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12: R2 Condensed Consolidated Balance Sheets HTML 135K
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Equity
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Transferred at Closing (Details)
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Purchase Price (Details)
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Assets Acquired (Details)
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(Address of principal executive offices) (Zip Code)
(i617)i986-6744
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report).
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name
of each exchange on which registered
iClass A Common Stock, $0.0001 par value
iDKNG
iThe
Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.iYes☒No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).iYes☒No☐
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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐Noi☒
As of August 3, 2022, there were i448,545,834
shares of the registrant’s Class A common stock, par value $0.0001 per share, and i393,013,951 shares of the registrant’s Class B common stock, par value $0.0001 per share, outstanding.
As further discussed in this Quarterly Report on Form 10-Q (this “Report”), on May 5, 2022 (the “Closing Date”), DraftKings Holdings Inc. (formerly known as DraftKings Inc.), a Nevada corporation (“Old DraftKings”), consummated the acquisition of Golden Nugget Online Gaming, Inc., a Delaware corporation (together with its subsidiaries unless the context requires otherwise, “GNOG”), pursuant to a definitive agreement and plan of merger, dated August 9, 2021 (the “Merger Agreement”), in an all-stock transaction (the “GNOG Transaction”). In connection with the GNOG Transaction,
Old DraftKings undertook a holding company reorganization whereby a new holding company, New Duke Holdco, Inc., a Nevada corporation (“New DraftKings”), became the going-forward public company and the direct parent company of both Old DraftKings and GNOG. New DraftKings was renamed “DraftKings Inc.” on the Closing Date. Unless otherwise indicated, the terms “DraftKings”, the “Company”, “we”, “us” and “our” refer to (i) Old DraftKings for periods preceding the Closing Date and (ii) New DraftKings for periods on and subsequent to the Closing Date, in each case, together with their respective consolidated subsidiaries.
Class A common stock, $ii0.0001/
par value; ii900,000/ shares authorized as of
June 30, 2022 and December 31, 2021; i456,199 and i414,911 shares issued and i448,022
and i407,781 outstanding as of June 30, 2022 and December 31, 2021, respectively
Gain
(loss) on remeasurement of warrant liabilities
i14,315
i16,984
i26,996
(i9,996)
Other
(expense) income, net
(i5,573)
i—
i32,309
i—
Loss
before income tax (benefit) provision and loss from equity method investment
(i298,251)
(i302,928)
(i763,124)
(i653,714)
Income
tax (benefit) provision
(i81,226)
i2,404
(i80,757)
(i2,191)
Loss
from equity method investment
i78
i194
i2,429
i347
Net
loss attributable to common stockholders
$
(i217,103)
$
(i305,526)
$
(i684,796)
$
(i651,870)
Loss
per share attributable to common stockholders:
Basic and diluted
$
(ii0.50/)
$
(ii0.76/)
$
(ii1.61/)
$
(ii1.63/)
See
accompanying notes to unaudited condensed consolidated financial statements.
Due to the timing of the consummation of the GNOG Transaction, the above periods, to the extent applicable, exclude GNOG’s operations prior to the closing date of May 5, 2022.
3
DRAFTKINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Foreign currency translation adjustments arising during period, net of iiiinil///
tax
i—
i7,697
i—
(i19,621)
Comprehensive
loss
$
(i217,103)
$
(i297,829)
$
(i684,796)
$
(i671,491)
See
accompanying notes to unaudited condensed consolidated financial statements.
Due to the timing of the consummation of the GNOG Transaction, the above periods, to the extent applicable, exclude GNOG’s operations prior to the closing date of May 5, 2022.
4
DRAFTKINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
See
accompanying notes to unaudited condensed consolidated financial statements.
Due to the timing of the consummation of the GNOG Transaction, the above periods, to the extent applicable, exclude GNOG’s operations prior to the closing date of May 5, 2022.
Supplemental Disclosure of Noncash Investing and Financing Activities:
Equity
consideration issued for acquisitions
$
i460,128
$
i33,149
Acquisition
of property and equipment, internally developed software and other investments included in accounts payable and accrued expenses
i9,425
(i114)
Convertible
notes financing costs included in accounts payable and accrued expenses
i—
i782
Acquisition
of gaming licenses included in accounts payable and accrued expenses
i—
(i4,976)
Increase
of other current assets from transfer agent related to warrants
i—
i494
Supplemental
Disclosure of Cash Activities:
(Decrease) increase in cash reserved for users
(i50,781)
i26,539
Cash
paid for interest
i—
i—
See
accompanying notes to unaudited condensed consolidated financial statements.
Due to the timing of the consummation of the GNOG Transaction, the above periods, to the extent applicable, exclude GNOG’s operations prior to the closing date of May 5, 2022.
8
DRAFTKINGS INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands,except loss per share data, unless otherwise noted)
1.iDescription
of Business
DraftKings Inc. is a digital sports entertainment and gaming company. The Company’s business-to-consumer (“B2C”) segment provides users with sports betting (“Sportsbook”), online casino (“iGaming”) and daily fantasy sports (“DFS”) products, as well as media and other online consumer products. The Company’s business-to-business (“B2B”) segment’s principal activities involve the design and development of sports betting and casino gaming software.
As further discussed in the Explanatory Note and Note 3 hereof entitled “Acquisition of Golden Nugget Online Gaming, Inc.,” on May 5, 2022, Old DraftKings consummated
the GNOG Transaction pursuant to the Merger Agreement. In connection with the GNOG Transaction, Old DraftKings undertook a holding company reorganization whereby New DraftKings became the going-forward public company and the direct parent company of both Old DraftKings and GNOG. New DraftKings was renamed “DraftKings Inc.” on the Closing Date. Unless otherwise indicated, the terms “DraftKings”, the “Company”, “we”, “us” and “our” refer to (i) Old DraftKings for periods preceding the Closing Date and (ii) New DraftKings for periods on and subsequent to the Closing Date, in each case, together with their respective consolidated subsidiaries.
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. As of June 30, 2022, 29 U.S. states, the District of Columbia and Puerto Rico have legalized some form of sports betting. Of those 31 legal jurisdictions in the United States, 25 have legalized online sports betting. Of those 25 jurisdictions, 20 are live, and DraftKings operates in i17
of them. The jurisdictions in the United States with statutes legalizing iGaming are Connecticut, Delaware, Michigan, New Jersey, Pennsylvania and West Virginia.
As of June 30, 2022, the Company operates online Sportsbooks in Arizona, Colorado, Connecticut, Illinois, Indiana, Iowa, Louisiana, Michigan, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, Tennessee, Virginia, West Virginia and Wyoming and has retail Sportsbooks in Colorado, Connecticut, Illinois, Iowa, Louisiana, Mississippi, New Hampshire, New Jersey and New York, as well as Ontario, Canada. As of June 30, 2022, the Company offers iGaming products
in Connecticut, Michigan, New Jersey, Pennsylvania and West Virginia, as well as Ontario, Canada. The Company also has arrangements in place with land-based casinos to expand operations into additional states upon the passing of relevant legislation, the issuance of related regulations and the receipt of required licenses.
Beginning in 2020 and continuing into 2022, the novel coronavirus (“COVID-19”) pandemic has adversely impacted global commercial activity, disrupted supply chains and contributed to significant volatility in financial markets. The primary impacts of the COVID-19 pandemic on the Company were the suspension, cancellation, rescheduling and shortening of sports seasons and sporting events, particularly
between March 2020 and July 2020, when many sports seasons and sporting events, including the MLB regular season, domestic soccer leagues and European Cup competitions, the NBA regular season and playoffs, the NCAA college basketball tournament, the Masters golf tournament, and the NHL regular season and playoffs, were suspended or cancelled. The suspension of sports seasons and sporting events reduced customers’ use of, and spending on, the Company’s Sportsbook and DFS products.
Beginning in July 2020, major professional sports leagues started to resume their activities, many of which with shortened seasons, and gradually resumed regular activities. In the six months ended June 30, 2022, sports seasons continued and sporting events were held as planned,
including the NFL regular season, the NFL Playoffs and Superbowl LVI, the NBA regular season and playoffs, the NHL regular season and playoffs, the NASCAR Cup Series, various NCAA football bowl games, the NCAA college basketball regular season and tournament, the MLB regular season and several golf tournaments. The continued return of major sports and sporting events generated significant user interest and activity in the Company's Sportsbook and DFS products. However, the possibility remains that sports seasons and sporting events may be suspended, cancelled, rescheduled or shortened due to COVID-19 outbreaks.
The Company’s revenue varies based on sports seasons and sporting events amongst other factors, and cancellations,
suspensions or alterations resulting from COVID-19 have the potential to adversely affect the Company’s revenue, possibly materially. However, the Company’s products that do not rely on sports seasons and sporting events, such as iGaming, may partially offset this adverse impact on revenue.
9
A significant or prolonged decrease in consumer spending on entertainment or leisure activities would also likely have an adverse effect on demand for the Company’s products, reducing cash
flows and revenues, and thereby materially harming the Company’s business, financial condition and results of operations. In addition, a materially disruptive resurgence of COVID-19 cases or the emergence of additional variants or strains of COVID-19 could cause other widespread or more severe impacts depending on where infection rates are highest. As steps taken to mitigate the spread of COVID-19 necessitated a shift away from a traditional office environment for many employees, the Company implemented business continuity programs to ensure that employees were safe and that the business continued to function with minimal disruptions to normal work operations while employees worked remotely. During the second quarter of 2022, our primary offices, including our corporate headquarters in Boston, Massachusetts,
re-opened with many of our employees returning to work onsite in various capacities. We will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19.
2.iSummary of Significant Accounting Policies and Practices
i
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 (“SEC”) and accounting principles generally accepted in the United States (“U.S. GAAP”) for interim reporting. As such, 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 fiscal year ended
December 31, 2021, which are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC on February 18, 2022 (“2021 Annual Report”). The accompanying 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 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 the various sports seasons, sporting events and other factors.
The accompanying unaudited condensed consolidated financial statements include the accounts and operations of the Company. All intercompany balances and transactions have been eliminated. iCertain amounts from a prior period, which are not material, have been reclassified to conform with the current period presentation.
i
Foreign
Currency
Effective as of January 1, 2022, the Company’s significant non-U.S. subsidiaries’ functional currency changed from the Euro to the U.S. dollar. Accordingly, the Company did not have to translate the financial statements of its significant non-U.S. subsidiaries for the period ended June 30, 2022.
Digital Assets and Liabilities
On March
31, 2022, the SEC issued Staff Accounting Bulletin No. 121 (“SAB 121”). SAB 121 sets out interpretive guidance from the staff of the SEC regarding the accounting for obligations to safeguard digital assets that an entity holds for its platform users. In accordance with SAB 121, the Company recognized a liability for the obligation to safeguard its users’ assets and recognized an associated asset for its non-fungible token (“NFTs”) held for its users. Both the liability and the associated asset are measured at the fair value of the NFTs being safeguarded. Refer to Note 6 hereof for disclosures required in accordance with Accounting Standards Codification 820, Fair Value Measurement.
i
Recently
Issued Accounting Pronouncements Not Yet Adopted
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which requires an acquirer in a business combination to recognize and measure contract assets and contract
liabilities in accordance with Accounting Standards Codification Topic 606. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and early adoption is permitted. While the Company is continuing to assess the timing of adoption and the potential impacts of ASU 2021-08, it does not expect ASU 2021-08 to have a material effect on its consolidated financial statements.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), which clarifies the guidance in Accounting Standards
10
Codification
Topic 820, Fair Value Measurement (“Topic 820”), when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and introduces new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is permitted. While the Company is continuing to assess the timing of adoption and the potential impacts of ASU 2022-03, it does not expect ASU 2022-03 to have a material effect on the Company’s consolidated
financial condition, results of operations or cash flows.
3.iBusiness Combination
Acquisition of Golden Nugget Online Gaming, Inc.
On August 9, 2021, Old DraftKings and GNOG entered into the Merger Agreement,
pursuant to which Old DraftKings would acquire GNOG in an all-stock transaction. On May 5, 2022, Old DraftKings consummated the GNOG Transaction and, in connection therewith, undertook a holding company reorganization whereby New DraftKings became the going-forward public company and the direct parent company of both Old DraftKings and GNOG. New DraftKings was renamed “DraftKings Inc.” on the Closing Date. Under the terms of the Merger Agreement and subject to certain exclusions contained therein, GNOG stockholders received a fixed ratio of i0.365
shares of New DraftKings’ Class A common stock for each share of GNOG that they held on the Closing Date. The Company issued approximately i29.3 million shares of its Class A common stock in connection with the consummation of the GNOG Transaction. New DraftKings is the registrant filing this
Report as the successor registrant for Old DraftKings.
