Exhibit 99.5
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Defined terms included below have the same meaning as terms defined and included elsewhere in this 8-K/A or the original 8-K filed with the SEC on April 29, 2020 (the “Original Report”). Unless the context otherwise requires, the “Company” refers to DraftKings Inc. and its subsidiaries after the Closing, and DEAC prior to the Closing.
Introduction
The unaudited pro forma condensed combined financial information is prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed combined financial information presents the pro forma effects of the following transactions (collectively the “Business Combination”):
| · | The Reverse Recapitalization between Merger Sub and DraftKings Inc., a Delaware corporation (“Old DK”); |
| · | The Private Placement; and |
| · | The issuance of Convertible Notes, which converted into shares of DEAC Class A common stock immediately prior to the consummation of the Business Combination. |
DEAC was incorporated as a Delaware corporation on March 27, 2019, and completed its initial public offering on May 14, 2019. DEAC is a blank check company whose purpose is to acquire, through a merger, share exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more businesses. Upon the closing of the IPO, $400.0 million from the net proceeds thereof was placed in a trust account and invested in U.S. “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act having a maturity of 185 days or in money market funds meeting certain conditions under Rule 2a-7 promulgated under the Investment Company Act which invest only in direct U.S. government treasury obligations. As of March 31, 2020, DEAC had approximately $405.0 million held in the trust account.
The following describes the two operating entities:
| · | Old DK was organized on December 29, 2011, as a Delaware corporation. It was founded with the initial mission of leveraging unique technology, analytics and marketing capabilities to deliver a daily fantasy sports offering. Within a few years, DraftKings became one of the largest and most recognized DFS platforms in the United States. |
| · | SBTech was incorporated on July 24, 2007, under the laws of Gibraltar. It was originally named Jamtech Limited, subsequently renamed Networkpot Limited and thereafter renamed SBTech (Global) Limited on August 16, 2010. |
The following unaudited pro forma condensed combined balance sheet as of March 31, 2020 assumes that the Business Combination occurred on March 31, 2020. The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2020 and year ended December 31, 2019 present the pro forma effect of the Business Combination as if it had been completed on January 1, 2019.
The pro forma combined financial statements do not necessarily reflect what DraftKings’ financial condition or results of operations would have been had the Business Combination occurred on the dates indicated. The pro forma combined financial information also may not be useful in predicting the future financial condition and results of operations of the post-combination company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.
The historical interim financial information of DEAC was derived from the unaudited consolidated financial statements of Diamond Eagle Acquisition Corp. as of March 31, 2020, and for the three months ended March 31, 2020, which are included in DEAC’s 10-Q filed with the SEC on May 15, 2020. The historical financial information of DEAC for the period between March 27, 2019 and December 31, 2019 was derived from the audited consolidated financial statements, which are included in the Original Report. The historical interim financial information of Old DK was derived from DraftKings’ unaudited condensed consolidated financial statements as of March 31, 2020, and for the three months ended March 31, 2020, which are included in this 8-K/A. The historical financial information of Old DK was derived from the audited consolidated financial statements for the year ended December 31, 2019, which are included in the Original Report. The historical interim financial information of SBT was derived from SBT’s unaudited condensed consolidated financial statements as of March 31, 2020, and for the three months ended March 31, 2020, which are included in this 8-K/A. The historical financial information of SBT was derived from the audited consolidated financial statements for the year ended December 31, 2019, which are included in the Original Report.
This information should be read together with DEAC’s, Old DK’s, and SBTech’s audited financial statements and related notes, as well as“DEAC’s Management’s Discussion and Analysis of Financial Condition and Results of Operations”,“DraftKings’ Management’s Discussion and Analysis of Financial Condition and Results of Operations” and“SBT’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Proxy, and other financial information, each of which is incorporated by reference.
The Reverse Recapitalization was accounted for as a reverse merger for which DraftKings was determined to be the accounting acquirer based on the following predominate factors:
| · | Old DK has the largest voting interest in DraftKings; |
| · | The board of directors of DraftKings (the “Board”) has 13 members, and DraftKings has nominated ten members of the Board; |
| · | Old DK’s former management makes up the vast majority of the management of DraftKings; |
| · | Old DK is the largest entity by revenue and net income/loss; |
| · | DraftKings Class B common stock issued to one DraftKings stockholder allows for incremental voting rights; |
| · | The post-combination company assumed Old DK’s name. |
Other factors were considered but they would not change the preponderance of factors indicating that Old DK was the accounting acquirer.
The merger between Old DK and Merger Sub was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with U.S. GAAP. Under this method of accounting, DEAC was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Reverse Recapitalization was treated as the equivalent of Old DK issuing stock for the net assets of DEAC, accompanied by a recapitalization. The net assets of DEAC are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Reverse Recapitalization are those of Old DK. The SBTech Acquisition was treated as a business combination under Financial Accounting Standards Board’s ASC 805, and was accounted for using the acquisition method of accounting. DraftKings recorded the fair value of assets acquired and liabilities assumed from SBTech.
Description of the Business Combination
Pursuant to the Business Combination Agreement, DEAC acquired all of the issued and outstanding equity interests of Old DK and SBTech in exchange for cash and equity. The initial purchase price was based on a combined pre-money enterprise value of Old DK and SBTech, which consists of $195.9 million of cash being transferred to SBTech shareholders (subject to adjustments as defined in the Business Combination Agreement), and the remaining value was in the form of shares of DraftKings’ Class A common stock, options, restricted stock units and warrants of DraftKings and, in the case of Mr. Robins, shares of Class B common stock of DraftKings.
