non-GAAP
financial measures. See “—Non-GAAP Information” below for additional information about these measures
and a reconciliation of these measures.
|
Revenue grew in the
quarter ended September 30, 2020 compared to the quarter ended September 30, 2019, reflecting the quarter-on-quarter performance
of our B2C segment as well as the acquisition of SBTech on April 23, 2020. The quarter-on-quarter performance of our B2C segment
reflected:
|
·
|
an increase in DFS revenues due to the resumption of the NBA regular season and playoffs, as well
as golf events moving into the third quarter due to COVID-19 scheduling changes, as discussed below;
|
|
·
|
the expansion of our Sportsbook product offering into several new states, offset by atypical hold
rates from NFL wagering; and
|
|
·
|
the increased engagement with our iGaming product offering due to higher volume of play and the
geographic expansion of the product offering to Pennsylvania in the second quarter of 2020 and West Virginia in the third quarter
of 2020.
|
Revenue for the three-month
period ended September 30, 2020 when compared to pro forma revenue for the three-month period ended September 30, 2019, which assumes
the Business Combination (as defined below) was consummated on January 1, 2019, increased by $39.5 million in the quarter ended
September 30, 2020 compared to the quarter ended September 30, 2019, mainly due to the performance of the B2C segment as discussed
above.
For the nine months
ended September 30, 2020, revenue grew by $99.8 million over the same period in the prior year, of which $44.1 million was attributable
to the acquisition of SBTech and $55.7 million reflected the strong performance of our B2C product offerings in the first quarter
prior to the outbreak of COVID-19, several new state launches for our Sportsbook and iGaming product offerings, as well as increased
engagement with our iGaming product offering and an increase in DFS revenues in the third quarter of 2020 as discussed above.
Pro forma revenue increased
by $52.0 million in the nine months ended September 30, 2020, compared to the same period in 2019, mainly reflecting the performance
of our B2C segment, as discussed above.
Impact of COVID-19
The novel coronavirus
(“COVID-19”) has adversely impacted global commercial activity and contributed to significant volatility in financial
markets. The COVID-19 pandemic has disrupted global supply chains and adversely impacted many different industries for most of
2020. COVID-19 could have a continued material adverse impact on economic and market conditions and trigger a period of continued
global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the extent and the
duration of the economic impact of COVID-19. COVID-19 therefore presents material uncertainty and risk with respect to the Company
and its performance and could affect the Company’s financial results in a materially adverse way.
The direct impact
of COVID-19 on the business of DraftKings beyond disruptions to normal business operations in several offices primarily results
from the suspension and cancellation of sports seasons and sporting events. During the July to September time period, major professional
sports leagues including the NBA and the NHL resumed their seasons, MLB began its season after a three month delay, and the NFL
season began as originally planned. The return of major sports and events, as well as the unique and concentrated sports calendar
in this time period, generated significant user interest and activity in the Company’s Sportsbook and DFS product offerings.
However, it remains possible that sports seasons and sporting events may be suspended or cancelled due to COVID-19 outbreaks. The
suspension and alteration of sports seasons and sporting events earlier in the year reduced customers’ use of, and spending
on, the Company’s Sportsbook and DFS product offerings and caused the Company to issue refunds for canceled events. Additionally,
while retail casinos where the Company has branded sportsbooks and DFS have reopened, they continue to operate with reduced capacity.
The Company’s revenues vary based on sports seasons and sporting events, and cancellations, suspensions or alterations resulting
from COVID-19 are likely to adversely affect the Company’s revenue, possibly materially. However, the Company’s product
offerings that do not rely on sports seasons and sporting events, such as iGaming, may partially offset this adverse impact on
revenue. DraftKings is also innovating to generate more products that do not rely on traditional sports seasons and sporting events,
for example, products that permit wagering and contests on events such as eSports, simulated NASCAR and League of Legends.
A significant or prolonged
decrease in consumer spending on entertainment or leisure activities would likely adversely affect demand for the Company’s
product offerings, reducing cash flows and revenues, and thereby materially harming our business, financial condition and results
of operations. As steps taken to mitigate the spread of COVID-19 have necessitated a shift away from traditional office environment
for many employees, the Company has business continuity programs in place to ensure that employees are safe and that the business
continues to function while its employees work remotely.
Comparability of Financial Results
On April 23, 2020,
we completed the business combination, by and among DEAC, Old DK and SBTech (the “Business Combination”). The Business
Combination drove, among other things, increases of $10.7 million in property and equipment, $490.5 million in amortizable intangible
assets and $470.9 million in goodwill at the acquisition date compared to our balance sheet as of December 31, 2019. The amortization
of the acquired intangibles is expected to materially increase our consolidated cost of sales (and adversely affect our consolidated
gross profit margins) for the foreseeable future. In addition, we became a public company listed on The Nasdaq Stock Market LLC
as a result of the Business Combination and have had to hire personnel and incur costs that are necessary and customary for our
operations as a public company, which has contributed to and is expected to continue contributing to higher general and administrative
costs in the near term.
On July 7, 2020, we
redeemed all of our outstanding public warrants that had not been exercised as of July 2, 2020, which resulted in the exercise
of 17.6 million warrants for proceeds to us of $201.5 million and the redemption of 78,156 public warrants at a redemption price
of $0.01 per warrant.
As
a result of the Business Combination and related private placement, a public offering of Class A common stock in June 2020, and
the exercise of warrants by our public warrant holders, we had cash on hand, excluding cash held on behalf of customers, of $1,140.9
million as of September 30, 2020, compared to $76.5 million as of December 31, 2019. In October 2020, we issued an additional 20.8
million shares of Class A common stock, inclusive of the full exercise of the underwriters’ option to purchase 4.8 million
shares, and received proceeds of approximately $1.06 billion, net of underwriting discounts and commissions.
The following discussion
includes our results of operations for the three and nine months ended September 30, 2020, which include the financial results
of SBTech from April 24, 2020, the day following the completion of the Business Combination, through September 30, 2020. Accordingly,
our consolidated results of operations for the three and nine months ended September 30, 2020 are not comparable to our consolidated
results of operations for prior periods and may not be comparable with our consolidated results for future periods. Our B2C segment
results, presented and discussed below, are comparable to DraftKings’ legacy operations and our reported consolidated results
for prior periods.
To facilitate comparability
between periods, we have included in this Report a supplemental discussion of our unaudited pro forma results of operations for
the three and nine months ended September 30, 2020 compared with the three and nine months ended September 30, 2019. Those pro
forma results were prepared giving effect to the Business Combination as if it had been consummated on January 1, 2019, and are
based on estimates and assumptions, which we believe are reasonable and consistent with Article 11 of Regulation S-X.
Key Performance Indicators – B2C
Operations
Monthly
Unique Payers (“MUPs”). MUPs is the average number of unique paid users (“unique payers”) that
use our B2C product offerings on a monthly basis.