Operating results for GNOG on and after the Closing Date are included in the Company’s unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2022. Because the Company is integrating GNOG's operations into its consolidated operating activities, the amount of revenue and earnings attributable to the GNOG business from the Closing Date through June 30, 2022, which is included within revenue and net loss attributable to common stockholders in the Company’s unaudited condensed
consolidated statements of operations, is impracticable to determine.
Preliminary Purchase Price Accounting for the GNOG Transaction
On the Closing Date, the Company acquired i100% of the equity interests of GNOG pursuant to the Merger Agreement. iThe
following is a summary of the consideration issued on the Closing Date:
Share consideration (1)
$
i460,128
Other
consideration (2)
i143,337
Total consideration
$
i603,465
(1)Includes
the issuance of approximately i29.3 million shares of New DraftKings’ Class A common stock issued at a price of $i15.73.
(2)Includes
(i) payments made by the Company on behalf of GNOG, including repayment of the outstanding portion of GNOG’s term loan (including the associated prepayment premium) and payment of certain of GNOG’s transaction expenses incurred in connection with the GNOG Transaction and (ii) warrants that were exercisable for shares of GNOG Class A common stock prior to the Closing Date, which were assumed by New DraftKings in connection with the GNOG Transaction and became eligible to be converted into approximately i2.1 million
shares of New DraftKings Class A common stock in the aggregate. These payments were partially offset by commercial credits received by the Company from Fertitta Entertainment, Inc. (“FEI”), which can be applied by the Company from time to time to offset future amounts otherwise owed by it to FEI or its affiliates under commercial arrangements among such parties, subject to certain limited exceptions, which partially offsets the other consideration issued in connection with the GNOG Transaction.
The purchase price allocation for the GNOG Transaction set forth herein is preliminary and subject to change within the measurement period, which will not extend beyond one year from the Closing Date. Measurement period
adjustments will be recognized in the reporting period in which the adjustment amounts are determined and may include adjustments pertaining to intangible assets acquired, tax liabilities assumed, including the calculation of deferred tax assets and liabilities, and contingent consideration (if any). Any such adjustments may be material.
11
i
The
following table summarizes the consideration issued or paid in connection with the GNOG Transaction and the preliminary fair value of the assets acquired and liabilities assumed in connection with the consummation of the GNOG Transaction on the Closing Date. The values set forth below are preliminary, pending finalization of valuation analyses:
Cash and cash equivalents
$
i66,709
Cash
reserved for users
i7,633
Receivables reserved for users
i2,814
Accounts
receivables
i9,005
Prepaid expenses and other current assets
i541
Property
and equipment, net
i2,674
Intangible assets, net
i307,000
Operating
lease right-of-use assets
i1,185
Deposits and other non-current assets
i47,395
Total
identifiable assets acquired
i444,956
Liabilities assumed:
Accounts payable and accrued expenses
i36,660
Liabilities
to users
i5,260
Operating lease liabilities
i1,185
Other
long-term liabilities
i76,750
Total liabilities assumed
i119,855
Net
assets acquired (a)
i325,101
Purchase consideration (b)
i603,465
Goodwill
(b) – (a)
$
i278,364
/
Goodwill represents the excess of the gross consideration transferred over the difference between the fair value of the underlying net assets acquired and the underlying 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. Goodwill associated with the GNOG Transaction is assigned as of the Closing Date to the Company’s B2C reporting unit. Goodwill recognized is partially deductible for tax purposes.
Intangible Assets
i
Fair Value
Weighted- Average Useful Life
Gaming
licenses
$
i137,000
i12.2
years
Customer relationships
i170,000
i5.9
years
Total
$
i307,000
/
Loan
Receivable
The Company acquired a long-term receivable in the amount of $i30.5 million in connection with the GNOG Transaction, which originally resulted from a $i30.0 million
mezzanine loan (the “Danville GN Casino Loan”) by GNOG to certain parties before the Closing Date to develop and construct a “Golden Nugget”-branded casino in Danville, Illinois, pending regulatory approvals, that would enable GNOG to obtain market access to the State of Illinois. There has been no significant deterioration of credit quality since the origination date of the Danville GN Casino Loan. The receivable related to the Danville GN Casino Loan is classified within deposits and other non-current assets on the Company’s condensed consolidated balance sheet.
12
Transaction Costs
For
the three and six months ended June 30, 2022, the Company incurred $i10.7 million and $i14.4 million
in advisory, legal, accounting and management fees in connection with the GNOG Transaction, respectively, which are included in general and administrative expenses on the Company’s condensed consolidated statements of operations.
Unaudited Pro-Forma Information
i
The financial information in the table below summarizes the combined results of operations of Old DraftKings
and GNOG, 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 GNOG Transaction had been consummated as of the beginning of the periods presented or of results that may occur in the future.
The
foregoing pro forma results are 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.
Amortization
expense was $i38.1 million and $i26.6 million for the three months ended June 30, 2022 and 2021,
respectively, and $i66.2 million and $i51.9 million for the six months ended June 30, 2022 and 2021,
respectively.
Goodwill
i
The changes in the carrying amount of goodwill for the six months ended June 30, 2022 by reporting unit are:
In October 2016, DK Crown Holdings Inc. (formerly DraftKings Inc.), a Delaware corporation (“DK DE”) entered into an amended and restated loan and security agreement with Pacific Western Bank, which was most recently amended in May 2022 (as amended, the “Credit Agreement”). The Credit Agreement provides a revolving line of credit of up to $i60.0 million. The Credit Agreement
has a maturity date of August 28, 2022.
Borrowings under the Credit Agreement bear interest at a variable annual rate equal to the greater of (i) i1.00% above the prime rate then in effect and (ii) i6.50%,
and the Credit Agreement requires monthly, interest-only payments. In addition, the Company is required to pay quarterly in arrears a fee equal to i0.25% per annum of the unused portion of the revolving line of credit. As of June 30, 2022 and December 31, 2021, the Credit Agreement provided a revolving line of credit of up to $ii60.0/
million. There was iino/ principal outstanding as of June 30, 2022 or December 31,
2021. Net facility available from the Credit Agreement as of June 30, 2022 and December 31, 2021 totaled $i56.0 million and $i55.8
million, respectively, which, in each case, excludes the letters of credit outlined in Note 13. The Company is also subject to certain affirmative and negative covenants until maturity. In connection with the issuance of the Convertible Notes (as defined below) and the entry into the Capped Call Transactions (as defined below), the Company obtained a waiver from Pacific Western Bank for any breach of the Credit Agreement that would have otherwise resulted from entering into these financing transactions. The Company also obtained a waiver from Pacific Western Bank for any breach of the Credit Agreement that would have otherwise resulted from exceeding a capital expenditure limitation for 2021 and the amendments
to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2021 and June 30, 2021, in each case, for the material weakness previously identified in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2020, as filed with the SEC on November 5, 2021. In connection with the GNOG Transaction, the
Company obtained a waiver from Pacific Western Bank for any breach of the Credit Agreement that
14
would have otherwise resulted from entering into the transactions contemplated thereby, as well as to permit certain transfers of cash from the borrowers thereunder to GNOG and its subsidiaries from time to time.
Convertible Notes and Capped Call
In March 2021, the Company issued zero-coupon convertible senior notes in an aggregate principal amount of $i1,265.0
million, which includes proceeds from the full exercise of the over-allotment option (collectively, the “Convertible Notes”). The Convertible Notes will mature on March 15, 2028 (the “Notes Maturity Date”) , subject to earlier conversion, redemption or repurchase. In connection with the issuance of the Convertible Notes, the Company incurred $i17.0 million of lender fees and $i1.7
million of debt financing costs. The Convertible Notes represent senior unsecured obligations of Old DraftKings, which are being amortized through the Notes Maturity Date. On May 5, 2022, in connection with the GNOG Transaction, (i) New DraftKings agreed to fully and unconditionally guarantee all of Old DraftKings’ obligations under the Convertible Notes and the indenture governing the Convertible Notes and (ii) each Convertible Note which was outstanding as of the consummation of the GNOG Transaction and previously convertible into shares of Old DraftKings Class A common stock became convertible into shares of New DraftKings Class A common stock.
The Convertible Notes are convertible at an initial conversion rate of 10.543 shares of New DraftKings’ Class A common stock per $1,000 principal
amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $i94.85 per share of New DraftKings’ Class A common stock. The conversion rate is subject to adjustment upon the occurrence of certain specified events and includes a make-whole adjustment upon early conversion in connection with a make-whole fundamental change (as defined in the indenture governing the Convertible Notes).
Prior to September
15, 2027, the Convertible Notes will be convertible only upon satisfaction of certain conditions and during certain periods, and thereafter, at any time until the close of business on the second scheduled trading day immediately preceding the Notes Maturity Date. Old DraftKings will satisfy any conversion election by paying or delivering, as the case may be, cash, shares of New DraftKings’ Class A common stock or a combination of cash and shares of New DraftKings’ Class A common stock. During the six months ended June 30, 2022, the conditions allowing holders of the Convertible Notes to convert their Convertible Notes were triggered by the holding company reorganization in connection with the GNOG Transaction, whereby New DraftKings became the going-forward public company and replaced Old DraftKings as the issuer of the Class A common stock issuable upon conversion of the Convertible Notes; such conversion window
expired on June 27, 2022, and no holders of the Convertible Notes exercised their conversion rights.
In connection with the pricing of the Convertible Notes and the exercise of the over-allotment option to purchase additional notes, the Company entered into a privately negotiated capped call transaction (“Capped Call Transactions”). The Capped Call Transactions have a strike price of $i94.85
per share, subject to certain adjustments, which corresponds to the initial conversion price of the Convertible Notes. The Capped Call Transactions have an initial cap price of $i135.50 per share, subject to certain adjustments. The Capped Call Transactions are expected generally to reduce potential dilution to the Company’s Class A common stock upon any conversion of Convertible Notes. As the transaction qualifies for equity classification, the net cost of $i124.0
million incurred in connection with the Capped Call Transactions was recorded as a reduction to additional paid-in capital on the Company’s consolidated balance sheet.
Although recorded at amortized cost on the Company’s consolidated balance sheet, the estimated fair value of the Convertible Notes was $i747.9 million and $i953.8
million as of June 30, 2022 and December 31, 2021, respectively, which was calculated using the estimated or actual bids and offers of the Convertible Notes in an over-the-counter market on the last business day of the period and is classified as Level 2 in the fair value hierarchy.
Indirect Taxes
Taxation of e-commerce is becoming more prevalent and could negatively affect the Company’s business as it primarily 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,
15
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 June 30, 2022 and December 31, 2021, the
Company’s estimated contingent liability for indirect taxes was $i52.7 million and $i47.5 million, respectively. The estimated contingent liability for indirect
taxes is recorded within other long-term liabilities on the consolidated balance sheets and general and administrative expenses on the Company’s condensed consolidated statements of operations.
Warrant Liabilities
As part of the initial public offering of Diamond Eagle Acquisition Corp. (“DEAC”) on May 14, 2019 (the “IPO”), DEAC issued i13.3 million
warrants each of which entitles the holder to purchase ione share of the Company’s Class A common stock at an exercise price of $i11.50
per share (the “Public Warrants”). Simultaneously with the closing of the IPO, DEAC completed the private sale of i6.3 million warrants to DEAC’s sponsor (the “Private Warrants”). As of June 30, 2022, there were ino
Public Warrants outstanding and i1.6 million Private Warrants outstanding. On May 5, 2022, in connection with the consummation of the GNOG Transaction, Old DraftKings entered into an assignment and assumption agreement (the “Old DraftKings Warrant Assignment Agreement”) with New DraftKings, Computershare Trust Company, N.A. and Computershare Inc. (together, “Computershare”), pursuant to which Old DraftKings assigned to New DraftKings all of its rights, interests and obligations under the warrant
agreement, dated as of May 10, 2019 (the “Old DraftKings Warrant Agreement”), by and between DEAC and Continental Stock Transfer & Trust Company, as warrant agent, as assumed by Old DraftKings and assigned to Computershare by that certain assignment and assumption agreement, dated as of April 23, 2020, governing Old DraftKings’ outstanding Private Warrants, on the terms and conditions set forth in the Old DraftKings Warrant Assignment Agreement. In connection with the consummation of the GNOG Transaction and pursuant to the Old DraftKings Warrant Assignment Agreement, each of the outstanding Private Warrants became exercisable for ione
share of New DraftKings Class A common stock on the existing terms and conditions, except as otherwise described in the Old DraftKings Warrant Assignment Agreement.