The following summarizes the consideration issued at closing in the Reverse Recapitalization and SBTech Acquisition at a $17.53 share price (as of April 23, 2020):
| Total Consideration (in 000s) | | Amounts | | | Shares | |
| Share consideration - DraftKings(2) | | $ | 3,620,939 | | | | 206,557 | |
| Cash consideration - SBTech(1) | | | 195,948 | | | | - | |
| Share consideration - SBTech(2) | | | 771,044 | | | | 43,984 | |
| Total Merger Consideration | | $ | 4,587,931 | | | | 250,541 | |
_____________________
| (1) | Amount is subject to adjustment for the Net Debt Amount and Working Capital Amount, as specified in the Business Combination Agreement. Per the Business Combination Agreement, the cash consideration amount is EUR 180.0 million. Amount was converted using the average EUR to USD rate for the seven consecutive business day period ending on the fifth day prior to the Closing as per the terms of the Business Combination Agreement. |
| (2) | Represents the estimated fair value of DraftKings common stock issued to Old DK/SBTech stockholders pursuant to the Business Combination Agreement. The estimate is based on shares that were outstanding and options and warrants that vested by the Closing. Amount is subject to adjustment based on an earnout clause included in the BCA. Per the terms of the BCA, a total of six million shares are held in escrow, three million of which will be for the benefit of Old DK/SBTech stockholders. The earnout shares will be paid out in thirds upon the share price of the post-combination company reaching $12.50, $14.00 and $16.00. |
The equity share capitalization of DraftKings at close is as follows (including shares issuable pursuant to vested options and warrants that rolled over at the Closing):
| Total Capitalization (in 000s) | | Shares | | | % | |
| Old DK rollover equity - DraftKings Class A | | | 206,557 | | | | 61.5 | |
| SBTech rollover equity | | | 43,984 | | | | 13.1 | |
| DEAC public shareholders | | | 39,991 | | | | 11.9 | |
| DEAC Founders Shares | | | 3,659 | | | | 1.1 | |
DEAC shares issued upon conversion of Convertible
Notes | | | 11,255 | | | | 3.3 | |
| DEAC shares issued in PIPE Offering | | | 30,471 | | | | 9.1 | |
| Total Class A Shares | | | 335,917 | | | | 100.0 | |
| DraftKings Class B Shares* | | | 393,014 | | | | | |
_____________________
| * | DraftKings’ Class B shares were issued to Jason Robins, such shares carry 10 votes per share and allow Jason Robins to have 90% of the voting power of the capital stock of DraftKings on a fully-diluted basis. As these shares have no economic or participating rights, they have been excluded from the calculation of earnings per share. |
The following unaudited pro forma condensed combined balance sheet as of March 31, 2020 and the unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2020 and the year ended December 31, 2019 are based on the historical financial statements of DEAC, Old DK, and SBTech. The unaudited pro forma adjustments are based on information currently available, and assumptions and estimates underlying the unaudited pro forma adjustments are described in the accompanying notes. Actual results may differ materially from the assumptions used to present the accompanying unaudited pro forma condensed combined financial information.
Unaudited Pro Forma Condensed Combined Balance Sheet
as of March 31, 2020
(Amounts in thousands)
| | | As of March 31, 2020 | | | | | | | | | | | | | | March 31, 2020 | |
| | | DraftKings
(Historical) | | | DEAC
(Historical) | | | SBTech
(As Adjusted)
(Note 3) | | | Accounting
Policies and
Reclassification
Adjustments
(Note 2) | | | Pro Forma
Adjustments
(Note 4 - PF) | | | | Purchase
Accounting
Adjustments
(Note 4 - PPA) | | | | Pro Forma
Combined | |
| ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 97,099 | | | $ | 158 | | | $ | 10,072 | | | $ | - | | | $ | 405,002 | | A | | $ | (200,991 | ) | A | | $ | 496,307 | |
| | | | | | | | | | | | | | | | | | | | (14,000 | ) | B | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (41,874 | ) | C | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 304,714 | | E | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (10,000 | ) | L | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (90 | ) | K | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (7,788 | ) | M | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (1,495 | ) | N | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (44,500 | ) | O | | | | | | | | | |
| Cash reserved for customers | | | 114,865 | | | | - | | | | - | | | | - | | | | - | | | | | - | | | | | 114,865 | |
| Receivables reserved for customers | | | 10,526 | | | | - | | | | - | | | | - | | | | - | | | | | - | | | | | 10,526 | |
| Trade receivables, net | | | - | | | | - | | | | 22,952 | | | | - | | | | - | | | | | - | | | | | 22,952 | |
| Prepaid expenses | | | - | | | | 93 | | | | - | | | | (93 | ) | | | - | | | | | - | | | | | - | |
| Prepaid expenses and other current assets | | | 16,696 | | | | - | | | | - | | | | 3,551 | | | | - | | | | | - | | | | | 20,247 | |
| Other current assets | | | - | | | | - | | | | 3,458 | | | | (3,458 | ) | | | - | | | | | - | | | | | - | |
| Total current assets | | | 239,186 | | | | 251 | | | | 36,482 | | | | - | | | | 589,969 | | | | | (200,991 | ) | | | | 664,897 | |
| Cash and investments held in Trust Account | | | - | | | | 405,002 | | | | - | | | | - | | | | (405,002 | ) | A | | | - | | | | | - | |
| Property and equipment, net | | | 26,372 | | | | - | | | | 10,819 | | | | 200 | | | | - | | | | | - | | | | | 37,391 | |
| Intangible assets, net | | | 34,137 | | | | - | | | | 28,859 | | | | (200 | ) | | | - | | | | | 235,525 | | B | | | 298,321 | |
| Goodwill | | | 4,738 | | | | - | | | | - | | | | - | | | | - | | | | | 701,987 | | A | | | 706,725 | |
| Equity method investment | | | 2,318 | | | | - | | | | - | | | | - | | | | - | | | | | - | | | | | 2,318 | |
| Deposits | | | 2,845 | | | | - | | | | - | | | | 393 | | | | - | | | | | - | | | | | 3,238 | |
| Deferred tax assets | | | - | | | | - | | | | 686 | | | | (686 | ) | | | - | | | | | - | | | | | - | |
| Other non-current assets | | | - | | | | - | | | | 393 | | | | 293 | | | | - | | | | | - | | | | | 686 | |
| Total Assets | | | 309,596 | | | | 405,253 | | | | 77,239 | | | | - | | | | 184,967 | | | | | 736,521 | | | | | 1,713,576 | |
| | | As of March 31, 2020 | | | | | | | | | | | | | | March 31, 2020 | |
| | | DraftKings
(Historical) | | | DEAC
(Historical) | | | SBTech
(As Adjusted)
(Note 3) | | | Accounting