MUPs is a key indicator
of the scale of our B2C user base and awareness of our brand. We believe that year-over-year MUPs is also generally indicative
of the long-term revenue growth potential of our B2C segment, although MUPs in individual periods may be less indicative of our
longer-term expectations. We expect the number of MUPs to grow as we attract, retain and re-engage users in new and existing jurisdictions
and expand our offerings to appeal to a wider audience.
We define MUPs as
the number of unique payers per month who had a paid engagement (i.e., participated in a real-money DFS contest, sports
bet or casino game) across one or more of our product offerings via our platform. For reported periods longer than one month, we
average the MUPs for the months in the reported period.
A “unique paid
user” or “unique payer” is any person who had one or more paid engagements via our B2C platform during the period
(i.e., a user that participates in a paid engagement with one of our B2C product offerings counts as a single unique paid
user or unique payer for the period). We exclude users who have made a deposit but have not yet had a paid engagement. Unique payers
or unique paid users include users who have participated in a paid engagement with promotional incentives, which are fungible with
other funds deposited in their wallets on our platform. The number of these users included in MUPs has not been material to date
and a substantial majority of such users are repeat users who have had paid engagements both prior to and after receiving incentives.
Average
Revenue per MUP (“ARPMUP”). ARPMUP is the average B2C segment revenue per MUP, and this key metric
represents our ability to drive usage and monetization of our B2C product offerings. The charts below present our ARPMUP for the three
and nine months ended September 30, 2020 and September 30, 2019, respectively:
Average Revenue per Monthly Unique Payer
(in whole dollars)
|
Average Revenue per Monthly Unique Payer
(in whole dollars)
|
We define and calculate
ARPMUP as the average monthly B2C segment revenue for a reporting period, divided by MUPs (i.e., the average number of unique
payers) for the same period.
The charts below present
our MUPs for the three and nine months ended September 30, 2020 and September 30, 2019, respectively:
Average Monthly Unique Payers
(in thousands)
|
Average Monthly Unique Payers
(in thousands)
|
Our period-on-period
increases in MUPs for the three and nine months ended September 30, 2020, compared to the same periods in 2019, reflect growth
in DFS, the expansion of our Sportsbook and iGaming product offerings into new states, the unique sports calendar, pent-up demand,
and the stay-at-home nature of COVID-19 which resulted in increased response rates to our advertising spending. ARPMUP decreased
in the three months ended September 30, 2020, compared to the same period in 2019, due to atypical hold rates from NFL wagering
and promotional spending, which were partially offset by increased engagement with our iGaming product offering. ARPMUP for the
nine months ended September 30, 2020 increased, compared to the same period in 2019, as a result of increased engagement with our
iGaming product offering as described above.
Non-GAAP Information
This Report includes
Adjusted EBITDA and Pro Forma Adjusted EBITDA, which are non-GAAP performance measures that we use to supplement our results presented
in accordance with U.S. GAAP. We believe Adjusted EBITDA and Pro Forma Adjusted EBITDA are useful in evaluating our operating performance
and are similar to measures reported by our publicly-listed U.S. competitors, and regularly used by security analysts, institutional
investors and other interested parties in analyzing operating performance and prospects. Adjusted EBITDA and Pro Forma Adjusted
EBITDA are not intended to be a substitute for any U.S. GAAP financial measure and, as calculated, may not be comparable to other
similarly titled measures of performance of other companies in other industries or within the same industry.
We define and calculate
Adjusted EBITDA as net loss before the impact of interest income or expense, income tax expense or benefit, depreciation and amortization,
and further adjusted for the following items: stock-based compensation, transaction-related costs, non-core litigation, settlement
and related costs and certain other non-recurring, non-cash and non-core items, as described in the reconciliation below. We define
and calculate Pro Forma Adjusted EBITDA as pro forma net loss (giving effect to the Business Combination as if it were consummated
on January 1, 2019) before the impact of interest income or expense, income tax expense or benefit and depreciation and amortization,
and further adjusted for the same items as Adjusted EBITDA.
We include these non-GAAP
financial measures because they are used by management to evaluate our core operating performance and trends and to make strategic
decisions regarding the allocation of capital and new investments. Adjusted EBITDA excludes certain expenses that are required
in accordance with U.S. GAAP because they are non-recurring items (for example, in the case of transaction-related costs), non-cash
expenditures (for example, in the case of depreciation, amortization, and stock-based compensation), or are not related to our
underlying business performance (for example, in the case of interest income and expense and litigation settlement and related costs).
Pro Forma Adjusted EBITDA excludes the same categories of expenses and is prepared to give effect to the Business Combination as
if it occurred on January 1, 2019.
Adjusted EBITDA
The table below presents
our Adjusted EBITDA reconciled to our net loss, the closest U.S. GAAP measure, for the periods indicated:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(347,753
|
)
|
|
$
|
(55,919
|
)
|
|
$
|
(577,870
|
)
|
|
$
|
(113,586
|
)
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (excluding acquired intangibles)
|
|
|
7,828
|
|
|
|
3,430
|
|
|
|
17,980
|
|
|
|
9,629
|
|
Amortization of acquired intangibles
|
|
|
18,767
|
|
|
|
–
|
|
|
|
31,987
|
|
|
|
–
|
|
Interest (income) expense, net
|
|
|
(686
|
)
|
|
|
(277
|
)
|
|
|
2,253
|
|
|
|
(1,364
|
)
|
Income tax (benefit) expense
|
|
|
(13
|
)
|
|
|
19
|
|
|
|
319
|
|
|
|
35
|
|
Stock-based compensation (1)
|
|
|
117,034
|
|
|
|
1,844
|
|
|
|
176,362
|
|
|
|
8,519
|
|
Transaction-related costs (2)
|
|
|
3,585
|
|
|
|
1,328
|
|
|
|
34,492
|
|
|
|
2,603
|
|
Litigation, settlement, and related costs (3)
|
|
|
2,419
|
|
|
|
710
|
|
|
|
5,771
|
|
|
|
2,411
|
|
Other non-recurring costs and special project costs (4)
|
|
|
1,645
|
|
|
|
444
|
|
|
|
4,291
|
|
|
|
1,816
|
|
Other non-operating costs
|
|
|
95
|
|
|
|
–
|
|
|
|
380
|
|
|
|
–
|
|
Adjusted EBITDA
|
|
$
|
(197,079
|
)
|
|
$
|
(48,421
|
)
|
|
$
|
(304,035
|
)
|
|
$
|
(89,937
|
)
|
Adjusted EBITDA by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B2B
|
|
$
|
4,376
|
|
|
$
|
–
|
|
|
$
|
854
|
|
|
$
|
–
|
|
B2C
|
|
$
|
(201,455
|
)
|
|
$
|
(48,421
|
)
|
|
$
|
(304,889
|
)
|
|
$
|
(89,937
|
)
|
|
(1)
|
The amounts for the three and nine months ended September 30, 2020, primarily reflect stock-based compensation expenses resulting
from the issuance of awards under long-term incentive plans and, for the nine months ended September 30, 2020, the issuance of
our Class B shares (which have no economic or conversion rights) to our CEO.