In addition, on May 5, 2022, in connection with the consummation of the GNOG Transaction, the Company assumed an additional i5.9 million warrants, each of which entitled the holder to purchase ione
share of GNOG’s Class A common stock at an exercise price of $i11.50 per share (the “GNOG Private Warrants”). Effective as of the consummation of the GNOG Transaction, each of the outstanding GNOG Private Warrants became exercisable for i0.365
of a share of the Company’s Class A common stock, or approximately i2.1 million shares of the Company’s Class A common stock in the aggregate, on the existing terms and conditions of such GNOG Private Warrants, except as otherwise described in the
assignment and assumption agreement relating to the GNOG Private Warrants entered into on the Closing Date. As of June 30, 2022, there were i5.9 million GNOG Private Warrants outstanding, which corresponds to an assumed warrant liability of $i13.2 million
as of the Closing Date less a gain on remeasurement of $i4.8 million from the Closing Date through June 30, 2022.
As of June 30, 2022, the fair value of the Company's warrant liability was $i13.1
million. Due to fair value changes throughout the three and six months ended June 30, 2022, the Company recorded gains on remeasurement of warrant liabilities of $i14.3 million and $i27.0
million, respectively. Due to fair value changes throughout the three and six months ended June 30, 2021, the Company recorded a gain on remeasurement of warrants liabilities of $i17.0 million and a loss on remeasurement of warrant liabilities of $i10.0
million, respectively. During the six months ended June 30, 2022, a de minimis number of Private Warrants and GNOG Private Warrants were exercised. During the six months ended June 30, 2021, i0.2 million Private Warrants were exercised resulting in a reclassification to additional paid-in-capital in the amount of $i4.2
million, reflecting the reclassification of the warrant liabilities of $i3.5 million and proceeds upon exercise of $i0.7 million.
6.iFair
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 and nonrecurring fair value measurements 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.
16
•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.
i
The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value as of June 30, 2022 and December 31, 2021 based on the three-tier fair value hierarchy:
(1)Represents
the Company’s money market funds, which are classified as Level 1 because the Company measures these assets to fair value using quoted market prices.
(2)Represents the asset and liability balance for the digital assets held by the Company for its users, which are classified as Level 2 because the Company measures these digital assets to fair value using observable inputs for similar transactions.
(3)Represents the
Company’s marketable equity securities, which are classified as Level 1 because the Company measures these assets to fair value using quoted market prices.
/
17
(4)Represents the Company’s non-marketable equity securities, which are classified as Level 2 because the Company measures these assets to fair value
using observable inputs for similar investments of the same issuer. The Company has elected the remeasurement alternative for these assets.
(5)Represents the Company’s derivative instruments held in other public and privately held entities. The Company measures these derivative instruments to fair value using option pricing models and, accordingly, classifies these assets as Level 3. During the six months ended June 30, 2022, there were not a significant amount of new derivative instruments purchased by or issued to the
Company. The table below includes a range and an average weighted by relative fair value of the significant unobservable inputs used to measure these Level 3 derivative instruments to fair value. A change in these significant unobservable inputs might result in a significantly higher or lower fair value measurement at the reporting date.
(6)The
Company measures its Private Warrants and the GNOG Private Warrants to fair value using a binomial lattice model with the significant assumptions being observable inputs and, accordingly, classifies these liabilities as Level 2.
During the three and six months ended June 30, 2022, the Company recorded $i5.6 million
of unrealized loss and $i31.8 million of unrealized gains, respectively, primarily all of which resulted from those financial assets categorized as Level 3. Those unrealized gains are included within other income, net in the Company’s condensed consolidated statements of operations. During the three and six
months ended June 30, 2021, iino/
such gains or losses were recorded.
7.iRevenue Recognition
Deferred Revenue
The Company included deferred revenue within accounts payable and accrued expenses
and liabilities to users in its condensed consolidated balance sheets. iThe deferred revenue balances were as follows:
Revenue
recognized in the period from amounts included in deferred revenue at the beginning of the period
i51,946
i20,664
i64,478
i26,613
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.
Revenue Disaggregation
i
Disaggregation
of revenue for the three and six months ended June 30, 2022 and 2021 is as follows:
Online
gaming includes Sportsbook, iGaming and DFS, which have certain similar attributes and patterns of recognition. Sources of Other revenue primarily includes media, Marketplace and retail Sportsbooks.
i
The following table presents the Company’s revenue by geographic region for the periods indicated:
The Company, historically, has issued ithree 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 equity awards which generally vest over a i4-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 revenue, Adjusted EBITDA or share price targets are achieved amongst other conditions, while PSP awards generally vest upon achievement of revenue targets and have a range of payouts amongst other conditions.
i
The
following table shows restricted stock unit (“RSU”) and stock option activity for the six months ended June 30, 2022:
As
of June 30, 2022, total unrecognized stock-based compensation expense of $i608.4 million related to granted and unvested share-based compensation arrangements is expected to be recognized over a weighted-average period of i1.9
years. iThe following table shows stock compensation expense for the three and six months ended June 30, 2022 and 2021:
(1)
Time-based awards vest and are expensed over a defined service period.
(2) PSP and LTIP awards vest based on defined performance criteria and are expensed based on the probability of achieving such criteria. During the three months ended March 31, 2022, the Company recorded a cumulative catch-up adjustment of $i20.7 million in additional stock-based compensation
expense related to its updated expectation on achieving higher revenue targets than originally estimated for certain PSP awards which have a range of payouts.
9.iIncome Taxes
i
The
Company’s provision for income taxes for the three and six months ended June 30, 2022 and 2021 is as follows:
The
effective tax rates for the three months ended June 30, 2022 and 2021 were i27.2% and (i0.8)%,
respectively, and the effective tax rates for the six months ended June 30, 2022 and 2021 were i10.6% and i0.3%,
respectively. The difference between the Company’s effective tax rates for the three and six month periods in 2022 and 2021 and the U.S. statutory tax rate of 21% was primarily due to a valuation allowance related to the Company’s deferred tax assets, offset partially by current state tax and current foreign tax. Additionally, the Company recorded a discrete income tax benefit of $i76.8 million
during the second quarter of 2022, as well as a discrete tax benefit of $i6.8 million during the first quarter of 2021, which were attributable to non-recurring partial releases of the Company’s U.S. valuation allowance as a result of the preliminary purchase accounting for GNOG and Vegas Sports Information Network, Inc. (“VSIN”), respectively. 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 of the deferred tax assets will not be realized.
10.iSegment Information
The Company
operates its business and reports its results through iitwo/
operating and reportable segments: B2C and B2B, in accordance with ASC Topic 280, Segment Reporting. The B2C segment provides users with Sportsbook, iGaming and DFS products, as well as media and other online consumer products. The B2B segment is involved in the design and development of sports betting and casino gaming software, which is primarily comprised of the Company’s wholly-owned subsidiary, SBTech (Global) Limited (“SBTech”).
Operating segments are components 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 operating and 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. The Company defines and calculates Adjusted EBITDA as net loss before the impact of interest income or expense (net), income tax
provision or benefit, and depreciation and amortization, and further adjusted for the following items: stock-based compensation, transaction-related costs, litigation, settlement and related costs, advocacy and other related legal expenses, gain or loss on remeasurement of warrant liabilities and other non-recurring and non-operating costs or income, as described in the reconciliation below.
20
A measure of segment assets and liabilities has not been currently provided to the Company’s CODM and therefore is not shown below.
i
Summarized
financial information for the Company’s segments is shown in the following table:
(Gain)
loss on remeasurement of warrant liabilities
(i14,315)
(i16,984)
(i26,996)
i9,996
Other
non-recurring and non-operating costs (income)
i5,652
i2,132
(i28,830)
i4,133
Net
loss attributable to common shareholders
$
(i217,103)
$
(i305,526)
$
(i684,796)
$
(i651,870)
Due
to the timing of the consummation of the GNOG Transaction, the above periods, to the extent applicable, exclude GNOG’s operations prior to the closing date of May 5, 2022.
/
11.iLoss
Per Share
i
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:
Basic
and diluted weighted-average common shares outstanding
ii437,033/
ii401,447/
ii424,121/
ii399,545/
Loss
per share attributable to common stockholders:
Basic and diluted
$
(ii0.50/)
$
(ii0.76/)
$
(ii1.61/)
$
(ii1.63/)
/
21
There
were no preferred or other dividends declared for the three and six months ended June 30, 2022. iFor the periods presented, the following securities were not required to be included in the computation of diluted shares outstanding:
Class A common stock resulting from exercise of all warrants
i3,761
i1,769
Stock
options and RSUs
i52,468
i58,031
Convertible
notes
i13,337
i13,337
Total
i69,566
i73,137
12.iRelated-Party
Transactions
Financial Advisor
The Company entered into an engagement letter with a related party (the “Financial Advisor”) in August 2019, as amended in December 2019. For the three and six months ended June 30, 2022, the Company incurred $ii8.5/
million of fees payable to its Financial Advisor. For the three and six months ended June 30, 2021, the Company incurred iino/
fees payable to its Financial Advisor.
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 in the form of general and administrative services. As of June 30, 2022 and December 31, 2021, the Company had $i0.4
million and $i0.6 million, respectively, of receivables from DKFS, LLC related to those services and expenses to be reimbursed to the Company, which are included within non-current assets in its consolidated balance sheets. The Company has committed to invest up to $i17.5
million into DBDK Venture Fund I, LP, a Delaware limited partnership and a subsidiary of DKFS LLC. As of June 30, 2022, the Company had invested a total of $i4.9 million of the total commitment.
Transactions with a Shareholder and their Immediate Family Members
As of June 30,
2022 and December 31, 2021, the Company had $i0.0 million and $i3.8
million of receivables due from former shareholders of SBTech, respectively, which includes a current director and shareholder of the Company. For the three months ended June 30, 2022 and June 30, 2021, the Company had $i0.5 million and $i1.7
million in sales, respectively, to entities that are wholly owned by an immediate family member of a current director of the Company. The Company recorded $i1.1 million and $i3.1
million of such sales in the six months ended June 30, 2022 and June 30, 2021, respectively. The Company had an associated accounts receivable balance of $i0.2 million and $i0.2
million as of June 30, 2022 and December 31, 2021, respectively, included in accounts receivable in its condensed consolidated balance sheets.
Aircraft
Starting in 2022, from time to time, the Company has chartered, without mark-up, the private plane owned by Jason Robins, the Company’s Chief Executive Officer, utilizing aircraft services from Jet Aviation Flight Services, Inc. for the business and personal travel of Mr. Robins and his family. The Company had no direct or indirect interest in such private plane. During the three
and six months ended June 30, 2022, the Company incurred $i0.0 million and $i0.7 million
of expense for use of the aircraft under these chartering services, respectively.
In March 2022, the Company entered into a ione-year lease of an aircraft from an entity controlled by Mr. Robins. Pursuant to such agreement, Mr. Robins’ entity leases the aircraft to the Company for $i0.6 million
for a ione-year period. The Company covers all operating, maintenance and other expenses associated with the aircraft. The audit and compensation committees of the Company’s board of directors approved this arrangement based, among other things, on the requirements of the overall security program that Mr. Robins and his family fly private and their assessment that such an arrangement is more efficient and flexible and better ensures safety, confidentiality and privacy. During the three and six months
ended June 30, 2022, the Company incurred $ii0.1/ million
of expense under the aircraft lease.
22
13.iLeases, Commitments and Contingencies
Leases
The
Company primarily leases corporate office facilities, data centers and motor vehicles under operating lease agreements. Some of the Company’s leases include one or more options to renew. For a majority of our leases, we do not assume renewals in our determination of the lease term as the renewals are not deemed to be reasonably certain to exercise. Our lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. As of June 30, 2022, the Company’s lease agreements typically have terms not exceeding iten
years.
Payments under the Company’s lease arrangements may be fixed or variable, and variable lease payments primarily represent costs related to common area maintenance and utilities. iThe components of lease cost are as follows:
Cash paid for amounts included
in the measurement of lease liabilities:
Operating cash flows used by operating leases
$
i8,489
$
i8,687
Right-of-use
assets obtained in exchange for new operating lease liabilities
$
i21,338
$
i2,413
The
weighted-average remaining lease term and weighted-average discount rate for the Company’s operating leases were i7.1 years and i6.5%
as of June 30, 2022. The Company calculated the weighted-average discount rates using incremental borrowing rates, which equal the rates of interest that it would pay to borrow funds on a fully collateralized basis over a similar term.