Policies and
Reclassification
Adjustments
(Note 2) | | | Pro Forma
Adjustments
(Note 4 - PF) | | | | Purchase
Accounting
Adjustments
(Note 4 - PPA) | | | | Pro Forma
Combined | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accounts payable | | | - | | | | 1,495 | | | | - | | | | (1,495 | ) | | | - | | | | | - | | | | | - | |
| Accounts payable and accrued expenses | | | 82,073 | | | | - | | | | - | | | | 28,928 | | | | (9,663 | ) | C | | | - | | | | | 99,843 | |
| | | | | | | | | | | | | | | | | | | | (1,495 | ) | N | | | | | | | | | |
| Liabilities to customers | | | 125,366 | | | | - | | | | - | | | | 1,324 | | | | - | | | | | - | | | | | 126,690 | |
| Term note, current portion | | | 44,500 | | | | - | | | | - | | | | - | | | | (44,500 | ) | O | | | - | | | | | - | |
| Settlement liability, current portion | | | - | | | | - | | | | - | | | | - | | | | - | | | | | - | | | | | - | |
| Trade payables | | | - | | | | - | | | | 10,448 | | | | (10,448 | ) | | | - | | | | | - | | | | | - | |
| Other accounts payable | | | - | | | | - | | | | 18,309 | | | | (18,309 | ) | | | - | | | | | - | | | | | - | |
| Total current liabilities | | | 251,939 | | | | 1,495 | | | | 28,757 | | | | - | | | | (55,658 | ) | | | | - | | | | | 226,533 | |
| Deferred underwriting commissions | | | - | | | | 14,000 | | | | - | | | | - | | | | (14,000 | ) | B | | | - | | | | | - | |
| Other long-term liabilities | | | 49,378 | | | | - | | | | - | | | | 556 | | | | (11,000 | ) | P | | | 4,163 | | C | | | 43,097 | |
| Convertible promissory notes | | | 110,230 | | | | - | | | | - | | | | - | | | | (110,230 | ) | D | | | - | | | | | - | |
| Accrued severance pay, net | | | - | | | | - | | | | 556 | | | | (556 | ) | | | - | | | | | - | | | | | - | |
| Total liabilities | | | 411,547 | | | | 15,495 | | | | 29,313 | | | | - | | | | (190,888 | ) | | | | 4,163 | | | | | 269,630 | |
Class A common stock subject to possible
redemption | | | - | | | | 384,758 | | | | - | | | | - | | | | (384,758 | ) | F | | | - | | | | | - | |
| Series E-1 Redeemable Convertible Preferred Stock | | | 119,832 | | | | - | | | | - | | | | - | | | | (119,832 | ) | H | | | - | | | | | - | |
| Series F Redeemable Convertible Preferred Stock | | | 149,785 | | | | - | | | | - | | | | - | | | | (149,785 | ) | H | | | - | | | | | - | |
| Stockholders’ Equity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A common stock | | | - | | | | - | | | | - | | | | - | | | | 1 | | D | | | 4 | | A | | | 34 | |
| | | | | | | | | | | | | | | | | | | | 3 | | E | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 4 | | F | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 1 | | G | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | - | | M | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 21 | | H | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | - | | P | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | - | | K | | | | | | | | | |
| Class B common stock | | | - | | | | 1 | | | | - | | | | - | | | | (1 | ) | G | | | - | | | | | 39 | |
| | | | | | | | | | | | | | | | | | | | - | | H | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 39 | | Q | | | | | | | | | |
| Common stock | | | 391 | | | | - | | | | - | | | | - | | | | (391 | ) | H | | | - | | | | | - | |
| Share capital | | | - | | | | - | | | | 3 | | | | - | | | | - | | | | | (3 | ) | D | | | - | |
| Actuarial reserve | | | - | | | | - | | | | (196 | ) | | | - | | | | - | | | | | 196 | | D | | | - | |
| | | As of March 31, 2020 | | | | | | | | | | | | | | March 31, 2020 | |
| | | DraftKings
(Historical) | | | DEAC
(Historical) | | | SBTech
(As Adjusted)
(Note 3) | | | Accounting
Policies and
Reclassification
Adjustments
(Note 2) | | | Pro Forma
Adjustments
(Note 4 - PF) | | | | Purchase
Accounting
Adjustments
(Note 4 - PPA) | | | | Pro Forma
Combined | |
| Additional paid-in capital | | | 695,505 | | | | 2,210 | | | | - | | | | - | | | | (12,180 | ) | C | | | 780,280 | | A | | | 2,554,642 | |
| | | | | | | | | | | | | | | | | | | | 112,543 | | D | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 304,711 | | E | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 384,754 | | F | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 2,789 | | I | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 269,987 | | H | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 3,010 | | J | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (90 | ) | K | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (7,788 | ) | M | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 11,000 | | P | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 7,911 | | Q | | | | | | | | | |
| Retained earnings | | | - | | | | 2,789 | | | | 47,204 | | | | (49,993 | ) | | | - | | | | | - | | | | | - | |
| Accumulated deficit | | | (1,067,464 | ) | | | - | | | | - | | | | 49,993 | | | | (20,031 | ) | C | | | (47,204 | ) | D | | | (1,110,769 | ) |
| | | | | | | | | | | | | | | | | | | | (2,314 | ) | D | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (2,789 | ) | I | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (3,010 | ) | J | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (10,000 | ) | L | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | (7,950 | ) | Q | | | | | | | | | |
| Total parent stockholders’ equity | | | (371,568 | ) | | | 5,000 | | | | 47,011 | | | | - | | | | 1,030,230 | | | | | 733,273 | | | | | 1,443,946 | |
| Non-controlling interest | | | - | | | | - | | | | 915 | | | | - | | | | - | | | | | (915 | ) | D | | | - | |
| Total stockholders’ equity | | | (371,568 | ) | | | 5,000 | | | | 47,926 | | | | - | | | | 1,030,230 | | | | | 732,358 | | | | | 1,443,946 | |
| Total Liabilities and Stockholders’ Equity | | | 309,596 | | | | 405,253 | | | | 77,239 | | | | - | | | | 184,967 | | | | | 736,521 | | | | | 1,713,576 | |
Unaudited Pro Forma Condensed Combined Statement of Operations
for the three months ended March 31, 2020
(Amounts in thousands, except per share data)
| | | For the Three Months ended
March 31, 2020 | | | For the Three Months ended
March 31, 2020 | | | For the Three Months ended
March 31, 2020 | | | | | | | | | | | | | | For the Three Months ended
March 31, 2020 | |
| | | DraftKings
(Historical) | | | DEAC
(Historical) | | | SBTech
(As Adjusted)
(Note 3) | | | Accounting Policies
and Reclassification
Adjustments
(Note 2) | | | Pro Forma
Adjustments
(Note 4 - PF) | | | | Purchase
Accounting
Adjustments
(Note 4 - PPA) | | | | Pro Forma
Combined | |
| Revenue | | $ | 88,542 | | | $ | - | | | $ | 24,903 | | | $ | - | | | $ | - | | | | $ | - | | | | $ | 113,445 | |