|
|
(2)
|
Includes capital markets advisory, consulting, accounting and legal expenses related to evaluation, negotiation and integration
costs incurred in connection with transactions and offerings, including the Business Combination. Also includes bonuses, paid
in the second quarter of 2020, to certain employees in connection with the consummation of the Business Combination. In 2019, these
costs related to exploratory acquisition activities.
|
|
(3)
|
Includes primarily external legal costs related to litigation and litigation settlement costs deemed unrelated to our core
business operations.
|
|
(4)
|
Includes primarily consulting, advisory and other costs relating to non-recurring items and special projects, including, for
the three and nine months ended September 30, 2019, the cost of our move to our new Boston headquarters, executive search costs
and, for the three and nine months ended September 30, 2020, implementation of internal controls over financial reporting and tax
advisory costs.
|
Pro Forma Adjusted
EBITDA
The table below presents
our Non-GAAP Pro Forma Adjusted EBITDA, with the exception of the three-month period ending September 30, 2020, which represents
actual results, reconciled to our pro forma net loss, for the periods indicated:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
(dollars in thousands)
|
|
Actual
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
Net Loss
|
|
$
|
(347,753
|
)
|
|
$
|
(62,624
|
)
|
|
$
|
(589,091
|
)
|
|
$
|
(140,579
|
)
|
Adjusted for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (excluding acquired intangibles)
|
|
|
7,828
|
|
|
|
4,087
|
|
|
|
19,102
|
|
|
|
11,609
|
|
Amortization of acquired intangibles
|
|
|
18,767
|
|
|
|
17,857
|
|
|
|
54,150
|
|
|
|
54,134
|
|
Interest (income) expense, net
|
|
|
(686
|
)
|
|
|
(497)
|
|
|
|
2,713
|
|
|
|
(1,330)
|
|
Income tax (benefit) expense
|
|
|
(13
|
)
|
|
|
(4,312
|
)
|
|
|
3,904
|
|
|
|
(13,036
|
)
|
Stock-based compensation (1)
|
|
|
117,035
|
|
|
|
1,981
|
|
|
|
187,239
|
|
|
|
9,106
|
|
Transaction-related costs (2)
|
|
|
3,585
|
|
|
|
1,328
|
|
|
|
3,585
|
|
|
|
2,603
|
|
Litigation, settlement, and related costs (3)
|
|
|
2,419
|
|
|
|
710
|
|
|
|
5,771
|
|
|
|
2,411
|
|
Other non-recurring costs and special project costs (4)
|
|
|
1,645
|
|
|
|
444
|
|
|
|
4,291
|
|
|
|
1,816
|
|
Other non-operating costs
|
|
|
95
|
|
|
|
–
|
|
|
|
380
|
|
|
|
–
|
|
Pro forma Adjusted EBITDA
|
|
$
|
(197,079
|
)
|
|
$
|
(41,026
|
)
|
|
$
|
(307,956
|
)
|
|
$
|
(73,266
|
)
|
|
(1)
|
The amounts for the three and nine months ended September 30, 2020, primarily reflect stock-based compensation expenses resulting
from the issuance of awards under long-term incentive plans and, for the nine months ended September 30, 2020, the issuance of
our Class B shares (which have no economic or conversion rights) to our CEO, and $10.9 million due to the satisfaction of the performance
condition, immediately prior to the consummation of the Business Combination, on stock-based compensation awards granted to SBTech
employees in prior periods.
|
|
(2)
|
Includes capital markets advisory, consulting, accounting and
legal expenses related to evaluation, negotiation and integration costs incurred in connection with transactions and offerings.
The transaction costs related to the Business Combination described in footnote 2 to the preceding table have been eliminated in
calculating our pro forma net income for the nine months ended September 30, 2020 pursuant to the principles of Article 11 of Regulation
S-X. In 2019, these costs related to exploratory acquisition activities.
|
|
(3)
|
Includes primarily external legal costs related to litigation and litigation settlement costs deemed unrelated to our core
business operations.
|
|
(4)
|
Includes primarily consulting, advisory and other costs relating to non-recurring items and special projects, including, for
the three and nine months ended September 30, 2019, the cost of our move to our new Boston headquarters, executive search costs
and, for the three and nine months ended September 30, 2020, implementation of internal controls over financial reporting and tax
advisory costs.
|
Results of Operations
Three Months Ended
September 30, 2020 Compared to the Three Months Ended September 30, 2019
The following table
sets forth a summary of our consolidated results of operations for the interim periods indicated, and the changes between periods.
|
|
Three months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
(in thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
132,836
|
|
|
$
|
67,014
|
|
|
$
|
65,822
|
|
|
|
98.2
|
%
|
Cost of revenue
|
|
|
(96,569
|
)
|
|
|
(25,332
|
)
|
|
|
(71,237
|
)
|
|
|
281.2
|
%
|
Sales and marketing
|
|
|
(203,339
|
)
|
|
|
(58,351
|
)
|
|
|
(144,988
|
)
|
|
|
248.5
|
%
|
General and administrative
|
|
|
(127,376
|
)
|
|
|
(25,185
|
)
|
|
|
(102,191
|
)
|
|
|
405.8
|
%
|
Product and technology
|
|
|
(53,909
|
)
|
|
|
(14,323
|
)
|
|
|
(39,586
|
)
|
|
|
276.4
|
%
|
Loss from operations
|
|
|
(348,357
|
)
|
|
|
(56,177
|
)
|
|
|
(292,180
|
)
|
|
|
520.1
|
%
|
Interest income (expense), net
|
|
|
686
|
|
|
|
277
|
|
|
|
409
|
|
|
|
147.8
|
%
|
Loss before income tax expense
|
|
|
(347,671
|
)
|
|
|
(55,900
|
)
|
|
|
(291,771
|
)
|
|
|
522.0
|
%
|
Income tax benefit (expense)
|
|
|
13
|
|
|
|
(19
|
)
|
|
|
32
|
|
|
|
-170.6
|
%
|
Loss from equity method investment
|
|
|
(95
|
)
|
|
|
–
|
|
|
|
(95
|
)
|
|
|
n.m.
|
|
Net Loss
|
|
$
|
(347,753
|
)
|
|
$
|
(55,919
|
)
|
|
$
|
(291,834
|
)
|
|
|
521.9
|
%
|
n.m. = not meaningful
Revenue.