As of June 30,
2022, the Company had long-lived assets, which consists of operating lease right-of-use assets and property and equipment, net, of $i106.3 million and $i25.0 million
located in the United States and internationally, respectively. As of December 31, 2021, the company had long-lived assets of $i77.2 million and $i32.6 million
located in the United States and internationally, respectively.
Other Contractual Obligations and Contingencies
i
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:
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 (the “DFS defendants”). 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 fell into four categories: (1) the Company’s online daily fantasy sports contests constitute illegal gambling; (2) the Company promulgated false or misleading advertisements that emphasized the ease of play and likelihood of winning; (3) the Company induced consumers to lose money through a deceptive bonus program; and (4)
the Company 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 sought money damages, equitable relief, and disgorgement of gains against the Company.
On October 6, 2021, the court entered judgment and an order approving a settlement and dismissing the claims with prejudice brought by all plaintiffs except the family members plaintiffs and one plaintiff asserting claims against the DFS defendants as a concerned citizen of the State of Florida (the “Concerned Citizen Claims”). This settlement agreement became effective on
November 5, 2021; as a result, the only remaining plaintiffs were the family member plaintiffs and the plaintiff who asserted the Concerned Citizen Claims . On January 21, 2022, DraftKings and the family member plaintiffs filed a joint motion for preliminary approval of a proposed settlement. On February 18, 2022, the court entered an order preliminarily approving the proposed settlement and scheduled a fairness hearing for final approval of the settlement on June 8, 2022. On June 8, 2022, the court entered judgment and an order approving the settlement and dismissing all claims with prejudice other than the Concerned Citizens Claims. On June 23, 2022, with all claims other
than the Concerned Citizen Claims resolved, the court dismissed the Concerned Citizen Claims from federal court for lack of Article III standing and remanded the Concerned Citizens Claims to state court in Florida. On July 8, 2022, the court officially closed the docket for In Re: Daily Fantasy Sports Litigation (Multi-District Litigation). The Company previously provided an accrual for this matter.
The Company intends to vigorously defend the Concerned Citizen Claims. If the plaintiff obtains a judgment in his favor in this matter, the
Company could be subject to substantial damages and it could be restricted from offering DFS contests in Florida. The Company cannot provide any assurance as to the outcome of the Concerned Citizen Claims.
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Despite the potential for significant damages, the Company does not believe, based on currently available information, that the outcome of the Concerned Citizen Claims 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.
Interactive Games LLC
On June 14, 2019, Interactive Games LLC filed suit against the Company in the U.S. District Court for the District of Delaware, alleging that our Daily Fantasy Sports product infringes itwo
patents and the Company’s Sportsbook product infringes itwo different patents. DraftKings intends to vigorously defend this case. In the event that a court ultimately determines that the Company is infringing the asserted patents, it may be subject to substantial damages, which may include treble damages and/or an injunction that could require the
Company to modify certain features that we currently offer.
The Company cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. The Company also cannot provide an estimate of the possible loss or range of loss. Any adverse outcome in these matters could expose the Company to substantial damages or penalties that may have a material adverse impact on the Company’s operations and cash flows.
Despite
the potential for significant damages, the Company does 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.
Winview Inc.
On July 7, 2021, Winview Inc., a Delaware corporation, filed suit against the Company in the U.S. District Court for the District of New Jersey, which was subsequently amended on July
28, 2021, alleging that our Sportsbook product infringes itwo patents, our Daily Fantasy Sports product infringes ione
patent, and that our Sportsbook product and Daily Fantasy Sports product infringe another patent. On November 15, 2021, Winview Inc. filed a second amended complaint (the “SAC”), adding as defendants DK DE and Crown Gaming Inc., a Delaware corporation, which are wholly-owned subsidiaries of the Company. The SAC largely repeats the allegations of the first amended complaint.
DraftKings intends to vigorously defend this case. In the event that a court ultimately determines that the Company is infringing the asserted patents, it may be subject to substantial damages, which
may include treble damages and/or an injunction that could require the Company to modify certain features that we currently offer.
The Company cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. The Company also cannot provide an estimate of the possible loss or range of loss. Any adverse outcome in these matters could expose the Company to substantial damages or penalties that may have a material adverse impact on the
Company’s operations and cash flows.
Despite the potential for significant damages, the Company does 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.
Securities Matters
On July 2, 2021, the first of itwo
substantially similar federal securities law putative class actions was filed in the U.S. District Court for the Southern District of New York against the Company and certain of its officers. The actions allege violations of Sections 10(b) and 20(a) of the Exchange Act on a behalf of a putative class of persons who purchased or otherwise acquired DraftKings stock between December 23, 2019 and June 15, 2021. The allegations relate to, among other things, allegedly false and misleading statements and/or failures to disclose information about the Company’s business and prospects, based primarily upon the allegations concerning SBTech that were contained in a report published about the
Company on June 15, 2021 by Hindenburg Research (the “Hindenburg Report”). The Company intends to vigorously defend against these claims. On November 12, 2021, the court consolidated the itwo actions under the caption In re DraftKings Securities Litigation and appointed a lead plaintiff. The lead plaintiff
filed a consolidated amended complaint on January 11, 2022.
25
Beginning on July 9, 2021, the Company received subpoenas from the SEC seeking documents concerning, among other things, certain of the allegations raised in the Hindenburg Report, as well as the Company’s disclosures regarding its compliance policies and procedures, and related matters. The Company intends to comply
with the related requests and is cooperating with the SEC’s ongoing inquiry.
The Company cannot predict with any degree of certainty the outcome of these matters or determine the extent of any potential liabilities. The Company also cannot provide an estimate of the possible loss or range of loss. Any adverse outcome in these matters could expose the Company to substantial damages or penalties that may have a material adverse impact on the Company’s operations and cash flows.
Despite
the potential for significant damages, the Company does 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.
Shareholder Derivative Litigation
On October 21, 2021, the first of ifive
substantially similar putative shareholder derivative actions was filed in Nevada by alleged shareholders of the Company. The actions purport to assert claims on behalf of the Company against certain current and former officers and/or members of the board of directors of the Company and DEAC. The itwo
actions filed in the U.S. District Court for the District of Nevada have since been consolidated, and itwo of the actions filed in Nevada state District Court in Clark County likewise have been consolidated. A substantially identical fifth action was filed in Nevada state District Court in Clark County and has been dismissed voluntarily by the plaintiff.The same plaintiff filed a substantially identical action in Massachusetts Superior Court, which has also been dismissed voluntarily by the plaintiff.
The Nevada actions purport to assert claims on behalf of the Company for, among other things, breach of fiduciary duty and corporate waste based primarily upon the allegations concerning SBTech that were contained in the Hindenburg Report. The federal court action in Nevada also contends that certain individuals are liable to the Company for any adverse judgment in the federal securities class actions described above under Sections 10(b) and 21D of the Exchange Act. The Nevada actions seek unspecified compensatory damages, changes to corporate governance and internal procedures, equitable and injunctive relief, restitution, costs and attorney’s fees.
The
Company cannot predict with any degree of certainty the outcome of these matters or determine the extent of any potential liabilities. The Company also cannot provide an estimate of the possible loss or range of loss. Because the Nevada actions allege claims on behalf of the Company and purport to seek judgments in favor of the Company, the Company does not believe, based on currently available information, that the outcome of these proceedings 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.
AG 18, LLC d/b/a/ Arrow Gaming
On August 19, 2021, AG 18, LLC d/b/a/ Arrow Gaming (“Arrow Gaming”) filed a complaint against DraftKings in the United States District Court for the District of New Jersey alleging that DraftKings’ DFS and Casino products infringe ifour patents.On October 12, 2021, Arrow Gaming filed an amended complaint to add ione additional patent. On December 20, 2021, Arrow Gaming filed a second amended complaint adding new allegations with respect to alleged willful infringement.
DraftKings intends to vigorously defend this case. In the event that
a court ultimately determines that the Company is infringing the asserted patents, it may be subject to substantial damages, which may include treble damages and/or an injunction that could require the Company to modify certain features that we currently offer.
The Company cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. The Company also cannot provide an estimate of the possible loss or range of loss. Any adverse outcome in these matters could expose the
Company to substantial damages or penalties that may have a material adverse impact on the Company’s operations and cash flows.
Despite the potential for significant damages, the Company does 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.
26
Beteiro,
LLC
On November 22, 2021, Beteiro, LLC filed a complaint against the Company in the United States District Court for the District of New Jersey alleging that the Company’s Sportsbook and Casino products infringe ifour patents.
DraftKings
intends to vigorously defend this case. In the event that a court ultimately determines that the Company is infringing the asserted patents, it may be subject to substantial damages, which may include treble damages and/or an injunction that could require the Company to modify certain features that we currently offer.
The Company cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. The Company also cannot provide an estimate of the possible loss or range of loss. Any adverse
outcome in these matters could expose the Company to substantial damages or penalties that may have a material adverse impact on the Company’s operations and cash flows.
Despite the potential for significant damages, the Company does 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.
Diogenes Ltd. & Colossus(IOM)
Ltd.
On December 1, 2021, Diogenes Ltd. & Colossus (IOM) Ltd. (“Colossus”), filed a complaint against the Company in the United States District Court for the District of Delaware alleging that the Company’s Sportsbook product infringes iseven
patents. Colossus amended its complaint on February 7, 2022 to, among other things, add ione additional patent.
DraftKings intends to vigorously defend this case. In the event that a court ultimately determines that the Company is infringing the asserted patents, it may be subject to substantial damages,
which may include treble damages and/or an injunction that could require the Company to modify certain features that we currently offer.
The Company cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. The Company also cannot provide an estimate of the possible loss or range of loss. Any adverse outcome in these matters could expose the Company to substantial damages or penalties that may have a material adverse impact on the
Company’s operations and cash flows.
Despite the potential for significant damages, the Company does 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.
Internal Revenue Service
The Company is 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 consolidated financial statements and may materially affect the Company’s 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 $i4.0
million and $i4.2 million as of June 30, 2022 and December 31, 2021, respectively, for the Company’s leases of office space.
27
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 (this “Report”) and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 18, 2022. As a result of the GNOG Transaction, which was consummated on May 5, 2022, New DraftKings became the going-forward public company and the direct parent company of both Old DraftKings and GNOG. New DraftKings was renamed “DraftKings Inc.” at the closing of the GNOG Transaction and is the
registrant filing this Report as the successor registrant for Old DraftKings. Unless otherwise indicated, the terms “DraftKings,” the “Company,”“we,”“us,” or “our” refer to (i) Old DraftKings for periods preceding the Closing Date and (ii) New DraftKings for periods on and subsequent to the Closing Date, in each case, together with their respective consolidated subsidiaries.
Forward-Looking Statements
This Report contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 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. You are cautioned that our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control, and, consequently, our actual results may differ materially from those projected.
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.
•factors relating to our business, operations and financial performance, including:
•our ability to effectively compete in the global entertainment and gaming industries;
•our ability to successfully acquire and integrate new operations;
•our ability to obtain and maintain licenses with gaming authorities;
•our inability to recognize deferred tax assets and tax loss carryforwards;
•market
and global conditions 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, including inflation, unemployment and our liquidity, operations and personnel;
•intense competition and competitive pressures from other companies worldwide in the industries in which we operate;
•our ability to raise financing in the future;
•our success in retaining or recruiting officers, key employees or directors; and
•litigation and the ability to adequately protect our intellectual property rights.
These risks
and other factors include those set forth under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 18, 2022. 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, except as required by applicable law. New factors may emerge and it is not possible
to predict all factors that may affect our business and prospects.
28
Our Business
We are a digital sports entertainment and gaming company. We provide users with sports betting (“Sportsbook”), online casino (“iGaming”) and daily fantasy sports (“DFS”) products, as well as media and other online consumer products. We are also involved in the design and development of sports betting and casino gaming software for online and retail Sportsbooks and casino gaming products, as well as other online consumer products. On May 5, 2022, we acquired GNOG
in an all-stock transaction to enable us to leverage Golden Nugget’s established brand to broaden our reach into new customer segments and enhance the combined company’s iGaming product offerings through our vertically-integrated tech stack and GNOG’s unique capabilities, including live dealer. For further details regarding the GNOG Transaction, please see the section entitled “Acquisition of Golden Nugget Online Gaming, Inc.” contained within Note 3 of our condensed consolidated financial statements.
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 Sportsbook, iGaming and DFS, as well as media and other online consumer products. We are also highly focused on our responsibility as a steward of this new era in real-money gaming. Our ethics
guide our decision making, with respect to both the tradition and integrity of sports and our investments in regulatory compliance and consumer protection.