| Cost of revenue | | | 43,416 | | | | - | | | | 16,902 | | | | - | | | | - | | | | | 2,390 | | AA | | | 62,708 | |
| Gross Profit | | | 45,126 | | | | - | | | | 8,001 | | | | - | | | | - | | | | | (2,390 | ) | | | | 50,737 | |
| Operating Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales and marketing | | | 53,706 | | | | - | | | | 3,084 | | | | - | | | | 12 | | DD | | | - | | | | | 56,802 | |
| General and administrative | | | 39,496 | | | | 719 | | | | 5,251 | | | | - | | | | (6,576 | ) | AA | | | 26 | | BB | | | 39,419 | |
| | | | | | | | | | | | | | | | | | | | 378 | | DD | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 125 | | EE | | | | | | | | | |
| Product and technology | | | 18,041 | | | | - | | | | - | | | | 6,477 | | | | 21 | | DD | | | - | | | | | 24,539 | |
| Research and development expenses | | | | | | | | | | | 6,477 | | | | (6,477 | ) | | | | | | | | | | | | | | |
| Total Operating Expenses | | | 111,243 | | | | 719 | | | | 14,812 | | | | - | | | | (6,040 | ) | | | | 26 | | | | | 120,760 | |
| (Loss) / Income from Operations | | | (66,117 | ) | | | (719 | ) | | | (6,811 | ) | | | - | | | | 6,040 | | | | | (2,416 | ) | | | | (70,023 | ) |
| Interest income (expense) | | | (2,351 | ) | | | - | | | | - | | | | (447 | ) | | | - | | | | | - | | | | | 2,798 | |
| Other income - interest on Trust Account | | | - | | | | 1,444 | | | | - | | | | - | | | | (1,444 | ) | BB | | | - | | | | | - | |
| Financial Income | | | - | | | | - | | | | 10 | | | | (10 | ) | | | - | | | | | - | | | | | - | |
| Financial Expenses | | | - | | | | - | | | | (457 | ) | | | 457 | | | | - | | | | | - | | | | | - | |
| (Loss)/Income before Income Tax Expense | | | (68,468 | ) | | | 725 | | | | (7,258 | ) | | | - | | | | 4,596 | | | | | (2,416 | ) | | | | (72,821 | ) |
| Income Tax Expense/(Benefit) | | | 9 | | | | 246 | | | | 133 | | | | - | | | | 1,267 | | CC | | | (667 | ) | CC | | | 988 | |
| Loss from equity method investment | | | 203 | | | | - | | | | - | | | | - | | | | - | | | | | - | | | | | 203 | |
| Net (Loss)/Income | | | (68,680 | ) | | | 479 | | | | 7,391 | | | | - | | | | 3,329 | | | | | (1,749 | ) | | | | (74,012 | ) |
| Earnings per Share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average Class A shares outstanding | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 335,917,094 | |
| Loss per share (Basic and Diluted) attributable to Class A common stockholders | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (0.22 | ) |
Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended December 31, 2019
(Amounts in thousands, except per share data)
| | | For the Year ended
December 31, 2019 | | | March 27, 2019
(inception) to
December 31, 2019 | | | For the Year ended
December 31, 2019 | | | | | | | | | | | | | | For the Year ended
December 31, 2019 | |
| | | DraftKings
(Historical) | | | DEAC
(Historical) | | | SBTech
(As Adjusted)
(Note 3) | | | Accounting Policies
and Reclassification
Adjustments
(Note 2) | | | Pro Forma
Adjustments
(Note 4 - PF) | | | | Purchase
Accounting
Adjustments
(Note 4 - PPA) | | | | Pro Forma
Combined | |
| Revenue | | $ | 323,410 | | | $ | - | | | $ | 108,424 | | | $ | - | | | $ | - | | | | $ | - | | | | $ | 431,834 | |
| Cost of revenue | | | 103,889 | | | | - | | | | 60,649 | | | | - | | | | - | | | | | 14,692 | | AA | | | 179,275 | |
| | | | | | | | | | | | | | | | | | | | | | | | | 45 | | BB | | | | |
| Gross Profit | | | 219,521 | | | | - | | | | 47,775 | | | | - | | | | - | | | | | (14,737 | ) | | | | 252,559 | |
| Operating Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales and marketing | | | 185,269 | | | | - | | | | 7,592 | | | | - | | | | 48 | | DD | | | 40 | | BB | | | 192,949 | |
| General and administrative | | | 124,868 | | | | 1,857 | | | | 13,230 | | | | - | | | | (10,472 | ) | AA | | | 1,188 | | BB | | | 132,684 | |
| | | | | | | | | | | | | | | | | | | | 1,513 | | DD | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | 500 | | EE | | | | | | | | | |
| Product and technology | | | 55,929 | | | | - | | | | - | | | | 20,408 | | | | 82 | | DD | | | - | | | | | 76,419 | |
| Research and development expenses | | | | | | | | | | | 20,408 | | | | (20,408 | ) | | | | | | | | | | | | | | |
| Total Operating Expenses | | | 366,066 | | | | 1,857 | | | | 41,230 | | | | - | | | | (8,329 | ) | | | | 1,228 | | | | | 402,052 | |
| (Loss) / Income from Operations | | | (146,545 | ) | | | (1,857 | ) | | | 6,545 | | | | - | | | | 8,329 | | | | | (15,965 | ) | | | | (149,493 | ) |
| Interest income (expense) | | | 1,348 | | | | - | | | | - | | | | (164 | ) | | | - | | | | | - | | | | | 1,184 | |
| Other income - interest on Trust Account | | | - | | | | 5,111 | | | | - | | | | - | | | | (5,111 | ) | BB | | | - | | | | | - | |
| Gain on initial equity method investment | | | 3,000 | | | | - | | | | - | | | | - | | | | - | | | | | - | | | | | 3,000 | |
| Financial Income | | | - | | | | - | | | | 26 | | | | (26 | ) | | | - | | | | | - | | | | | - | |
| Financial Expenses | | | - | | | | - | | | | (190 | ) | | | 190 | | | | - | | | | | - | | | | | - | |
| (Loss)/Income before Income Tax Expense | | | (142,197 | ) | | | 3,254 | | | | 6,381 | | | | - | | | | 3,218 | | | | | (15,965 | ) | | | | (145,309 | ) |
| Income Tax Expense/(Benefit) | | | 58 | | | | 944 | | | | 796 | | | | - | | | | (2,002 | ) | CC | | | (4,414 | ) | CC | | | (4,618 | ) |
| Loss from equity method investment | | | 479 | | | | - | | | | - | | | | - | | | | - | | | | | - | | | | | 479 | |
| Net (Loss)/Income | | | (142,734 | ) | | | 2,310 | | | | 5,585 | | | | - | | | | 5,220 | | | | | (11,551 | ) | | | | (141,170 | ) |
| Earnings per Share | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted average Class A shares outstanding | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 335,917,094 | |
| Loss per share (Basic and Diluted) attributable to Class A common stockholders | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (0.42 | ) |
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation
The merger between a subsidiary of DEAC and Old DK was accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, DEAC was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Reverse Recapitalization was treated as the equivalent of Old DK issuing stock for the net assets of DEAC, accompanied by a recapitalization. The net assets of DEAC are stated at historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Reverse Recapitalization are those of Old DK.