Revenue increased $65.8 million, or 98.2%, to $132.8 million in the three months ended September 30, 2020 from $67.0 million in
the three months ended September 30, 2019. The increase was partially attributable to $29.2 million in revenue from SBTech, which
we acquired on April 23, 2020, and which now comprises our B2B segment.
Excluding the impact
of the SBTech Acquisition, revenue would have increased by $36.6 million in the three months ended September 30, 2020, reflecting
the performance of our B2C segment, where DFS revenues increased due to the NBA playoffs, NHL playoffs, and U.S. Open (golf) Championship
moving from the second quarter to the third quarter due to COVID-19 scheduling changes. Additionally, we had increased engagement
with our iGaming product offering, driven by higher volume of play and the geographic expansion of the product offering to Pennsylvania
in May 2020 and West Virginia in July 2020. Quarter-on-quarter, MUPs for our B2C segment increased by 64.5%, reflecting growth
in DFS, the expansion of our Sportsbook and iGaming product offerings into several new states, as well as the unique sports calendar,
pent-up demand, and the stay-at-home nature of COVID, which resulted in increased response rates to our advertising spending. ARPMUP
for our B2C segment decreased by 6.0% due to atypical hold rates from NFL wagering and promotional spending, which were partially
offset by increased engagement with our iGaming product offering.
Cost of Revenue.
Cost of revenue increased by $71.2 million, or 281.2%, to $96.6 million in the three months ended September 30, 2020 from $25.3
million in the three months ended September 30, 2019. Of this increase, $27.9 million was attributable to SBTech, including $18.8
million in amortization of acquired intangibles.
Excluding the impact
of the SBTech Acquisition, the cost of revenue increase would have been $43.3 million in the three months ended September 30, 2020,
reflecting the expanded product and geographic footprint of our B2C segment (including launches in Indiana, Pennsylvania, New Hampshire,
Iowa, Colorado, and Illinois, all after October 1, 2019). Of this increase, $21.4 million was attributable to product taxes primarily
related to higher Sportsbook and iGaming revenue due to expansion into new states and growth in existing states. The remainder
of the increase was driven mainly by a $10.0 million increase in platform costs, a $9.8 million increase in processing fees (which
generally scale with deposit and withdrawal volumes), and modestly higher revenue share payments reflecting our expansion into
new states. B2C segment cost of revenue as a percentage of B2C revenue increased by 28.4 percentage points to 66.2% in
the three months ended September 30, 2020 from 37.8% in the three months ended September 30, 2019, reflecting our changed revenue
mix and investment in new geographies. In general, our iGaming and Sportsbook product offerings produce revenue at a higher cost
per revenue dollar relative to our DFS offering.
Sales and Marketing. Sales
and marketing expense increased by $145.0 million, or 248.5%, to $203.3 million in the three months ended September 30, 2020 from
$58.4 million in the three months ended September 30, 2019, of which $1.6 million was attributable to SBTech. Excluding the impact
of the SBTech Acquisition, the increase was $143.4 million and was primarily due to higher advertising spending to increase awareness
and user acquisition for our Sportsbook and iGaming offerings, particularly in newly launched states, advertising spending related
to the resumption of major sports such as MLB, the NBA and the NHL in July and August and the beginning of the NFL season, and
an $11.5 million increase in stock-based compensation expense.
General and Administrative. General
and administrative expense increased by $102.2 million, or 405.8%, to $127.4 million in the three months ended September 30, 2020
from $25.2 million in the three months ended September 30, 2019. Of this increase, $4.6 million was attributable to SBTech and
$80.6 million was attributable to stock-based compensation expense from the issuance of awards granted under our long-term incentive
plans. Excluding the impact of the acquisition of SBTech and the stock-based compensation awards, the increase would have been
$17.0 million, or 67.5%, mainly due to an increase in personnel costs, reflecting headcount growth, including new hires to support
our operations as a public company.
Product and Technology. Product
and technology expense increased by $39.6 million, or 276.4%, to $53.9 million in the three months ended September 30, 2020 from
$14.3 million in the three months ended September 30, 2019, of which $14.4 million was attributable to SBTech. Excluding the impact
of the acquisition of SBTech, the increase would have been $25.2 million and primarily reflects a $19.8 million increase in stock-based
compensation expense from the issuance of awards under our long-term incentive plans, as well as additions to our product operations
and engineering headcount in our B2C segment.
Interest Income
(Expense). Interest income was $0.7 million in the three months ended September 30, 2020 compared to interest income of $0.3
million in the three months ended September 30, 2019.
Net Loss. Net
loss increased by $291.8 million to $347.8 million in the three months ended September 30, 2020 from $55.9 million in the three
months ended September 30, 2019, for the reasons discussed above.
Nine Months
Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
The following table
sets forth a summary of our consolidated results of operations for the interim periods indicated, and the changes between periods.
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
(in thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
292,309
|
|
|
$
|
192,496
|
|
|
$
|
99,813
|
|
|
|
51.9
|
%
|
Cost of revenue
|
|
|
(187,315
|
)
|
|
|
(64,718
|
)
|
|
|
(122,597
|
)
|
|
|
189.4
|
%
|
Sales and marketing
|
|
|
(303,233
|
)
|
|
|
(124,867
|
)
|
|
|
(178,366
|
)
|
|
|
142.8
|
%
|
General and administrative
|
|
|
(274,180
|
)
|
|
|
(78,181
|
)
|
|
|
(195,999
|
)
|
|
|
250.7
|
%
|
Product and technology
|
|
|
(102,499
|
)
|
|
|
(39,645
|
)
|
|
|
(62,854
|
)
|
|
|
158.5
|
%
|
Loss from operations
|
|
|
(574,918
|
)
|
|
|
(114,915
|
)
|
|
|
(460,003
|
)
|
|
|
400.3
|
%
|
Interest income (expense), net
|
|
|
(2,253
|
)
|
|
|
1,364
|
|
|
|
(3,617
|
)
|
|
|
-265.2
|
%
|
Loss before income tax expense
|
|
|
(577,171
|
)
|
|
|
(113,551
|
)
|
|
|
(463,620
|
)
|
|
|
408.3
|
%
|
Income tax benefit (expense)
|
|
|
(319
|
)
|
|
|
(35
|
)
|
|
|
(284
|
)
|
|
|
810.3
|
%
|
Loss from equity method investment
|
|
|
(380
|
)
|
|
|
–
|
|
|
|
(380
|
)
|
|
|
n.m.
|
|
Net Loss
|
|
$
|
(577,870
|
)
|
|
$
|
(113,586
|
)
|
|
$
|
(464,284
|
)
|
|
|
408.8
|
%
|
n.m. = not meaningful
Revenue.
Revenue increased by $99.8 million, or 51.9%, to $292.3 million in the nine months ended September 30, 2020 from $192.5
million in the nine months ended September 30, 2019. Of this increase, $44.1 million was attributable to revenue from SBTech, our
new B2B segment.