We make deliberate and substantial investments in support of our mission and long-term growth. For example, we have invested in our products and technology in order to continuously launch new product innovations, improve marketing, merchandising, and operational efficiency through data science, and deliver a great user experience. We also make significant investments in sales and marketing and incentives to grow and retain our paid user base, including personalized cross-product offers and promotions, and promote brand awareness to attract the “skin-in-the-game” sports fan. Together, these investments have enabled us to create a leading product built on scalable technology, while attracting a user base that has resulted in the rapid growth of our business.
Our
priorities are to (a) continue to invest in our products and services, (b) launch our products in new geographies, (c) create replicable and predictable state-level unit economics in sports betting and iGaming and (d) expand our other online consumer products. When we launch Sportsbook and iGaming offerings in a new jurisdiction, we invest in user acquisition, retention and cross-selling until the new jurisdiction provides a critical mass of users engaged across our products.
Our current technology is highly scalable with relatively minimal incremental spend required to launch our products in new jurisdictions. We will continue to manage our fixed-cost base in conjunction with our market entry plans and focus our variable spend on marketing, user experience and support and regulatory compliance to become the product of choice for users and maintain favorable relationships with regulators. We also expect to improve our profitability
over time through cost synergies and new opportunities driven by the continued optimization of our technology infrastructure.
Our path to profitability is based on the acceleration of positive contribution profit growth driven primarily by marketing efficiencies as we continue the transition from local to regional to national advertising as well as scale benefits from investments in our product and technology and general and administrative functions. On a consolidated Adjusted EBITDA basis, we expect to achieve profitability when total contribution profit exceeds the fixed costs of our business, which depends, in part, on the percentage of the U.S. adult population that has access to our products and the other factors summarized in the section entitled “Forward-Looking Statements”.
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 business of DK Crown Holdings Inc. (formerly DraftKings Inc.), a Delaware corporation (“DK DE”), which includes our DraftKings-branded Sportsbook, iGaming and DFS products, as well as our other online consumer products, and our GNOG brand. Across our DraftKings-branded products, we offer users a single integrated product 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.
29
B2B
Our
B2B business is primarily comprised of the operations of 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 the United States.
Impact of COVID-19
Beginning in 2020 and continuing into 2022, the novel coronavirus (“COVID-19”) pandemic has adversely impacted global commercial
activity, disrupted supply chains and contributed to significant volatility in financial markets. The primary impacts of the COVID-19 pandemic on us were the suspension, cancellation, rescheduling and shortening of sports seasons and sporting events, particularly between March 2020 and July 2020, when many sports seasons and sporting events, including the MLB regular season, domestic soccer leagues and European Cup competitions, the NBA regular season and playoffs, the NCAA college basketball tournament, the Masters golf tournament, and the NHL regular season and playoffs, were suspended or cancelled. The suspension of sports seasons and sporting events reduced customers’ use of, and spending on, our Sportsbook and DFS products.
Beginning in July 2020, major professional sports leagues started to resume their activities, many of which with shortened seasons, and gradually resumed regular activities. In the six months ended
June 30, 2022, sports seasons continued and sporting events were held as planned, including the NFL regular season, the NFL Playoffs and Superbowl LVI, the NBA regular season and playoffs, the NHL regular season and playoffs, the NASCAR Cup Series, various NCAA football bowl games, the NCAA college basketball regular season and tournament, the MLB regular season and several golf tournaments. The continued return of major sports and sporting events generated significant user interest and activity in our Sportsbook and DFS products. However, the possibility remains that sports seasons and sporting events may be suspended, cancelled, rescheduled or shortened due to COVID-19 outbreaks.
Our revenue varies based on sports seasons and sporting events amongst other factors, and cancellations, suspensions or alterations resulting from COVID-19 have the potential to adversely affect
our revenue, possibly materially. However, our products that do not rely on sports seasons and sporting events, such as iGaming, may partially offset this adverse impact on revenue.
A significant or prolonged decrease in consumer spending on entertainment or leisure activities would also likely have an adverse effect on demand for our products, reducing cash flows and revenues, and thereby materially harming our business, financial condition and results of operations. In addition, a materially disruptive resurgence of COVID-19 cases or the emergence of additional variants or strains of COVID-19 could cause other widespread or more severe impacts depending on where infection rates are highest. As steps taken to mitigate the spread of COVID-19 necessitated a shift away from a traditional office environment for many employees, we implemented business continuity programs to ensure that employees were safe and that our business
continued to function with minimal disruptions to normal work operations while employees worked remotely. During the second quarter of 2022, our primary offices, including our corporate headquarters in Boston, Massachusetts, re-opened with many of our employees returning to work onsite in various capacities. We will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19.
Financial Highlights and Trends
The following table sets forth a summary of our financial results for the periods indicated:
Three
months ended June 30,
Six months ended June 30,
(amounts in thousands)
2022
2021
2022
2021
Revenue
$
466,185
$
297,605
$
883,390
$
609,881
Net
Loss
(217,103)
(305,526)
(684,796)
(651,870)
Adjusted EBITDA (1)
(118,134)
(95,302)
(407,643)
(234,564)
(1)Adjusted
EBITDA is a non-GAAP financial measure. See “—Non-GAAP Information” below for additional information about this measure and a reconciliation of this measure to the most directly comparable financial measure calculated in accordance with U.S. GAAP.
30
Revenue increased by $168.6 million in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 primarily due to the strong performance of our B2C segment as a result of robust customer acquisition and retention and the successful launches of our Sportsbook and iGaming products in additional jurisdictions since the second quarter
of 2021.
Revenue increased by $273.5 million in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to the strong performance of our B2C segment as a result of robust customer acquisition and retention and the successful launches of our Sportsbook and iGaming products in additional jurisdictions since the second quarter of 2021. These increases were partially offset by an increase in promotional intensity (primarily due to the launch of our Sportsbook product in New York), as well as atypically low hold rates (primarily attributable to NCAA basketball wagering) in the three months ended March 31, 2022.
Key
Performance Indicators – B2C Operations
Monthly Unique Payers (“MUPs”). MUPs is the average number of unique paid users (“unique payers”) that use our B2C products 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 products 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 engagement with one of our B2C products such as a DFS contest, sports bet or casino game) across one or more of our products via our technology. 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 technology during the period (i.e., a user that participates in a paid engagement with one of our B2C products 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 only promotional incentives, which are fungible with other funds deposited into their wallets on our technology;
however, the number of such users has not been material to date.
The chart below presents our MUPs for the three and six months ended June 30, 2021 and 2022:
31
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 products. The chart below presents our ARPMUP for the three and six months ended June 30, 2021 and 2022:
32
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.
Our period-on-period increase in MUPs for the three and six months ended June 30, 2022, compared to the same periods in 2021, reflects strong unique payer retention and acquisition across our Sportsbook and iGaming products, as well as the expansion of our iGaming and Sportsbook products into new jurisdictions, partially offset by a decline in DFS MUPs.
ARPMUP increased in the three months ended June 30, 2022, compared to the same period in 2021, primarily due to strong customer engagement, a continued mix shift into our iGaming and Sportsbook products and reduced promotional intensity compared to the same period in 2021.
ARPMUP increased in the six
months ended June 30, 2022, compared to the same period in 2021, primarily due to strong customer engagement and a continued mix shift into our iGaming and Sportsbook products, which was partially offset by an increase in promotional intensity (primarily due to the launch of our Sportsbook product in New York), as well as atypically low hold rates in the three months ended March 31, 2022 (primarily attributable to NCAA basketball wagering).
Non-GAAP Information
This Report includes Adjusted EBITDA, which is a non-GAAP financial measure that we use to supplement our results presented in accordance with U.S. GAAP. We believe Adjusted
EBITDA is useful in evaluating our operating performance, 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 is not intended to be a substitute for any U.S. GAAP financial measure. As calculated, it 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 (net), income tax provision or benefit, and depreciation and amortization, and further adjusted for the following items: stock-based compensation, transaction-related costs, litigation, settlement and related costs, advocacy and other related legal expenses, gain or loss on remeasurement of warrant liabilities and other
non-recurring and non-operating costs or income, as described in the reconciliation below.
We include 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 and advocacy and other related legal expenses), non-cash expenditures (for example, in the case of depreciation and amortization, remeasurement of warrant liabilities and stock-based compensation), or
33
non-operating
items which are not related to our underlying business performance (for example, in the case of interest income and expense and litigation, settlement and related costs).
Adjusted EBITDA
The table below presents our Adjusted EBITDA reconciled to our net loss, which is the most directly comparable financial measure calculated in accordance with U.S. GAAP, for the periods indicated:
Three
months ended June 30,
Six months ended June 30,
(amounts in thousands)
2022
2021
2022
2021
Net loss
$
(217,103)
$
(305,526)
$
(684,796)
$
(651,870)
Adjusted
for:
Depreciation and amortization (1)
42,315
30,051
74,540
58,244
Interest income, net
(1,929)
(1,642)
(2,077)
(2,627)
Income
tax (benefit) provision
(81,226)
2,404
(80,757)
(2,191)
Stock-based compensation (2)
135,521
171,739
322,598
323,582
Transaction-related
costs (3)
10,505
7,890
14,279
10,913
Litigation, settlement, and related costs (4)
2,446
3,599
4,396
4,221
Advocacy
and other related legal expenses (5)
—
11,035
—
11,035
(Gain) loss on remeasurement of warrant liabilities
(14,315)
(16,984)
(26,996)
9,996
Other
non-recurring and non-operating costs (income) (6)
5,652
2,132
(28,830)
4,133
Adjusted EBITDA
$
(118,134)
$
(95,302)
$
(407,643)
$
(234,564)
Adjusted
EBITDA by segment:
B2B
$
(19,230)
$
(3,043)
$
(39,568)
$
(951)
B2C
$
(98,904)
$
(92,259)
$
(368,075)
$
(233,613)
(1)The
amounts include the amortization of acquired intangible assets of $27.1 million and $20.6 million for the three months ended June 30, 2022 and 2021, respectively, and $46.3 million and $39.7 million for the six months ended June 30, 2022 and 2021, respectively.
(2)Primarily reflects stock-based compensation expenses resulting from the issuance of awards under long-term incentive plans.
(3)Includes capital markets advisory, consulting, accounting and legal expenses related to evaluation, negotiation and integration costs incurred in connection with pending or completed transactions and offerings.
(4)Primarily
includes external legal costs related to litigation and litigation settlement costs deemed unrelated to our core business operations.
(5)Includes certain non-recurring costs relating to advocacy efforts and other legal expenses in jurisdictions where we do not operate certain products and are actively seeking licensure, or similar approval, for those products. For the three and six months ended June 30, 2021, those costs primarily related to our activities in Florida. The amounts presented exclude other costs relating to advocacy efforts and other legal expenses incurred in jurisdictions where related legislation has been passed and we currently operate.
(6)Primarily includes the change in fair value of certain financial assets, as well as our equity method share of the investee’s losses
and other costs relating to non-recurring and non-operating items.
Due to the timing of the consummation of the GNOG Transaction, the above periods, to the extent applicable, exclude GNOG’s operations prior to the closing date of May 5, 2022.
The
following table sets forth a summary of our consolidated results of operations for the interim periods indicated, and the changes between periods. Due to the timing of the consummation of the GNOG Transaction, the below periods, to the extent applicable, exclude GNOG’s operations prior to the closing date of May 5, 2022.
Three months
ended June 30,
(amounts in thousands, except percentages)
2022
2021
$ Change
% Change
Revenue
$
466,185
$
297,605
$
168,580
56.6
%
Cost
of revenue
312,767
187,006
(125,761)
(67.2)
%
Sales and marketing
197,529
170,712
(26,817)
(15.7)
%
Product
and technology
77,202
62,635
(14,567)
(23.3)
%
General and administrative
187,609
198,806
11,197
5.6
%
Loss
from operations
(308,922)
(321,554)
12,632
3.9
%
Interest income, net
1,929
1,642
287
17.5
%
Gain
on remeasurement of warrant liabilities
14,315
16,984
(2,669)
(15.7)
%
Other expense, net
(5,573)
—
(5,573)
(100.0)
%
Loss
before income tax (benefit) provision and loss from equity method investment
(298,251)
(302,928)
4,677
1.5
%
Income tax (benefit) provision
(81,226)
2,404
83,630
(3,478.8)
%
Loss
from equity method investment
78
194
116
59.8
%
Net loss
$
(217,103)
$
(305,526)
$
88,423
28.9
%
Revenue.