As Old DK was determined to be the accounting acquirer in the SBTech Acquisition, the acquisition is considered a business combination under ASC 805, and was accounted for using the acquisition method of accounting. DraftKings recorded the fair value of assets acquired and liabilities assumed from SBTech.
The unaudited pro forma condensed combined balance sheet as of March 31, 2020 assumes that the Business Combination occurred on March 31, 2020. The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2020 and year ended December 31, 2019 present pro forma effect to the Business Combination as if it had been completed on January 1, 2019. These periods are presented on the basis of Old DK being the accounting acquirer.
The unaudited pro forma condensed combined balance sheet as of March 31, 2020 and the unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2020 and year ended December 31, 2019 have been prepared using, and should be read in conjunction with, the following:
| · | DEAC’s unaudited consolidated balance sheet as of March 31, 2020 and the related notes for the period ended March 31, 2020, included DEAC’s 10-Q filed with the SEC on May 15, 2020; |
| · | DraftKings’ unaudited consolidated balance sheet as of March 31, 2020 and the related notes for the period ended March 31, 2020, included elsewhere in this 8-K/A; and |
| · | SBTech’s unaudited consolidated balance sheet as of March 31, 2020 and the related notes for the period ended March 31, 2020, included elsewhere in this 8-K/A.[*] |
The unaudited pro forma condensed combined statement of operations for the three months ended March 31, 2020 has been prepared using, and should be read in conjunction with, the following:
| · | DEAC’s unaudited statement of operations for the period ended March 31, 2020 and the related notes, included in DEAC’s 10-Q filed with the SEC on May 15, 2020; |
________________________
* The historical financial information for SBTech was prepared under IFRS as issued by the IASB. Refer to Footnote 3 for additional details regarding impact of conversion to U.S. GAAP for unaudited pro forma financial information.
| · | DraftKings’ unaudited statement of operations for the three months ended March 31, 2020 and the related notes, included elsewhere in this 8-K/A; and |
| · | SBTech’s audited statement of operations for the three months ended March 31, 2020 and the related notes, included elsewhere in this 8-K/A.* |
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 has been prepared using, and should be read in conjunction with, the following:
| · | DEAC’s audited statement of operations for the period between March 27, 2019 and December 31, 2019 and the related notes, included in the 8-K filed with the SEC on April 29, 2020; |
| · | DraftKings’ audited statement of operations for the twelve months ended December 31, 2019 and the related notes, included in the 8-K filed with the SEC on April 29, 2020; and |
| · | SBTech’s audited statement of operations for the twelve months ended December 31, 2019 and the related notes, included in the 8-K filed with the SEC on April 29, 2020.* |
Management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented.
The unaudited pro forma condensed combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings or cost savings that may be associated with the Business Combination.
The pro forma adjustments reflecting the completion of the Business Combination are based on certain currently available information and certain assumptions and methodologies that DraftKings believes are reasonable under the circumstances. The unaudited condensed pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated.
Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the difference may be material. DraftKings believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the Business Combination based on information available to management at this time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined financial information is not necessarily indicative of what the actual results of operations and financial position would have been had the Business Combination taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of the post-combination company. They should be read in conjunction with the historical financial statements and notes thereto of DEAC, Old DK, and SBTech.
| 2. | Accounting Policies and Reclassifications |
As part of the preparation of these unaudited pro forma condensed combined financial statements, certain reclassifications were made to align DEAC’s, Old DK’s and SBTech’s financial statement presentation. Management will perform a comprehensive review of DEAC’s, Old DK’s, and SBTech’s accounting policies. As a result of the review, management may identify differences between the accounting policies of the three entities which, when conformed, could have a material impact on the financial statements of the post-combination company. Based on its initial analysis, DEAC had identified differences that would have an impact on the unaudited pro forma condensed combined financial information and recorded the necessary adjustments.
| 3. | Adjustments to Historical SBTech Financial Information |
The historical financial information of SBTech was prepared in accordance with IFRS and presented in Euros. The historical financial information was translated from Euros to U.S. dollars using the following historical exchange rates:
| | | $ / € | |
| Period end exchange rate as of March 31, 2020 | | | 1.10 | |
| Average exchange rate for three months ended March 31, 2020 | | | 1.10 | |
| Average exchange rate for twelve months ended December 31, 2019 | | | 1.12 | |
In addition, adjustments were made to convert SBTech’s financial information from IFRS to U.S. GAAP, to align SBTech’s accounting policies to those applied by Old DK. Refer to tables below for impacted line items and adjustment amounts in the pro forma condensed combined balance sheet and statements of operations.