Excluding
the impact of the acquisition of SBTech, revenue would have increased by approximately $55.7 million in the nine months
ended September 30, 2020, reflecting the performance of our B2C segment. The increase was attributable to the rapid growth of our
B2C operations prior to the outbreak of COVID-19. Prior to March 11, 2020, our net revenue was up approximately 60% year-over-year,
reflecting the launch of our online Sportsbook offering in Indiana, New Hampshire, Pennsylvania and West Virginia in the third
and fourth quarters of 2019, and Iowa in the first quarter of 2020. Revenue declined in mid-March 2020 due to the suspension and
cancellation of sports seasons and sporting events. Revenue growth resumed towards the end of the second quarter and in the third
quarter when many of these seasons and events returned. Revenue growth also reflected the launch of our Sportsbook and iGaming
product offerings in several new states. Period-on-period, MUPs for our B2C segment increased by 20.1% while ARPMUP increased by
7.3%.
Cost
of Revenue. Cost of revenue increased by $122.6 million, or 189.4%, to $187.3 million in the nine months
ended September 30, 2020 from $64.7 million in the nine months ended September 30, 2019. Of this increase, $46.9 million was attributable
to SBTech, including $32.0 million attributable to amortization of acquired intangibles.
Excluding the impact
of the SBTech Acquisition, the increase would have been $75.7 million in the nine months ended September 30, 2020, reflecting the
expanded product and geographic footprint of our B2C segment. Product taxes accounted for $35.9 million of the increase due to
expansion into new states and growth in existing states. Platform costs and revenue share arrangements contributed another $17.6
million and $7.4 million, respectively, of the increase, reflecting our expanded footprint and increased customer engagement. Processing
fees increased $13.0 million, in line with the period-over-period increase in customer deposits. B2C segment cost of revenue as
a percentage of B2C revenue increased by 23.0 percentage points to 56.6% in the nine months ended September 30, 2020 from
33.6% in the nine months ended September 30, 2019, mainly due to a change in revenue mix towards products with higher cost of revenue,
investment in new geographies, and the adverse revenue impact of COVID-19 in the second quarter of 2020. In general, our iGaming
and Sportsbook product offerings produce revenue at a higher cost per revenue dollar relative to our DFS offering.
Sales
and Marketing. Sales and marketing expense increased by $178.4 million, or 142.8%, to $303.2 million in the nine
months ended September 30, 2020 from $124.9 million in the nine months ended September 30, 2019. Our B2C segment accounted for
substantially all of this increase, reflecting higher advertising and marketing spend to increase awareness and user acquisition
for our Sportsbook and iGaming offerings, particularly in newly launched states, higher headcount, marketing technology and support
costs, and a $14.4 million increase in stock-based compensation expense As discussed above, while we decreased our advertising
spending upon the outbreak of COVID-19 in mid-March of 2020, we increased advertising and customer acquisition marketing spending
in May 2020 and onwards as sports began to return.
General and Administrative. General
and administrative expense increased by $196.0 million, or 250.7%, to $274.2 million in the nine months ended September 30, 2020
from $78.2 million in the nine months ended September 30, 2019. Of this increase, $8.5 million was attributable to SBTech. Excluding
the impact of the SBTech Acquisition, the increase would have been $187.5 million, driven by a $125.3 million increase in stock-based
compensation expense, as discussed above, and $34.5 million in transaction costs, including transaction-related employee bonuses.
Headcount growth and additions to our estimated contingent liability for indirect taxes also contributed to the increase.
Product and Technology.
Product and technology expense increased by $62.9 million, or 158.5%, to $102.5 million in the nine months ended September 30,
2020 from $39.6 million in the nine months ended September 30, 2019. Of this increase, $23.1 million was attributable to SBTech.
Excluding the impact of the SBTech Acquisition, the increase would have been $39.8 million driven by a $24.5 million increase in
stock-based compensation expense, as discussed above, and an increase in product operations and engineering headcount in our B2C
segment.
Interest Income
(Expense). Interest expense was $2.3 million in the nine months ended September 30, 2020 compared to interest income of $1.4
million in the nine months ended September 30, 2019.
Net Loss. Net
loss increased by $464.3 million to $577.9 million in the nine months ended September 30, 2020 from $113.6 million in the nine
months ended September 30, 2019, for the reasons discussed above.
Results of
Operations for the Three Months Ended September 30, 2020 Compared to the Supplemental Unaudited Pro Forma Results of
Operations for the Three Months Ended September 30, 2019
Set forth below are
our results of operations for the three months ended September 30, 2020 compared with the pro forma results of operations for the
three months ended September 30, 2019. These pro forma results assume that the Business Combination, including our acquisition
of SBTech, which comprises the entirety of our new B2B segment, occurred on January 1, 2019 and are based on estimates and assumptions
which we believe are reasonable. They are not the results that would have been realized had the Business Combination actually occurred
on January 1, 2019 and are not indicative of our consolidated results of operations for future periods.
|
|
Three months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
(in thousands, except percentages)
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
132,836
|
|
|
$
|
93,318
|
|
|
$
|
39,518
|
|
|
|
42.3
|
%
|
Cost of revenue
|
|
|
(96,569
|
)
|
|
|
(49,295
|
)
|
|
|
(47,274
|
)
|
|
|
95.9
|
%
|
Sales and marketing
|
|
|
(203,339
|
)
|
|
|
(59,804
|
)
|
|
|
(143,535
|
)
|
|
|
240.0
|
%
|
General and administrative
|
|
|
(127,376
|
)
|
|
|
(27,698
|
)
|
|
|
(99,678
|
)
|
|
|
359.9
|
%
|
Product and technology
|
|
|
(53,909
|
)
|
|
|
(23,954
|
)
|
|
|
(29,955
|
)
|
|
|
125.1
|
%
|
Loss from operations
|
|
|
(348,357
|
)
|
|
|
(67,433
|
)
|
|
|
(280,924
|
)
|
|
|
416.6
|
%
|
Interest income (expense), net
|
|
|
686
|
|
|
|
497
|
|
|
|
189
|
|
|
|
38.1
|
%
|
Loss before income tax expense
|
|
|
(347,671
|
)
|
|
|
(66,936
|
)
|
|
|
(280,735
|
)
|
|
|
419.4
|
%
|
Income tax benefit (expense)
|
|
|
13
|
|
|
|
4,312
|
|
|
|
(4,299
|
)
|
|
|
-99.7
|
%
|
Loss from equity method investment
|
|
|
(95
|
)
|
|
|
–
|
|
|
|
(95
|
)
|
|
|
n.m.
|
|
Net Loss
|
|
$
|
(347,753
|
)
|
|
$
|
(62,624
|
)
|
|
$
|
(285,129
|
)
|
|
|
455.3
|
%
|
n.m. = not meaningful
Revenue.