Revenue increased $168.6 million, or 56.6%, to $466.2 million in the three months ended June 30, 2022, from $297.6 million in the three months ended June 30, 2021. The increase was attributable to $184.5 million in incremental B2C segment revenue, partially offset by a decrease in B2B segment revenue of $16.0 million.
The $184.5 million increase in our B2C segment revenue was primarily attributable to our online gaming revenues which increased $175.9 million, or 68.1%, to $434.1 million in the three months ended June 30, 2022, from $258.2 million in the three months ended June 30, 2021. The remaining increase in our B2C segment revenue was attributable to “Other” revenue, which primarily
includes media, Marketplace and retail Sportsbooks.
Online gaming revenue grew in the three months ended June 30, 2022 primarily due to MUPs increasing by 29.7% and ARPMUP also increasing by 29.7% as compared to the three months ended June 30, 2021. These key performance indicators increased primarily due to strong customer engagement, a continued mix shift into our iGaming and Sportsbook products and reduced promotional intensity compared to the same period in 2021.
Cost of Revenue. Cost of revenue increased $125.8 million, or 67.2%, to $312.8 million in the three months ended June 30, 2022, from $187.0 million in the three months
ended June 30, 2021. Our B2C segment accounted for substantially all of this increase, reflecting growth in revenue from our expanded product and geographic footprint, including the launch of our Sportsbook product in Arizona, Connecticut, Louisiana, New York and Ontario, Canada and the launch of our iGaming product in Connecticut and Ontario, Canada since the three months ended June 30, 2021. The cost of revenue increase was primarily attributable to an increase in our variable expenses such as product taxes and payment processing fees, which increased by $65.8 million and $16.7 million, respectively, relative to the expenses incurred during the three months ended June 30, 2021. The remaining increase was primarily attributable to variable platform costs and revenue share arrangements resulting from additional customer
activity.
B2C segment cost of revenue as a percentage of B2C revenue increased by 5.4 percentage points to 62.1% in the three months ended June 30, 2022, as compared to 56.7% in the three months ended June 30, 2021, reflecting our changed revenue mix from our more mature DFS product to our iGaming and Sportsbook products as well as higher promotional investment in the launches of our products in new states, principally the launch of our Sportsbook product in New York in January 2022. In addition, as a result of customer activity in these new states, we incurred variable expenses that are not based on net revenue, including payment processing fees, and revenue share arrangements. In general, our iGaming and Sportsbook products produce revenue at a higher cost per revenue dollar relative
to our more mature DFS product.
35
Sales and Marketing. Sales and marketing expense increased $26.8 million, or 15.7%, to $197.5 million in the three months ended June 30, 2022, from $170.7 million in the three months ended June 30, 2021. Our B2C segment accounted for substantially all of this increase. Of the $26.8 million increase, $21.7 million resulted from activities to acquire and retain players in new states that we operate in, such as marketing costs including advertising and the development of marketing campaigns, as well as headcount and technology associated with analyzing, developing and deploying those
campaigns. The remainder of the increase primarily resulted from an increase in various team and league sponsorships.
Product and Technology. Product and technology expense increased $14.6 million, or 23.3%, to $77.2 million in the three months ended June 30, 2022, from $62.6 million in the three months ended June 30, 2021, of which $1.3 million was attributable to our B2B segment. The remaining increase of $13.3 million primarily reflects additions to our product operations and engineering headcount in our B2C segment.
General and Administrative. General and administrative expense decreased $11.2 million, or 5.6%, to $187.6 million in the three months ended
June 30, 2022, from $198.8 million in the three months ended June 30, 2021. Our B2C segment accounted for substantially all of this decrease, primarily driven by a decrease in stock-based compensation expense of $32.8 million, which was partially offset by an increase of $17.2 million in compensation costs due to an increase in headcount.
Gain on Remeasurement of Warrant Liabilities. We recorded a gain on remeasurement of warrant liabilities of $14.3 million in the three months ended June 30, 2022, compared to a gain of $17.0 million in the three months ended June 30, 2021 primarily due to changes in the underlying share price of our Class A common stock.
Other
Expense. Other expense, net was $5.6 million in the three months ended June 30, 2022, as compared to no other expense, net in the three months ended June 30, 2021. This increase was primarily attributable to a change in the fair value of certain financial assets.
Income tax (benefit) provision. We recorded an income tax benefit of $81.2 million in the three months ended June 30, 2022, as compared to an income tax provision of $2.4 million in the three months ended June 30, 2021. This increase was primarily due to a discrete income tax benefit of $76.8 million recorded during the second quarter of 2022, which was attributable to non-recurring partial releases of the
Company’s U.S. valuation allowance as a result of the preliminary purchase accounting for GNOG.
Net Loss. Net loss decreased by $88.4 million to $217.1 million in the three months ended June 30, 2022, as compared to a net loss of $305.5 million in the three months ended June 30, 2021, for the reasons discussed above.
The following table sets forth a summary of our consolidated results of operations for the interim periods indicated, and the changes between periods. Due to the timing of the consummation of the GNOG Transaction, the below periods, to the extent applicable, exclude GNOG’s operations prior to the closing date of May 5, 2022.
Six
months ended June 30,
(amounts in thousands, except percentages)
2022
2021
$ Change
% Change
Revenue
$
883,390
$
609,881
$
273,509
44.8
%
Cost
of revenue
626,146
370,231
(255,915)
(69.1)
%
Sales and marketing
518,981
399,398
(119,583)
(29.9)
%
Product
and technology
158,554
118,794
(39,760)
(33.5)
%
General and administrative
404,215
367,803
(36,412)
(9.9)
%
Loss
from operations
(824,506)
(646,345)
(178,161)
(27.6)
%
Interest income, net
2,077
2,627
(550)
(20.9)
%
Gain
(loss) on remeasurement of warrant liabilities
26,996
(9,996)
36,992
370.1
%
Other income, net
32,309
—
32,309
100.0
%
Loss
before income tax (benefit) provision and loss from equity method investment
(763,124)
(653,714)
(109,410)
(16.7)
%
Income tax benefit
(80,757)
(2,191)
78,566
3,585.9
%
Loss
from equity method investment
2,429
347
(2,082)
(600.0)
%
Net loss
$
(684,796)
$
(651,870)
$
(32,926)
(5.1)
%
Revenue.
Revenue increased $273.5 million, or 44.8%, to $883.4 million in the six months ended June 30, 2022, from $609.9 million in the six months ended June 30, 2021. The increase was attributable to $307.4 million in incremental B2C segment revenue, partially offset by a decrease in B2B segment revenue of $33.9 million.
The $307.4 million increase in our B2C segment revenue was primarily attributable to our online gaming revenues which increased $289.9 million, or 54.6%, to $820.8 million in the six months ended June 30, 2022, from $530.9 million in the six months ended June 30, 2021. The remaining increase in our B2C segment revenue was attributable to “Other” revenue, which primarily includes
media, Marketplace and retail Sportsbooks.
Online gaming revenue grew in the six months ended June 30, 2022 primarily due to MUPs increasing by 29.4% and ARPMUP increasing by 19.9% as compared to the six months ended June 30, 2021. These key performance indicators increased primarily due to strong customer engagement and a continued mix shift into our iGaming and Sportsbook products, which was partially offset by an increase in promotional intensity (primarily due to the launch of our Sportsbook product in New York), as well as atypically low hold rates in the three months ended March 31, 2022 (primarily attributable to NCAA basketball wagering).
Cost of
Revenue. Cost of revenue increased $255.9 million, or 69.1%, to $626.1 million in the six months ended June 30, 2022, from $370.2 million in the six months ended June 30, 2021. Our B2C segment accounted for substantially all of this increase, reflecting growth in revenue from our expanded product and geographic footprint, including the launch of our Sportsbook product in Arizona, Connecticut, Louisiana, New York and Ontario, Canada and the launch of our iGaming product in Connecticut and in Ontario, Canada since the six months ended June 30, 2021. The cost of revenue increase was primarily attributable to an increase in our variable expenses such as product taxes and payment processing fees, which increased by $146.2 million and $38.2 million, respectively, relative to the expenses incurred during
the six months ended June 30, 2021. The remaining increase was primarily attributable to variable platform costs and revenue share arrangements resulting from additional customer activity.
B2C segment cost of revenue as a percentage of B2C revenue increased by 10.5 percentage points to 65.8% in the six months ended June 30, 2022, as compared to 55.3% in the six months ended June 30, 2021, reflecting our changed revenue mix from our more mature DFS product to our iGaming and Sportsbook products as well as higher promotional investment in the launches of our products in new states, principally the launch of our Sportsbook product in New York. In addition, as a result of customer activity in these new states, we incurred variable expenses that
are not based on net revenue, including payment processing fees, and revenue share arrangements. In general, our iGaming and Sportsbook products produce revenue at a higher cost per revenue dollar relative to our more mature DFS product.
37
Sales and Marketing. Sales and marketing expense increased $119.6 million, or 29.9%, to $519.0 million in the six months ended June 30, 2022, from $399.4 million in the six months ended June 30, 2021. Our B2C segment accounted for substantially all of this increase with $94.1 million of the increase resulting from activities to acquire and retain players in new states that we
operate in, such as marketing costs including advertising and the development of marketing campaigns, as well as headcount and technology associated with analyzing, developing and deploying those campaigns. The remainder of the increase primarily resulted from an increase in various team and league sponsorships.
Product and Technology. Product and technology expense increased $39.8 million, or 33.5%, to $158.6 million in the six months ended June 30, 2022, from $118.8 million in the six months ended June 30, 2021, of which $6.6 million was attributable to our B2B segment. The remaining increase of $33.2 million primarily reflects additions to our product operations and engineering headcount in our B2C segment.
General
and Administrative. General and administrative expense increased $36.4 million, or 9.9%, to $404.2 million in the six months ended June 30, 2022, from $367.8 million in the six months ended June 30, 2021. Our B2C segment accounted for substantially all of this increase, primarily driven by an increase of $29.7 million in compensation costs due to an increase in headcount, as well as an increase in software and facility fees, which were partially offset by a decrease in stock-based compensation expense of $10.2 million.
Gain (Loss) on Remeasurement of Warrant Liabilities. We recorded a gain on remeasurement of warrant liabilities of $27.0 million in the six months ended June 30, 2022, compared
to a loss of $10.0 million in the six months ended June 30, 2021 primarily due to changes in the underlying share price of our Class A common stock.
Other Income. Other income, net was $32.3 million in the six months ended June 30, 2022, as compared to no other income, net in the six months ended June 30, 2021. This increase was primarily attributable to a change in the fair value of certain financial assets.
Income tax benefit. We recorded an income tax benefit of $80.8 million in the six months ended June 30, 2022, as compared to an income tax benefit of $2.2
million in the six months ended June 30, 2021. This increase was primarily due to a discrete income tax benefit of $76.8 million recorded during the second quarter of 2022, which was attributable to non-recurring partial releases of the Company’s U.S. valuation allowance as a result of the preliminary purchase accounting for GNOG.
Net Loss. Net loss increased by $32.9 million to $684.8 million in the six months ended June 30, 2022, as compared to a net loss of $651.9 million in the six months ended June 30, 2021, for the reasons discussed above.
Liquidity
and Capital Resources
We had $1.5 billion in cash and cash equivalents as of June 30, 2022 (excluding player cash, which we segregate from our operating cash balances on behalf of our paid users for all jurisdictions 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. We will continue to evaluate our long-term operating performance and cash needs and believe we are well positioned to continue to fund the operations of the business long-term.
Debt. In March 2021, we issued zero-coupon convertible senior notes in an aggregate principal amount of $1,265.0 million. The Convertible Notes mature on March 15, 2028, subject to earlier conversion, redemption
or repurchase. In connection with the pricing of the Convertible Notes and the exercise of the option to purchase additional Convertible Notes, we entered into privately negotiated Capped Call Transactions. The Capped Call Transactions are expected generally to reduce potential dilution to our Class A common stock upon any conversion of the Convertible Notes. The net cost of $124.0 million incurred to enter into the Capped Call Transactions was recorded as a reduction to additional paid-in capital on the Company’s consolidated balance sheet.
Leases. We have lease arrangements for certain corporate office facilities, data centers, and motor vehicles. As of June 30, 2022, the Company
had lease obligations of $83.9 million, with $5.7 million payable within 12 months.
Other Purchase Obligations. We have certain non-cancelable contracts with vendors, licensors and others requiring us to make future cash payments. As of June 30, 2022, these purchase obligations were $1,913.5 million, with $267.7 million payable in the remainder of 2022.