Impact on pro forma balance sheet as of March 31, 2020:
| | | As of
March 31,
2020 | | | | | | | As of
March 31,
2020 | | | As of
March 31,
2020 | |
| | | IFRS
SBTech
(in EUR) | | | Total
Adjustments
(in EUR) | | | | US GAAP
SBTech
(in EUR) | | | US GAAP
SBTech
(in USD) | |
| ASSETS | | | | | | | | | | | | | | | | | |
| CURRENT ASSETS: | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | € | 9,143 | | | € | - | | | | € | 9,143 | | | $ | 10,072 | |
| Trade receivables, net | | | 20,835 | | | | - | | | | | 20,835 | | | | 22,952 | |
| Other current assets | | | 3,212 | | | | (73 | ) | A | | | 3,139 | | | | 3,458 | |
| Total current assets | | | 33,190 | | | | (73 | ) | | | | 33,117 | | | | 36,482 | |
| NON-CURRENT ASSETS: | | | | | | | | | | | | | | | | | |
| Intangible assets, net | | | 26,197 | | | | - | | | | | 26,197 | | | | 28,859 | |
| Right-of-use assets | | | 25,497 | | | | (25,497 | ) | A | | | - | | | | - | |
| Property, plant and equipment, net | | | 9,821 | | | | - | | | | | 9,821 | | | | 10,819 | |
| Deferred tax assets | | | 623 | | | | - | | | | | 623 | | | | 686 | |
| Other non-current assets | | | 357 | | | | - | | | | | 357 | | | | 393 | |
| Total assets | | | 95,685 | | | | (25,570 | ) | | | | 70,115 | | | | 77,239 | |
| LIABILITIES AND EQUITY | | | | | | | | | | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | | | | | | | | | | |
| Trade payables | | | 9,484 | | | | - | | | | | 9,484 | | | | 10,448 | |
| Lease liabilities | | | 3,889 | | | | (3,889 | ) | A | | | - | | | | - | |
| Other accounts payable | | | 16,620 | | | | - | | | | | 16,620 | | | | 18,309 | |
| Total current liabilities | | | 29,993 | | | | (3,889 | ) | | | | 26,104 | | | | 28,757 | |
| NON-CURRENT LIABILITIES | | | | | | | | | | | | | | | | | |
| Lease liabilities | | | 22,373 | | | | (22,373 | ) | A | | | - | | | | - | |
| Accrued severance pay, net | | | 505 | | | | - | | | | | 505 | | | | 556 | |
| Total non-current liabilities | | | 22,878 | | | | (22,373 | ) | | | | 505 | | | | 556 | |
| SHARHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | |
| Share capital | | | 3 | | | | - | | | | | 3 | | | | 3 | |
| Actuarial reserve | | | (178 | ) | | | - | | | | | (178 | ) | | | (196 | ) |
| Retained earnings | | | 42,158 | | | | 692 | | A | | | 42,850 | | | | 47,204 | |
| Equity attributable to owners of the parent | | | 41,983 | | | | 692 | | | | | 42,675 | | | | 47,011 | |
| Non-controlling interest | | | 831 | | | | - | | | | | 831 | | | | 915 | |
| Total equity | | | 42,814 | | | | 692 | | | | | 43,506 | | | | 47,926 | |
| TOTAL LIABILITIES AND EQUITY | | | 95,685 | | | | (25,570 | ) | | | | 70,115 | | | | 77,239 | |
Impact on pro forma income statement for the three months ended March 31, 2020:
| | | For the
Three Months ended
March 31,
2020 | | | | | | | For the
Three Months ended
March 31,
2020 | | | For the
Three Months ended
March 31,
2020 | |
| | | IFRS
SBTech
(in EUR) | | | Total
Adjustments
(in EUR) | | | | US GAAP
SBTech
(in EUR) | | | US GAAP
SBTech
(in USD) | |
| Revenue | | € | 22,594 | | | € | - | | | | € | 22,594 | | | $ | 24,903 | |
| Cost of revenue | | | 15,601 | | | | (266 | ) | A | | | 15,335 | | | | 16,902 | |
| Gross Profit | | | 6,993 | | | | 266 | | | | | 7,259 | | | | 8,001 | |
| Operating Expenses: | | | | | | | | | | | | | | | | | |
| Selling and marketing expenses | | | 2,734 | | | | 64 | | A | | | 2,798 | | | | 3,084 | |
| General and administrative expenses | | | 4,756 | | | | 8 | | A | | | 4,764 | | | | 5,251 | |
| Research and development expenses | | | 5,865 | | | | 11 | | A | | | 5,876 | | | | 6,477 | |
| Total operating costs and expenses | | | 13,355 | | | | 83 | | | | | 13,438 | | | | 14,812 | |
| Operating income | | | (6,362 | ) | | | 183 | | | | | (6,179 | ) | | | (6,811 | ) |
| Financial Income | | | 9 | | | | - | | | | | 9 | | | | 10 | |
| Financial Expenses | | | 511 | | | | (96 | ) | A | | | 415 | | | | 457 | |
| Profit before tax | | | (6,864 | ) | | | 279 | | | | | (6,585 | ) | | | (7,258 | ) |
| Tax expenses | | | 121 | | | | - | | | | | 121 | | | | 133 | |
| Net Profit | | | (6,985 | ) | | | 279 | | | | | (6,706 | ) | | | (7,391 | ) |
Impact on pro forma income statement for the year ended December 31, 2019:
| | | For the
Year ended
December 31,
2019 | | | | | | | For the
Year ended
December 31,
2019 | | | For the
Year ended
December 31,
2019 | |
| | | IFRS
SBTech
(in EUR) | | | Total
Adjustments
(in EUR) | | | | US GAAP
SBTech
(in EUR) | | | US GAAP
SBTech
(in USD) | |
| Revenue | | € | 96,857 | | | € | - | | | | € | 96,857 | | | $ | 108,424 | |
| Cost of revenue | | | 54,173 | | | | 6 | | A | | | 54,179 | | | | 60,649 | |
| Gross Profit | | | 42,684 | | | | (6 | ) | | | | 42,678 | | �� | | 47,775 | |
| Operating Expenses: | | | | | | | | | | | | | | | | | |
| Selling and marketing expenses | | | 6,772 | | | | 10 | | A | | | 6,782 | | | | 7,592 | |
| General and administrative expenses | | | 11,772 | | | | 47 | | A | | | 11,819 | | | | 13,230 | |
| Research and development expenses | | | 18,103 | | | | 128 | | A | | | 18,231 | | | | 20,408 | |
| Total operating costs and expenses | | | 36,647 | | | | 185 | | | | | 36,832 | | | | 41,230 | |
| Operating income | | | 6,037 | | | | (191 | ) | | | | 5,846 | | | | 6,545 | |
| Financial Income | | | 23 | | | | - | | | | | 23 | | | | 26 | |
| Financial Expenses | | | 846 | | | | (676 | ) | A | | | 170 | | | | 190 | |
| Profit before tax | | | 5,214 | | | | 485 | | | | | 5,699 | | | | 6,381 | |
| Tax expenses | | | 638 | | | | 73 | | | | | 711 | | | | 796 | |
| Net Profit | | | 4,576 | | | | 412 | | | | | 4,988 | | | | 5,585 | |
| A. | Reflects the reversal of the impact of the adoption and ongoing effects of the accounting treatment of IFRS 16, Leases, recognized by SBTech in their financial statements as of and for the three months ended March 31, 2020, as Old DK, the accounting acquirer, has not yet adopted the similar U.S. GAAP standard under ASC 842, Leases, and operates under ASC 840, Leases, as of and for the three months ended March 31, 2020 and year ended December 31, 2019. |
| 4. | Adjustments to Unaudited Pro Forma Condensed Combined Financial Information |
The historical consolidated financial statements have been adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the Business Combination, (2) factually supportable and (3) with respect to the statement of operations, expected to have a continuing impact on the results of DraftKings.