Revenue increased by $39.5 million, or 42.3%, to $132.8 million in the three months ended September 30, 2020 from pro
forma revenue of $93.3 million in the three months ended September 30, 2019. Of this increase, $36.6 million was attributable to
the performance of our B2C segment, as discussed above.
Cost
of Revenue. Cost of revenue increased by $47.3 million, or 95.9%, to $96.6 million in the three months ended September
30, 2020 from pro forma cost of revenue of $49.3 million in the three months ended September 30, 2019. Of this increase, $43.3
million was attributable to the performance of our B2C segment, as discussed above. The remaining $4.0 million of the increase
was attributable to the pro forma performance of our B2B segment as SBTech had higher costs related to data providers as well as
higher amortization of intangible assets.
Sales and Marketing.
Sales and marketing expense increased by $143.5 million, or 240.0%, to $203.3 million in the three months ended September 30, 2020
from pro forma sales and marketing expense of $59.8 million in the three months ended September 30, 2019. Substantially all of
the increase was attributable to the performance of our B2C segment, as discussed above. Our B2B segment sales and marketing costs
remained relatively steady between periods, reflecting a modest headcount increase that was offset by a substantial decrease in
conferences and other marketing spending following the outbreak of COVID-19.
General and Administrative. General
and administrative expense increased by $99.7 million, or 359.9%, to $127.4 million in the three months ended September 30, 2020
from pro forma general and administrative expense of $27.7 million in the three months ended September 30, 2019. Of this increase,
$97.6 million was attributable to the performance of our B2C segment, as discussed above. B2B segment pro forma general and administrative
expense increased by $2.1 million, mainly reflecting an increase in stock-based compensation awards and increased headcount.
Product
and Technology. Product and technology expense increased by $30.0 million, or 125.1%, to $53.9 million in the three
months ended September 30, 2020 from pro forma product and technology expense of $24.0 million in the three months ended September
30, 2019. Of this increase, $25.2 million was attributable to the performance of our B2C segment, as discussed above. The remaining
increase was attributable to the pro forma performance of the B2B segment, driven mainly by an increase in stock-based compensation
awards and increased headcount.
Interest
Income (Expense). Interest income was $0.7 million in the three months ended September 30, 2020 compared to pro forma interest
income of $0.5 million in the three months ended September 30, 2019.
Net
Loss. Net loss increased by $285.1 million to $347.8 million in the three months ended September 30, 2020 from pro forma
net loss of $62.6 million in the three months ended September 30, 2019, for the reasons discussed above.
Supplemental
Unaudited Pro Forma Results for the Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
Set forth below are
our pro forma results of operations for the nine months ended September 30, 2020 compared with the nine months ended September
30, 2019. These pro forma results assume that the Business Combination, including our acquisition of SBTech, which comprises the
entirety of our new B2B segment, occurred on January 1, 2019 and are based on estimates and assumptions, which we believe are reasonable.
They are not the results that would have been realized had the Business Combination actually occurred on January 1, 2019 and are
not indicative of our consolidated results of operations for future periods.
|
|
Nine months ended September 30,
|
|
Pro Forma Information
|
|
2020
|
|
|
2019
|
|
|
$ Change
|
|
|
% Change
|
|
(in thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
321,279
|
|
|
$
|
269,259
|
|
|
$
|
52,020
|
|
|
|
19.3
|
%
|
Cost of revenue
|
|
|
(218,177
|
)
|
|
|
(137,208
|
)
|
|
|
(80,969
|
)
|
|
|
59.0
|
%
|
Sales and marketing
|
|
|
(307,530
|
)
|
|
|
(131,789
|
)
|
|
|
(175,741
|
)
|
|
|
133.4
|
%
|
General and administrative
|
|
|
(257,596
|
)
|
|
|
(88,015
|
)
|
|
|
(169,581
|
)
|
|
|
192.7
|
%
|
Product and technology
|
|
|
(120,070
|
)
|
|
|
(67,192
|
)
|
|
|
(52,878
|
)
|
|
|
78.7
|
%
|
Loss from operations
|
|
|
(582,094
|
)
|
|
|
(154,945
|
)
|
|
|
(427,149)
|
|
|
|
275.7
|
%
|
Interest income (expense), net
|
|
|
(2,713
|
)
|
|
|
1,330
|
|
|
|
(4,043
|
)
|
|
|
-304.0
|
%
|
Loss before income tax expense
|
|
|
(584,807
|
)
|
|
|
(153,615
|
)
|
|
|
431,192
|
|
|
|
280.7
|
%
|
Income tax benefit (expense)
|
|
|
(3,904
|
)
|
|
|
13,036
|
|
|
|
(16,940
|
)
|
|
|
-129.9
|
%
|
Loss from equity method investment
|
|
|
(380
|
)
|
|
|
–
|
|
|
|
(380)
|
|
|
|
n.m.
|
|
Net Loss
|
|
$
|
(589,091
|
)
|
|
|
(140,579
|
)
|
|
|
(448,512
|
)
|
|
|
319.0
|
%
|
n.m. = not meaningful
Revenue.
Pro forma revenue increased by $52.0 million, or 19.3%, to $321.3 million in the nine months ended September 30, 2020
from $269.3 million in the nine months ended September 30, 2019. Our B2C segment contributed a $55.7 million pro forma revenue
increase as discussed above, partially offset by a $3.7 million pro forma revenue decrease from our B2B segment, reflecting the
suspension and cancellation of sports seasons and sporting events due to COVID-19.
Cost
of Revenue. Pro forma cost of revenue increased by $81.0 million, or 59.0%, to $218.2 million in the nine months
ended September 30, 2020 from $137.2 million in the nine months ended September 30, 2019. Of this increase, $75.7 million was attributable
to the performance of our B2C segment, as described above. The remaining $5.3 million of the increase was attributable to the pro
forma performance of the B2B segment, driven by higher data provider and amortization costs.
Sales and Marketing.
Pro forma sales and marketing expense increased by $175.7 million, or 133.4%, to $307.5 million in the nine months ended September
30, 2020 from $131.8 million in the nine months ended September 30, 2019. Substantially all of the increase was attributable to
the performance of our B2C segment, as discussed above. Our B2B pro forma segment sales and marketing costs remained steady between
periods, reflecting a modest headcount increase that was offset by a substantial decrease in conferences and other marketing spending
following the outbreak of COVID-19.