38
Cash Flows
The table below summarizes our cash flows for the periods indicated. Due to the timing of the consummation of the GNOG
Transaction, the below periods, to the extent applicable, exclude GNOG’s operations prior to the closing date of May 5, 2022.
Six months ended June 30,
(amounts in thousands)
2022
2021
Net cash used in operating activities
$
(529,303)
$
(176,375)
Net
cash used in investing activities
(147,468)
(100,579)
Net cash (used in) provided by financing activities
(12,531)
1,131,911
Effect of foreign exchange rates on cash and cash equivalents and restricted cash
—
824
Net (decrease) increase in cash and cash equivalents
and restricted cash
(689,302)
855,781
Cash and cash equivalents and restricted cash at beginning of period
2,629,842
2,104,976
Cash and cash equivalents and restricted cash at end of period
$
1,940,540
$
2,960,757
Operating
Activities. Net cash used in operating activities in the six months ended June 30, 2022 was $529.3 million, compared to $176.4 million in the six months ended June 30, 2021, mainly reflecting a decrease in operating working capital of $199.0 million primarily due to an increase in cash used in accounts payable, accrued expenses, liabilities to users, prepaid expenses and other current assets. In addition, we incurred a $32.9 million higher net loss, for the reasons discussed above, net of non-cash cost items. Non-cash cost items decreased $121.0 million period-over-period, primarily driven by deferred income taxes, a gain on remeasurement of warrants liabilities and a gain on various financial assets.
Investing Activities. Net cash used in investing activities during the six months
ended June 30, 2022 increased by $46.9 million to $147.5 million from $100.6 million during the same period in 2021, mainly reflecting an increase in cash paid for acquisitions during the six months ended June 30, 2022 when compared to the six months ended June 30, 2021.
Financing Activities. Net cash provided by (used in) financing activities during the six months ended June 30, 2022 decreased by $1,144.4 million to $(12.5) million from $1,131.9 million during the same period in 2021, mainly reflecting the completion of our issuance of Convertible Notes during the three months ended March 31, 2021.
Commitments
and Contingencies
Refer to Note 13 of our unaudited condensed consolidated financial statements included elsewhere in this Report for a summary of our commitments as of June 30, 2022.
Critical Accounting Policies
Our financial statements have been prepared in accordance with U.S. GAAP. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions
we believe are reasonable. Actual results could differ materially from these estimates.
During the six months ended June 30, 2022, there were no changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 18, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in our exposure to market risk during the six months ended June 30, 2022. Refer to Item 7A. Quantitative
and Qualitative Disclosures about Market Risk in our 2021 Annual Report.
39
Item 4. Controls and Procedures.
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 March 31, 2022. 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.
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.
40
PART II. —OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in a number of legal proceedings (including those described below) concerning matters arising in connection with the conduct of our business activities.
These proceedings are at varying stages, and many of these proceedings seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or an additional loss may have been incurred and to determine if accruals are appropriate. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of the possible loss or range of possible loss can be made.
For certain cases described on the following pages, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons, (i) the proceedings are in various stages; (ii) damages have not been sought; (iii) damages are unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals
or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties involved. For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on our financial condition, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
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 (the “DFS defendants”) 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. On September 2, 2016, the consolidated group of plaintiffs filed their First Amended Master Class Action Complaint, superseding their original class action complaint, which superseded their individual complaints.
The plaintiffs asserted 27 claims arising under both state and federal law against the DFS defendants. The plaintiffs’ claims against us generally fell 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 sought money damages, equitable relief, and disgorgement of gains against us.
On November 16, 2016, the DFS defendants filed a motion to compel arbitration against all named plaintiffs except one plaintiff asserting claims against the DFS defendants as a concerned citizen of the State of Florida (the “Concerned Citizen Claims”). On November 27, 2019, the Court granted the DFS defendants’ motion to compel arbitration with respect to all named plaintiffs
other than a small set of plaintiffs who are family members of individuals who have DraftKings or FanDuel accounts and who asserted claims under various state laws regarding gambling (the “Family Member Plaintiffs”). On March 9, 2020, the DFS defendants moved to dismiss the Family Member Plaintiffs’ claims and the Concerned Citizen Claims. On April 7, 2020, an opposition to the motion to dismiss the Concerned Citizen Claim was filed. On April 20, 2020, the Family Member Plaintiffs filed their opposition to the DFS defendants’ motion to dismiss, and on April 29, 2020, the Family Member Plaintiffs filed a motion for leave to amend the First Amended Master Class Action Complaint. On May 11, 2020, the DFS defendants filed
their reply in support of their motion to dismiss the Family Member Plaintiffs’ claims and the Concerned Citizen Claims, and on May 13, 2020, the DFS defendants filed their opposition to the Family Member Plaintiffs’ motion for leave to amend the First Amended Master Class Action Complaint. On March 5, 2020, one named plaintiff with respect to whom the motion to compel was granted filed a renewed motion to remand his case to state court. On May 29, 2020, we filed an opposition to that motion.
On March 3, 2021, DraftKings and the plaintiffs (other than the Family Member Plaintiffs) filed in Court a joint motion for preliminary approval of a proposed settlement, which the Court granted on June
15, 2021. On October 6, 2021, the Court entered judgment and an order approving a settlement and dismissing the claims with prejudice brought by all plaintiffs except the Family Member Plaintiffs and the Concerned Citizen Claims. This settlement agreement became effective on November 5, 2021; as a result, the only remaining plaintiffs were the Family Member Plaintiffs and the plaintiff who asserted the Concerned Citizen Claims. On January 21, 2022, DraftKings and the Family Member Plaintiffs filed a joint motion for preliminary approval of a proposed settlement.On February 18, 2022, the Court entered an order preliminarily approving the proposed settlement and scheduled a fairness hearing for final approval of the settlement
on June 8, 2022. On June 8, 2022, the court
41
entered judgment and an order approving the settlement and dismissing all claims with prejudice other than the Concerned Citizens Claims. On June 23, 2022, with all claims other than the Concerned Citizen Claims resolved, the court dismissed the Concerned Citizen Claims from federal court for lack of Article III standing and remanded the Concerned Citizen Claims to state court in Florida. On July 8, 2022, the court officially closed the docket for In Re: Daily Fantasy Sports Litigation
(Multi-District Litigation).The Company previously provided an accrual for this matter.
We intend to vigorously defend the Concerned Citizen Claims. If the plaintiff obtains a judgment in his favor in this matter, we may be subject to substantial damages and we may have to withdraw our DFS operation in Florida. We cannot predict with any degree of certainty the outcome of the Concerned Citizen Claims.
Despite the potential for significant damages, we do not believe, based on currently available information, that the outcome of the Concerned Citizen Claims will have a material adverse effect on our financial condition, although the outcome could be material to our operating results for any
particular period, depending, in part, upon the operating results for such period.
Attorney General of Texas
On January 19, 2016, the Texas Attorney General issued an opinion letter that “odds are favorable that a court would conclude that participation in paid daily fantasy sports leagues constitutes illegal gambling” under Texas law. In response to the opinion letter, we sued the Texas Attorney General on March 4, 2016 in Dallas County, Texas.
The lawsuit makes five claims: (1) a claim for a declaratory judgment that daily fantasy sports contests do not violate Texas law; (2) a claim of denial of due process under the Fifth and Fourteenth
Amendments to the U.S. Constitution; (3) a claim of denial of due course of law under Article I of the Texas Constitution; (4) a claim of denial of equal protection under the Fourteenth Amendment to the U.S. Constitution; and (5) a claim of denial of equal rights under Article I of the Texas Constitution. We are also seeking reimbursement of our costs and attorneys’ fees.
On May 2, 2016, the Texas Attorney General filed a motion to transfer venue to Travis County, Texas. On April 16, 2018, the parties filed a notice of agreed non-suit without prejudice, and we re-filed our lawsuit against the Texas Attorney General in Travis County. On April 17, 2018, the Dallas County court granted the parties’ agreed non-suit without prejudice, thereby dismissing
the Dallas County lawsuit without prejudice.
On May 24, 2018, the Texas Attorney General answered the complaint filed in Travis County, Texas.
FanDuel filed a petition in intervention on August 24, 2018, seeking essentially the same relief as DraftKings seeks. The Court entered an updated scheduling order setting the case for a non-jury trial on April 20, 2021. The parties subsequently filed an agreed motion to extend the scheduling order seeking, among other things, to change the non-jury trial date to January 29, 2024.
We
intend to vigorously pursue our claims. In the event a court ultimately determines that daily fantasy sports contests violate Texas law, that determination could cause financial harm to us and loss of business in Texas.
We cannot predict with any degree of certainty the outcome of these matters or determine the extent of any potential liabilities.
We do not believe, based on currently available information, that the outcome of this proceeding will have a material adverse effect on our financial condition, although the outcome could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
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. In the Complaint, IG alleges that our daily fantasy sports (“DFS”) product infringes two patents: U.S. Patent No. 8,956,231 (the “231 Patent”), which is entitled “Multi-process communication regarding gaming information”, and U.S. Patent No. 8,974,302 (the “302 Patent”), which is entitled “Multi-process communication regarding gaming information.” That same Complaint alleges that our Sportsbook product infringes two additional patents: U.S. Patent No. 8,616,967 (the “967 Patent”), which is entitled “System and method for convenience gaming” and U.S. Patent No. 9,430,901 (the “901 Patent”), which is entitled “System and method for wireless gaming with location determination.” All four of these patents are collectively referred to
as the “IG Patents.”
42
In response to the complaint, we filed a motion to dismiss the complaint under 35 U.S.C. Section 101, asserting the IG Patents are directed to non-patentable subject matter. The Court has not yet ruled on that motion, as the judge previously stayed the District Court litigation pending resolution of the inter partes reviews and dismissed the motion to dismiss (without ruling on the merits), but granted leave to refile such motion with updated briefing if the stay is lifted.
On June 17, 2020, we filed petitions for inter
partes review with the Patent Trial and Appeal Board (the “PTAB”) challenging the validity of each of the IG Patents. The PTAB instituted review for the ‘901 Patent, the ‘231 Patent, and the ‘967 Patent but denied institution for the ‘302 Patent. On February 5, 2021, we filed a request for rehearing regarding the decision on the ‘302 Patent, which was denied by the PTAB on March 2, 2021. On October 13, 2021, the PTAB heard oral argument on the ’901 Patent, the ’231 Patent, and the ’967 Patent. On January 4, 2022, the PTAB issued a final written decision finding all challenged claims of the ’901 Patent, the ’231 Patent, and the ’967 Patent unpatentable. On March 8, 2022, IG appealed the final
written decisions for all three instituted inter partes reviews. On April 19, 2022, IG moved to voluntarily dismiss the appeal for the inter partes review related to the ’901 Patent, which was granted on April 20, 2022. On July 15, 2022, IG filed its opening briefs in the appeals of the inter partes reviews for the ’231 Patent and ’967 Patent. The District Court litigation remains stayed pending resolution of all appeals from the inter partes reviews.
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 this matter or determine the extent of any potential liabilities. We also cannot provide an estimate of the possible loss or range of loss. Any adverse outcome in this matter could expose the Company to substantial damages or penalties that may have a material adverse impact on the Company’s operations and cash flows.
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 our financial condition, although the outcome could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
Winview Inc.
On July 7, 2021, Winview Inc., a Delaware corporation (“Winview”) filed suit against DraftKings Inc., a Nevada corporation in the U.S. District Court for the District of New Jersey. In the complaint, Winview alleges that DraftKings infringe two patents: U.S. Patent No. 9,878,243 (“the ’243 Patent”), entitled “Methodology for Equalizing Systemic Latencies in Television Reception in Connection with Games of Skill Played in Connection
with Live Television Programming”, and U.S. Patent No. 10,721,543 (“the ’543 Patent”), entitled “Method of and System for Managing Client Resources and Assets for Activities on Computing Devices”. The allegations based on the ’243 Patent are directed to Sportsbook, and the allegations based on the ‘543 Patent are directed to both Sportsbook and DFS.
On July 28, 2021, Winview filed an amended complaint, in which it alleges that DraftKings infringes two additional patents: U.S. Patent No. 9,993,730 (“the ’730 Patent”), entitled ”Methodology for Equalizing Systemic Latencies in Television Reception in Connection with Games of Skill Played in Connection with Live Television Programming”, and U.S. Patent No. 10,806,988 (“the ’988 Patent”), entitled “Method Of and System For Conducting Multiple Contests
of Skill with a Single Performance”. The allegations based on the ’730 Patent are directed at Sportsbook, and the allegations based on the ’988 Patent are directed at DFS.