There were no intercompany balances or transactions between DEAC, Old DK and SBTech as of the dates and for the periods of these unaudited pro forma combined financial statements.
The pro forma combined consolidated provision for income taxes does not necessarily reflect the amounts that would have resulted had the companies filed consolidated income tax returns during the periods presented.
The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma condensed combined consolidated statements of operations are based upon the number of DEAC’s shares outstanding, assuming the Business Combination occurred on January 1, 2019.
Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
The pro forma adjustments included in the unaudited pro forma condensed combined balance sheet as of March 31, 2020 are as follows:
Pro Forma Adjustments (PF)
| A. | Reflects the reclassification of $405.0 million of cash and cash equivalents held in the DEAC trust account that became available for transaction consideration, transaction expenses, redemption of public shares and the operating activities of DraftKings following the Business Combination. At Business Combination close, total amount in trust available for transaction consideration, net of cash used for redemptions, was $404.9. |
| B. | Reflects the settlement of $14.0 million of deferred underwriters’ fees. |
| C. | Represents transaction costs in consummating the Business Combination (excluding approximately $1.8 million in transaction-related costs, including a tail liability insurance for SBTech’s current directors and officers, incurred by SBTech and to be borne by DraftKings under the Business Combination Agreement, which was allocated to purchase price). Of the total amount shown, approximately $9.7 million was previously incurred and accrued for on the balance sheet as of March 31, 2020. |
| D. | Represents triggering of the mandatory conversion feature upon a business combination for the Convertible Notes, causing a conversion of the outstanding principal amount of these Notes and any unpaid accrued interest into equity securities at a specified price. The Convertible Notes were outstanding from December 2019 through April 2020. For purposes of this pro forma presentation, interest of $3.4 million, of which $2.7 million was included in the historical financials, was accrued and converted in addition to the principal balance. The remaining adjustment reflects the net income statement impact captured in retained earnings that is associated with the conversion of the Notes. |
| E. | Represents proceeds of $304.7 million from the issuance of 30.5 million shares in the Private Placement. |
| F. | Reflects the reclassification of approximately $384.8 million of DEAC Class A common stock subject to possible redemption to permanent equity. |
| G. | Reflects the conversion of DEAC Class B common stock to DEAC Class A common stock. In connection with the Closing, all shares of DEAC Class B common stock converted into shares of DEAC Class A common stock. |
| H. | Represents recapitalization of Old DK equity and issuance of 206.6 million of DraftKings Class A common stock to Old DK Equity holders as consideration for the Reverse Recapitalization. |
| I. | Reflects the reclassification of DEAC’s historical retained earnings. |
| J. | Reflects the amount of compensation cost related to the acceleration of the vesting for certain existing stock options granted. |
| K. | Reflects redemptions of 8,928 DEAC public shares for $0.1 million at a redemption price of $10.12 per share based on a pro forma redemption date of March 31, 2020. As of the actual redemption date, the redemption price was also $10.12 per share. |
| L. | Reflects the payment of $10.0 million in bonuses to management of Old DK upon closing of the transaction as redemptions were less than 10% of DEAC public shares. |
| M. | Reflects the cash amount paid to Old DK Stockholders that were deemed to be non-accredited by Old DK, in lieu of common stock. |
| N. | Reflects the settlement of $1.5 million of DEAC's historical liabilities at transaction close. |
| O. | Reflects payment of $44.5 million on the revolver that Old DK drew from prior to the close of the Business Combination for liquidity needs. Old DK used proceeds from the Business Combination to pay down this balance at transaction close. The draw was short-term in nature and as such has only been reflected on the pro forma balance sheet. |
| P. | Reflects the cancellation of $11.0 million of promissory notes in exchange for Series F preferred shares in lieu of cash which occurred subsequent to the balance sheet date. The Series F shares converted to Class A shares upon close of the business combination and have been reflected herein as such. |
| Q. | Reflects the issuance of 393.0 million shares of DraftKings Class B common stock to Jason Robins valued at $8.0 million. In connection with issuance of the Class B shares, DraftKings agreed to indemnify Mr. Robins for any personal tax liabilities that may arise, which would result in DraftKings incurring an additional liability and an incremental compensation charge. The Class B shares were valued using a market trading comparables approach. |
Purchase Price Allocation Adjustments (PPA)
| A. | The estimated consideration is as follows: |
| Estimated Consideration | | | |
| Cash consideration(1) | | $ | 199,176 | |
| Share consideration(2) | | | 780,284 | |
| Other consideration(3) | | | 1,815 | |
| Total estimated consideration | | | 981,275 | |
_____________________
| (1) | Includes the cash consideration, as adjusted for estimated excess Net Debt Amount and Working Capital Amount of $3.2 million as of March 31, 2020. At the Closing, the Net Debt Amount and Working Capital Amount represented a decrease in total consideration of $11.0 million, resulting in cash consideration of $184.9. |
| (2) | Includes the share consideration and the estimated contingent consideration of the earnout clause as specified in the Business Combination Agreement. The additional consideration related to the earnout clause was estimated assuming a 100%, 100%, and 75% probability of reaching the specified share price targets of $12.50, $14.00, and $16.00, respectively. The possible range for the value of the contingent consideration related to the earnout clause is $0 to $10.2 million. |
| (3) | Includes transaction costs incurred by SBTech to be borne by Old DK and the six year liability insurance for SBTech’s current directors and officers, as specified in the Business Combination Agreement. |
Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed of SBTech are recorded at the acquisition date fair values. The pro forma adjustments are preliminary and based on estimates of the fair value and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effect of the SBTech Acquisition.
For all assets acquired and liabilities assumed other than identified intangible assets and goodwill, the carrying value was assumed to equal fair value. The final determination of the fair value of certain assets and liabilities will be completed within the one-year measurement period as required by ASC 805. The size and breadth of the SBTech Acquisition may necessitate the use of this measurement period to adequately analyze and assess a number of the factors used in establishing the asset and liability fair values as of the acquisition date, including the significant contractual and operational factors underlying the developed technology and user relationship intangible assets and the assumptions underpinning the related tax impacts of any changes made. Any potential adjustments made could be material in relation to the preliminary values presented.
Accordingly, the pro forma purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurances that these additional analyses and final valuations will not result in significant changes to the estimates of fair value set forth below.