General and Administrative. Pro
forma general and administrative expense increased by $169.6 million, or 192.7%, to $257.6 million in the nine months ended September
30, 2020 from $88.0 million in the nine months ended September 30, 2019. Pro forma general and administrative expense excludes
approximately $30.9 million in transaction costs related to the Business Combination, including transaction-related bonuses, pursuant
to the principles of Article 11 of Regulation S-X, which are included in our consolidated results of operations for the nine months
ended September 30, 2020 discussed above. Most of the increase was related to higher stock-based compensation and B2C segment headcount
additions, as discussed above. B2B segment pro forma general and administrative expense increased by $13.0 million, mainly reflecting
the satisfaction of the performance condition, immediately prior to the consummation of the Business Combination, on stock-based
compensation awards in the amount of $7.3 million, increased headcount, bad debt expense related to the insolvency of two customers
and costs related to the remediation of a cybersecurity incident.
Product
and Technology. Pro forma product and technology expense increased by $52.9 million, or 78.7%, to $120.1 million in the
nine months ended September 30, 2020 from $67.2 million in the nine months ended September 30, 2019. Of this increase, $39.8
million was attributable to the performance of our B2C segment, as discussed above. The remainder of the increase was attributable
to the pro forma performance of the B2B segment, driven mainly by product operations and engineering headcount additions, reflecting
growth plans and the launch of new operations in the United States, as well as the satisfaction of the performance condition on
stock-based compensation awards previously granted to SBTech employees.
Interest
Income (Expense). Pro forma interest expense was $2.7 million in the nine months ended September 30, 2020 compared to pro
forma interest income of $1.3 million in the nine months ended September 30, 2019.
Net
Loss. Pro forma net loss increased by $448.5 million to $589.1 million in the nine months ended September 30, 2020
from $140.6 million in the nine months ended September 30, 2019, for the reasons discussed above.
Liquidity and Capital Resources
We had $1,140.9 million
in cash and cash equivalents as of September 30, 2020 (excluding player cash, which we segregate from our operating cash balances
on behalf of our paid users for all jurisdiction and products). We believe our cash on hand is sufficient to meet our current working
capital and capital expenditure requirements for a period of at least twelve months from the date of this filing, irrespective
of the continuing impact of COVID-19.
Debt
We had no debt outstanding
as of September 30, 2020. We have a revolving credit facility with Pacific Western Bank with a current limit of $60.0 million.
The facility is scheduled to mature on March 1, 2022. As of September 30, 2020, $5.1 million of the amount available under the
facility was applied to the issuance of letters of credit in connection with our office leases. $54.9 million was available for
borrowing under the revolving credit facility as of the date of this Report.
Cash Flows
The following table summarizes
our cash flows for the periods indicated:
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
(dollars in thousands)
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(241,291
|
)
|
|
$
|
(63,634
|
)
|
Net cash provided by (used in) investing activities
|
|
|
(211,633
|
)
|
|
|
(26,408
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,515,940
|
|
|
|
8,149
|
|
Effect of foreign exchange rates on cash and cash equivalents
|
|
|
1,358
|
|
|
|
–
|
|
Net increase in cash and cash equivalents
|
|
|
1,064,374
|
|
|
|
(81,893
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
76,533
|
|
|
|
117,908
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,140,907
|
|
|
$
|
36,015
|
|
Operating
Activities. Our cash used in operating activities includes the impact of changes in cash reserved for users, user cash
receivables and liabilities to users. Cash reserved for users is comprised of deposits by our users. We treat this cash as the
property of our users and segregate it from our operating cash balances. When we receive a user deposit, we record it as cash reserved
for users on our balance sheet. In certain cases, a payment processor may delay the remittance of deposits to us for risk management
or other reasons, in which case we grant our users access to those funds and record the deposits as a receivable reserved for users.
The sum of the changes in cash reserved for users, and changes in receivables reserved for users, are approximately equal to the
change in liabilities owed to users for any given period. While on deposit with us, cash reserved for users earns interest, which
is recorded as interest income on our income statement and is included in our operating cash flows. This interest income has not
been material to date.
Net cash used in
operating activities in the nine months ended September 30, 2020 was $241.3 million, compared to $63.6 million in the nine months
ended September 30, 2019, mainly reflecting our $464.3 million higher net loss, for the reasons discussed above, net of non-cash
cost items, and changes in operating working capital. Non-cash cost items increased $208.5 million period-over-period, driven by
an increase in stock-based compensation expense of $167.8 million and amortization of acquired intangibles of $40.3 million.
Investing Activities. Net
cash used in investing activities during the nine months ended September 30, 2020 increased by $185.2 million to $211.6 million
from $26.4 million during the same period in 2019, mainly reflecting the cash portion of consideration paid to SBTech shareholders,
net of cash acquired, in connection with the Business Combination.
Financing Activities. Net
cash provided by financing activities during the nine months ended September 30, 2020 increased by $1,507.8 million to $1,515.9
million from $8.1 million during the same period in 2019. The increase was driven by $668.0 million related to the recapitalization
of DEAC shares and net proceeds of $201.5 million related to the exercise of our public warrants, which became exercisable following
the Business Combination, and net proceeds of approximately $620.8 million received in connection with our public offering in June
2020, as discussed above. Comparable activities were not undertaken in the nine months ended September 30, 2019.
Commitments and Contingencies
As of September 30,
2020, we had contingencies for various indirect operating taxes amounting to $43.8 million. Refer to Note 15 of our unaudited condensed
consolidated financial statements included elsewhere in this Report for a summary of our commitments as of September 30, 2020.
Critical Accounting Policies
Our unaudited consolidated
financial statements have been prepared in accordance with U.S. generally accepted accounting principles, (U.S. GAAP). Preparation
of the financial statements requires our management to make judgments, estimates and assumptions that impact the reported amount
of revenue and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting
judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree
of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on our unaudited consolidated
financial statements. Our significant accounting policies are described in Note 2 of DraftKings’ unaudited consolidated financial
statements included elsewhere in this Report. Our critical accounting policies are described below.
Loss Contingencies
Our loss contingencies,
which are included within the “other long-term liabilities” caption on our consolidated balance sheets, are uncertain
by nature and their estimation requires significant management judgment as to the probability of loss and estimation of the amount
of loss. These contingencies include, but may not be limited to, litigation, regulatory investigations and proceedings and management’s
evaluation of complex laws and regulations, including those relating to indirect taxes, and the extent to which they may apply
to our business and industry.
We regularly review
our contingencies to determine whether the likelihood of loss is probable and to assess whether a reasonable estimate of the loss
can be made. Determination of whether a loss estimate can be made is a complex undertaking that considers the judgement of management,
third-party research, the prospect of negotiation and interpretations by regulators and courts, among other information. When a
loss is determined to be probable, as that term is defined under U.S. GAAP, and the amount of the loss can be reasonably estimated,
an estimated contingent liability is recorded. We continually reevaluate our indirect tax and other positions for appropriateness.