On October 4, 2021, we filed a motion to dismiss Winview’s direct infringement claims for the ’543 Patent and the ’730 Patent, as well as its claims for willful, induced, and contributory infringement for all four asserted patents. On October 29, 2021, the parties filed a stipulation that allowed Winview to file a second amended complaint on or before November 15, 2021, which the court signed and ordered on November 1, 2021.
On
November 15, 2021, Winview filed a second amended complaint (the “SAC”), adding as defendants DK DE and Crown Gaming Inc., a Delaware corporation, which are wholly-owned subsidiaries of DraftKings. The SAC, among other allegations, repeats the allegations of the first amended complaint that the defendants infringe the ’243 Patent, the ’543 Patent, the ’730 Patent, and the ’988 Patent. On December 15, 2021, DraftKings filed its motion to dismiss the SAC, again arguing that Winview failed to state a claim for direct infringement of the ’543 Patent and the ’730 Patent, and for willful, induced, and contributory infringement for all four asserted patents. Winview filed its memorandum in opposition to the motion to dismiss on January
24, 2022, and DraftKings filed its reply brief to Winview’s opposition on January 31, 2022. On August 3, 2022, we filed a petition for inter partes review with the PTAB challenging the validity of the ‘243 Patent.
43
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 this matter or determine the extent of any potential liabilities. We also cannot provide an estimate of the possible loss or range of loss.Any adverse outcome in this matter could expose the Company to substantial damages or penalties that may have a material adverse impact on the Company’s operations and cash flows.
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 our financial condition, although the outcome could be material to our operating results for any particular period,
depending, in part, upon the operating results for such period.
Securities Matters
On July 2, 2021, the first of two substantially similar federal securities law putative class actions was filed in the U.S. District Court for the Southern District of New York against the Company and certain of its officers. The actions allege violations of Sections 10(b) and 20(a) of the Exchange Act on a behalf of a putative class of persons who purchased or otherwise acquired DraftKings stock between December 23, 2019 and June 15, 2021. The allegations relate to, among other things, allegedly false and misleading
statements and/or failures to disclose information about the Company’s business and prospects, based primarily upon the allegations concerning SBTech that were contained in a report published about DraftKings on June 15, 2021 by Hindenburg Research (the “Hindenburg Report”). We intend to vigorously defend against these claims. On November 12, 2021, the court consolidated the two actions under the caption In re DraftKings Securities Litigation and appointed a lead plaintiff. The lead plaintiff filed a consolidated amended complaint on January 11, 2022. On February 22, 2022, defendants filed a motion seeking dismissal of this action,
and in response, the lead plaintiff filed a second amended complaint on April 5, 2022. On April 26, 2022, defendants again filed a motion seeking dismissal of this action. That motion remains pending.
Beginning on July 9, 2021, the Company received subpoenas from the SEC seeking documents concerning, among other things, certain of the allegations raised in the Hindenburg Report, as well as the Company’s disclosures regarding its compliance policies and procedures, and related matters. The
Company intends to comply with the related requests and is cooperating with the SEC’s ongoing inquiry.
We cannot predict with any degree of certainty the outcome of these matters or determine the extent of any potential liabilities. We also cannot provide an estimate of the possible loss or range of loss. Any adverse outcome in these matters could expose the Company to substantial damages or penalties that may have a material adverse impact on the Company’s operations and cash flows.
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 our financial condition, although the outcome could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
Shareholder Derivative Litigation
On October 21, 2021, the first of five substantially similar putative shareholder derivative actions was filed in Nevada by alleged shareholders of the Company. The actions purport to assert claims on behalf of the Company against certain current and former officers and/or members of the board of directors of the
Company and DEAC. The two actions filed in the U.S. District Court for the District of Nevada have since been consolidated, and two of the actions filed in Nevada state District Court in Clark County likewise have been consolidated. A substantially identical fifth action was filed in Nevada state District Court in Clark County and has been dismissed voluntarily by the plaintiff. The same plaintiff filed a substantially identical action in Massachusetts Superior Court, which has also been dismissed voluntarily by the plaintiff. The Nevada actions purport to assert claims on behalf of the Company for, among other things, breach of fiduciary duty and corporate waste based primarily upon the allegations concerning SBTech that were contained in the Hindenburg Report. The federal court action in Nevada also contends that certain individuals are liable to the
Company for any adverse judgment in the federal securities class actions described above under Sections 10(b) and 21D of the Exchange Act. The Nevada actions seek unspecified compensatory damages, changes to corporate governance and internal procedures, equitable and injunctive relief, restitution, costs and attorney's fees. All proceedings in both pending Nevada actions have been stayed by agreement of the parties pending resolution of the above-referenced motion to dismiss in In re DraftKings Securities Litigation.
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The Company cannot predict with any degree of certainty the outcome of these
matters or determine the extent of any potential liabilities. The Company also cannot provide an estimate of the possible loss or range of loss. Because the Nevada actions allege claims on behalf of the Company and purport to seek judgments in favor of the Company, the Company does not believe, based on currently available information, that the outcome of these proceedings 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.
AG
18, LLC d/b/a/ Arrow Gaming
On August 19, 2021, AG 18, LLC d/b/a/ Arrow Gaming (“Arrow Gaming”) filed a complaint against DraftKings in the United States District Court for the District of New Jersey alleging that DraftKings’ DFS and Casino products infringe four patents. On October 12, 2021, Arrow Gaming filed an amended complaint to add one additional patent. The following U.S. Patents are asserted against one or both of DraftKings’ DFS and Casino products in the amended complaint: (1) U.S. Patent No. 9,613,498 (“the ’498 Patent”), entitled “Systems and Methods For Peer-to-Peer Gaming”; (2) U.S. Patent No. 9,978,205 (“the ’205 Patent”), entitled “Location Based Restrictions on Networked Gaming”; (3) U.S. Patent No. 10,497,220 (“the ’220 Patent”) entitled
“Location Based Restrictions on Networked Gaming”); (4) U.S. Patent No. 10,614,657 (“the ’657 Patent”) entitled “Location Based Restrictions on Networked Gaming”; and (5) U.S. Patent No. 11,024,131 (“the ’131 Patent”) entitled “Location Based Restrictions on Networked Gaming” (collectively, the “Arrow Gaming Patents”).
On November 9, 2021, we filed a motion to dismiss plaintiff’s complaint. On November 10, 2021, we answered the complaint and filed counterclaims (the “Counterclaims”). In the Counterclaims we seek, among other things, a declaratory judgment that the Arrow Gaming Patents are invalid. On December 1, 2021, Arrow Gaming answered our Counterclaims. On December
20, 2021, Arrow Gaming filed a second amended complaint adding new allegations with respect to the alleged willful infringement.
On January 21, 2022, DraftKings filed a motion to dismiss plaintiff’s second amended complaint. On February 22, 2022, plaintiff filed its opposition to DraftKings’ motion to dismiss plaintiff’s second amended complaint, and on March 25, 2022, DraftKings filed its reply thereto. On March 7, 2022, DraftKings filed a motion to disqualify plaintiff’s counsel. On March 21, 2022, plaintiff filed its opposition to DraftKings’ motion to disqualify plaintiff’s counsel, and on March
28, 2022, DraftKings filed its reply thereto.
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 this matter or determine the extent of any potential liabilities. We also cannot provide an estimate of the possible loss or range of loss. Any adverse outcome in this matter could expose the Company to substantial damages or penalties that may have a material adverse impact on the
Company’s operations and cash flows.
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 our financial condition, although the outcome could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
Beteiro, LLC
On November 22, 2021, Beteiro, LLC (“Beteiro”) filed a complaint against the Company in the United States District Court for the District of New Jersey alleging that the
Company’s Sportsbook and Casino products infringe four patents. The following U.S. Patents are asserted against Company’s Sportsbook and Casino products in the complaint: U.S. Patent No. 9,965,920, entitled “Apparatus and Method for Facilitating Gaming Activity and/or Gambling Activity” (“the ’920 Patent”); U.S. Patent No. 10,043,341, entitled “Apparatus and Method for Facilitating Gaming Activity and/or Gambling Activity” (“the ’341 Patent”); U.S. Patent No. 10,147,266, entitled “Apparatus and Method for Facilitating Gaming Activity and/or Gambling Activity” (“the ’266 Patent”); and U.S. Patent No. 10,255,755, entitled “Apparatus and Method for Facilitating Gaming Activity and/or Gambling Activity” (“the ’755 Patent”) (collectively, the “Beteiro Patents”).
DraftKings’ filed its motion to dismiss plaintiff’s complaint
on February 9, 2022. On April 7, 2022, Plaintiff filed its opposition to DraftKings’ motion to dismiss, and on April 25, 2022, DraftKings filed its reply thereto.
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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 this matter or determine the extent of any potential liabilities. We also cannot provide an estimate of the possible loss or range of loss. Any adverse outcome in this matter could expose the Company to substantial damages or penalties that may have a material adverse impact on the Company’s operations and cash flows.
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 our financial condition, although the outcome could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
Diogenes
Ltd. & Colossus (IOM) Ltd.
On December 1, 2021, Diogenes Ltd. & Colossus (IOM) Ltd. (“Colossus”), filed a complaint against DraftKings in the United States District Court for the District of Delaware alleging that the Company’s Sportsbook product infringes seven of its patents. The following U.S. Patents, each entitled “Wagering apparatus, methods and systems”, are asserted against the Company’s Sportsbook product in the complaint: U.S. Patent No. 8,721,439 (“the ’439 patent”); U.S. Patent No. 9,117,341 (“the ’341 patent”); U.S. Patent No. 9,275,516 (“the ’516 patent”); U.S. Patent No. 9,424,716 (“the ’716 patent”); U.S. Patent
No. 9,704,338 (“the ’338 patent”); U.S. Patent No. 10,970,969 (“the ’969 patent”); and U.S. Patent No. 10,997,822 (“the ’822 patent”).
On January 24, 2022, DraftKings filed its motion to dismiss the original complaint. On February 7, 2022, Colossus filed an amended complaint (the “Amended Complaint”) to, among other things, assert one additional patent against DraftKings, U.S. Patent No. 11,200,779 (“the ’779 patent”).
DraftKings filed its motion to dismiss the Amended Complaint on February 22, 2022. On March 15, 2022, Plaintiffs filed their opposition to DraftKings’ motion to dismiss,
and on March 29, 2022, DraftKings’ filed its reply thereto. On March 25, 2022, a scheduling order was entered in which, among other things, trial was scheduled for January 13, 2025. On July 18, 2022, Magistrate Judge Burke issued a report and recommendation (the “Report and Recommendation”) that the motion to dismiss be granted-in-part and denied-in-part. The Company and Colossus each filed their objections to the Report and Recommendation on August 1, 2022.
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 this matter or determine the extent of any potential liabilities. We also cannot provide an estimate of the possible loss or range of loss. Any adverse outcome in this matter could expose the Company to substantial damages or penalties that may have a material adverse impact on the Company’s operations and cash flows.
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 our financial condition, although the outcome could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims that arise in the ordinary course of business. In our opinion, the amount of ultimate liability with respect to any of these actions is unlikely to materially affect our financial condition, results of operations or liquidity, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
Item 1A.
Risk Factors.
Factors that could cause our actual results to differ materially from those in this Report are any of the risks described in our 2021 Annual Report. Any of these factors could result in a significant or material adverse effect on our results of operations or
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financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3.
Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Letter Agreements
On August 4, 2022, the Company entered into letter agreements with each of Messrs. Jason Robins, the
Company’s Chief Executive Officer; Matthew Kalish, the Company’s President, DraftKings North America; and Paul Liberman, the Company’s President, Global Technology and Product, pursuant to which each executive officer agreed to a voluntary reduction in their respective base salaries to $1 for fiscal year 2022 (the “Base Salary Reductions”). The Base Salary Reductions do not modify any other rights under each of Messrs. Robins, Kalish and Liberman’s employment agreements that are determined by reference to such executive officer’s base salary (other than to the extent otherwise described in such letter agreements), and such provisions will continue to be applied based on the base salary rate in effect without giving effect to any Base Salary Reductions. Furthermore, the Base Salary Reductions
are not intended to reduce any Company employee benefit provided to Messrs. Robins, Kalish and Liberman that is determined by reference to base salary, except that life and disability insurance will not be provided to Messrs. Robins, Kalish and Liberman during the applicable Base Salary Reduction period.
Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
†Annexes, schedules and/or exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted attachment to the SEC on a confidential basis upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