The following table sets forth a preliminary allocation of the estimated consideration for the SBTech Acquisition to the identifiable tangible and intangible assets acquired and liabilities assumed based on SBTech’s March 31, 2020 balance sheet, with the excess recorded as goodwill:
| Estimated Goodwill | | | |
| Cash and cash equivalents | | $ | 10,072 | |
| Trade receivables, net | | | 22,952 | |
| Other current assets | | | 3,458 | |
| Property and equipment, net | | | 11,028 | |
| Intangible assets, net | | | 264,175 | |
| Deferred tax assets | | | 686 | |
| Other non-current assets | | | 393 | |
| Total Assets | | | 312,764 | |
| Trade payables | | | 10,448 | |
| Other accounts payable | | | 18,309 | |
| Other long-term liabilities | | | 4,163 | |
| Accrued severance pay, net | | | 556 | |
| Total liabilities | | | 33,476 | |
| Net assets acquired (a) | | | 279,288 | |
| Estimated purchase consideration (b) | | | 981,275 | |
| Estimated goodwill (b) - (a) | | | 701,987 | |
In accordance with ASC Topic 350, Goodwill and Other Intangible Assets, goodwill will not be amortized, but instead will be tested for impairment at least annually or more frequently if certain indicators are present. In the event management determines that the value of goodwill has become impaired, an accounting charge for the amount of impairment during the quarter in which the determination is made may be recognized. Goodwill recognized is not expected to be deductible for tax purposes.
| B. | The table below indicates the estimated fair value of each of the identifiable intangible assets: |
| | | Preliminary
Estimated
Asset Fair Value | | | Weighted Average
Useful Life (Years) |
| | | (in thousands, except for useful life) |
| Developed technology | | | 131,983 | | | 10 |
| Customer Relationships | | | 101,898 | | | 15 |
| Trademarks and Trade Names | | | 30,294 | | | 15 |
| Total | | | 264,175 | | | |
| Less: Net intangible assets reported on SBTech’s historical financial statements | | | (28,650 | ) | | |
| Pro forma adjustment | | | 235,525 | | | |
The fair values of the developed technology intangible assets were determined by using an “income approach,” specifically the relief-from-royalty approach, which is a commonly accepted valuation approach. This approach is based on the assumption that in lieu of ownership, a firm would be willing to pay a royalty in order to exploit the related benefits of this asset. Therefore, a portion of SBTech’s earnings, equal to the after-tax royalty that would have been paid for the use of the asset, can be attributed to the firm’s ownership. The fair values of the trademark and tradename intangible assets were also determined by the relief-from-royalty approach. The fair values of the user relationship intangible assets were determined by using an “income approach,” specifically a multi-period excess earnings approach, which is a commonly accepted valuation approach. Under this approach, the net earnings attributable to the asset or liability being measured are isolated using the discounted projected net cash flows. These projected cash flows are isolated from the projected cash flows of the combined asset group over the remaining economic life of the intangible asset or liability being measured. Both the amount and the duration of the cash flows are considered from a market participant perspective. Where appropriate, the net cash flows were adjusted to reflect the potential attrition of existing customers in the future, as existing customers are a “wasting” asset and are expected to decline over time.
| C. | Represents the deferred tax impact associated with the incremental differences in book and tax basis created from the preliminary purchase price allocation resulting from the step up in fair value of intangible assets. Deferred taxes were established based on SBTech’s blended statutory tax rate of 4.09%, based on jurisdictions where income has historically been generated. This estimate of deferred income tax liabilities is preliminary and is subject to change based upon SBTech’s final determination of the fair value of assets acquired and liabilities assumed by jurisdiction. |
| D. | Represents the elimination of SBTech’s historical equity. |
Adjustments to Unaudited Pro Forma Condensed Combined Statement of Operations
The pro forma adjustments included in the unaudited pro forma condensed statement of operations for the three months ended March 31, 2020 and year ended December 31, 2019 are as follows:
Pro Forma Adjustments (PF)
| AA. | Reflects elimination of transaction-related costs incurred and recorded by DEAC and Old DK. |
| BB. | Reflects the elimination of interest income on the trust account. |
| CC. | Reflects adjustments to income tax expense as a result of the tax impact on the pro forma adjustments at the estimated statutory tax rate of 27.6%. |
| DD. | Reflects the incremental stock-based compensation expense related to certain equity awards expected to continue vesting subsequent to the closing. |
| EE. | Reflects additional compensation expense recorded as a result of the execution of employment agreements with certain members of the management team. |
Purchase Price Allocation Adjustments (PPA)
| AA. | Reflects the incremental amortization expense recorded as a result of the fair value adjustment for intangible assets acquired in the SBTech Acquisition. |
| BB. | Reflects the adjustment to stock-based compensation expense for the post-combination portion of the SBT rolled-over options. The new stock-based compensation expense is amortized on a straight-line basis over the remaining vesting periods. |
| CC. | Reflects adjustments to income tax expense as a result of the tax impact on the purchase accounting adjustments at the estimated statutory tax rate of 27.6%. |
Represents the net earnings per share calculated using the historical weighted average shares outstanding and the issuance of additional shares in connection with the Business Combination, assuming the shares were outstanding since January 1, 2019. As the Business Combination is being reflected as if it had occurred at the beginning of the periods presented, the calculation of weighted average shares outstanding for basic and diluted net income per share assumes that the shares issuable relating to the Business Combination have been outstanding for the entire periods presented. For shares redeemed, this calculation is retroactively adjusted to eliminate such shares for the entire periods.
| | | For the Three Months ended March 31, 2020 | | | For the Year ended December 31, 2019 | |
| | | (in thousands except share and per share data) | | | (in thousands except share and per share data) | |
| Pro forma net loss | | | (74,012 | ) | | | (141,170 | ) |
| Weighted average shares outstanding of Class A common stock | | | 335,917,094 | | | | 335,917,094 | |
Net loss per share (Basic and Diluted) attributable to Class A
common stockholders (1) | | | (0.22 | ) | | $ | (0.42 | ) |
_____________________
(1) For the purposes of applying the if converted method for calculating diluted earnings per share, it was assumed that all outstanding warrants sold in the IPO and the private placement are exchanged to Class A common stock. However, since this results in anti-dilution, the effect of such exchange was not included in calculation of diluted loss per share. Additionally, DraftKings’ Class B shares were issued to Jason Robins, such shares carry 10 votes per share and allow Jason Robins to have 90% of the voting power of the capital stock of DraftKings on a fully-diluted basis. As these shares have no economic or participating rights, they have been excluded from the calculation of earnings per share.