Goodwill
Goodwill is tested
for impairment at the reporting unit level, which is the same or one level below an operating segment. In accordance with ASC Topic
350 Intangibles - Goodwill and Other, our business is classified into three reporting units: B2C (i.e., DFS, iGaming, Online
Sportsbook, and Retail Sportsbook), Media and B2B. As of September 30, 2020, we recorded goodwill of $486.3 million, of which $353.1
million was allocated to our B2C reporting unit, on account of the prospective cost synergies of the transaction, and $133.2 million
was allocated to our B2B reporting unit. Of the total goodwill recorded on our balance sheet, $481.6 million was attributable to
the Business Combination consummated on April 23, 2020, including of $470.9 million at acquisition date and $10.7 million related
to the cumulative translation adjustment as of September 30, 2020. We review and evaluate our goodwill and indefinite life intangible
assets for potential impairment at a minimum annually, in the fourth quarter, or more frequently if circumstances indicate that
impairment is possible.
In testing goodwill
for impairment, we have the option to begin with a qualitative assessment, commonly referred to as “Step 0”, to determine
whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value.
This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and
market considerations, cost factors, entity-specific financial performance and other events, such as changes in our management,
strategy and primary user base. If we determine that it is more likely than not that the fair value of a reporting unit is less
than its carrying value, we then perform a quantitative goodwill impairment analysis. Depending upon the results of that measurement,
the recorded goodwill may be written down, and impairment expense is recorded in the consolidated statements of operations when
the carrying amount of the reporting unit exceeds the fair value of the reporting unit. Based on assessments performed in 2020,
2019 and 2018, we determined it was more likely than not that goodwill was not impaired.
Business Combinations
We account for business
acquisitions in accordance with ASC Topic 805, Business Combinations. We measure the cost of an acquisition as the aggregate
of the acquisition date fair values of the assets transferred and liabilities assumed and equity instruments issued. Transaction
costs directly attributable to the acquisition are expensed as incurred. We record goodwill for the excess of (i) the total costs
of acquisition, fair value of any non-controlling interests and acquisition date fair value of any previously held equity interest
in the acquired business over (ii) the fair value of the identifiable net assets of the acquired business.
The acquisition method
of accounting requires us to exercise judgment and make estimates and assumptions based on available information regarding the
fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable
intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions and contingencies. We
must also refine these estimates over a one-year measurement period, to reflect any new information obtained about facts and circumstances
that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that
date. If we are required to retroactively adjust provisional amounts that we have recorded for the fair value of assets and liabilities
in connection with an acquisition, these adjustments could materially impact our results of operations and financial position.
Estimates and assumptions that we must make in estimating the fair value of future acquired technology, user lists and other identifiable
intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results
and updated projections of the underlying business activity change compared with the assumptions and projections used to develop
these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets
and these lives are used to calculate depreciation and amortization expenses. If our estimates of the economic lives change, depreciation
or amortization expenses could be accelerated or slowed, which could materially impact our results of operations.
The SBTech Acquisition
is accounted for under ASC 805. Pursuant to ASC 805, Old DK was determined to be the accounting acquirer. Refer to Note 3 “Business
Combination” of our unaudited condensed consolidated financial statements included elsewhere in this Report for more
information. In accordance with the acquisition method, we recorded the fair value of assets acquired and liabilities assumed from
SBTech. The allocation of the consideration to the assets acquired and liabilities assumed is based on various estimates. As of
September 30, 2020, we performed our preliminary purchase price allocations. We continue to evaluate the fair value of the acquired
assets, liabilities and goodwill. As such, these estimates are subject to change within the respective measurement period, which
will not extend beyond one year from the acquisition date (April 23, 2021). Any adjustments will be recognized in the reporting
period in which the adjustment amounts are determined.
Stock-based Compensation
Our historical and
outstanding stock-based compensation awards, including the issuances of options and other stock awards under our equity compensation
plans, have typically included service-based or performance-based vesting conditions. For awards with only service-based vesting
conditions, we record compensation cost for these awards using the straight-line method less an assumed forfeiture rate. For awards
with performance-based vesting conditions, we recognize compensation cost on a tranche-by-tranche basis (the accelerated attribution
method).
Stock-based compensation
expense is measured based on the grant-date fair value of the stock-based awards and is recognized over the requisite service period
of the awards. We use the Black-Scholes option pricing model to estimate the grant-date fair value of grants. Following the Business
Combination, the fair value of our Class A common stock is now determined based on the quoted market price. Prior to the Business
Combination, our management and board of directors considered various objectives and subjective factors to determine the fair value
of Old DK’s common stock as of each grant date, including the value determined by a third-party valuation firm. These factors
included, among other things, financial performance, capital structure, forecasted operating results and market performance analyses
of similar companies in our industry. The Black-Scholes model requires management to make a number of key assumptions, including
expected volatility, expected term, risk-free interest rate and expected dividends. The expected term represents the period of
time that the options are expected to be outstanding and is estimated using the midpoint between the requisite service period and
the contractual term of the option. The risk-free interest rate is estimated using the rate of return on U.S. treasury notes with
a life that approximates the expected term. For the three and nine months ended September 30, 2020, we recorded $117.0 million
and $176.4 million, respectively, of stock-based compensation expense.
The assumptions underlying
these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management
judgment. As a result, if factors or expected outcomes change and our management uses significantly different assumptions or estimates,
our stock-based compensation expense for future periods could be materially different, including as a result of adjustments to
stock-based compensation expense recorded for prior periods.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
We have in the past
and may in the future be exposed to certain market risks, including interest rate, foreign currency exchange and financial instrument
risks, in the ordinary course of business.
Foreign Currency
Exchange Risk
As a result of the
Business Combination, we are exposed to foreign currency exchange risk related to our transactions and our translation of subsidiaries’
balances that are denominated in currencies other than the U.S. dollar, our functional currency. We are required to translate a
significant portion of our B2B segment results from Euros, the functional currency of most of SBTech’s non-U.S. subsidiaries,
to U.S. dollars, our functional currency. SBTech was consolidated in our results only from April 24, 2020, and consequently our
exposure to these risks was not material in the first nine months of 2020. However, we expect it to increase in future periods.
We seek to naturally hedge our foreign exchange transaction exposure by matching the transaction currencies for our cash inflows
and outflows. Currently, we do not otherwise hedge our foreign exchange transaction or translation exposure but may consider doing
so in the future.
Item 4. Controls and Procedures.
Management’s Evaluation of Disclosure
Controls and Procedures
Under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2020. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period
covered by this report.
Changes in Internal Control Over Financial
Reporting
There has been no change
in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. However, we are continually monitoring the COVID-19 pandemic and any potential impact to our internal controls.
Limitations on Effectiveness of Controls
and Procedures
Our disclosure controls
and procedures are designed to provide reasonable assurance of achieving their objectives, as specified above. Our management recognizes
that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide
absolute assurance that its objectives will be met.