DraftKings Inc. 10-Q

Item 1. Financial Statements. DRAFTKINGS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except par value) March 31, 2022 (Unaudited) December 31, 2021 Assets Current assets: Cash and cash equivalents $ 1,772,892 $ 2,152,892 Cash reserved for users 464,854 476,950 Receivables reserved for users 55,946 51,949 Accounts receivable 48,211 45,864 Prepaid expenses and other current assets 56,562 25,675 Total current assets 2,398,465 2,753,330 Property and equipment, net 49,734 46,019 Intangible assets, net 523,023 535,017 Goodwill 615,655 615,655 Operating lease right-of-use assets 61,169 63,831 Equity method investment 7,474 9,825 Deposits and other non-current assets 90,795 45,377 Total assets $ 3,746,315 $ 4,069,054 Liabilities and Stockholders’ equity Current liabilities: Accounts payable and accrued expenses $ 379,254 $ 387,737 Liabilities to users 520,775 528,874 Operating lease liabilities, current portion 12,911 12,814 Total current liabilities 912,940 929,425 Convertible notes, net of issuance costs 1,249,106 1,248,452 Non-current operating lease liabilities 54,457 57,341 Warrant liabilities 14,230 26,911 Long-term income tax liability 78,947 79,125 Other long-term liabilities 51,035 49,272 Total liabilities $ 2,360,715 $ 2,390,526 Commitments and contingent liabilities (Note 13) Stockholders' equity: Class A common stock, $ 0.0001 par value; 900,000 shares authorized as of March 31, 2022 and December 31, 2021; 425,151 and 414,911 shares issued and 417,228 and 407,781 outstanding as of March 31, 2022 and December 31, 2021, respectively $ 42 $ 41 Class B common stock, $ 0.0001 par value; 900,000 shares authorized as of March 31, 2022 and December 31, 2021; 393,014 shares issued and outstanding as of March 31, 2022 and December 31, 2021 39 39 Treasury stock, at cost; 7,923 and 7,130 shares as of March 31, 2022 and December 31, 2021, respectively ( 320,697 ) ( 306,614 ) Additional paid-in capital 5,891,235 5,702,388 Accumulated deficit ( 4,221,507 ) ( 3,753,814 ) Accumulated other comprehensive income 36,488 36,488 Total stockholders’ equity 1,385,600 1,678,528 Total liabilities and stockholders’ equity $ 3,746,315 $ 4,069,054 See accompanying notes to unaudited condensed consolidated financial statements. 2 DRAFTKINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Amounts in thousands, except loss per share data) Three months ended March 31, 2022 2021 Revenue $ 417,205 $ 312,276 Cost of revenue 313,379 183,225 Sales and marketing 321,452 228,686 Product and technology 81,352 56,159 General and administrative 216,606 168,997 Loss from operations ( 515,584 ) ( 324,791 ) Other income (expense): Interest income, net 148 985 Gain (loss) on remeasurement of warrant liabilities 12,681 ( 26,980 ) Other income, net 37,882 — Loss before income tax provision (benefit) and loss from equity method investment ( 464,873 ) ( 350,786 ) Income tax provision (benefit) 469 ( 4,595 ) Loss from equity method investment 2,351 153 Net loss attributable to common stockholders $ ( 467,693 ) $ ( 346,344 ) Loss per share attributable to common stockholders: Basic and diluted $ ( 1.14 ) $ ( 0.87 ) See accompanying notes to unaudited condensed consolidated financial statements. 3 DRAFTKINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (Amounts in thousands) Three months ended March 31, 2022 2021 Net loss $ ( 467,693 ) $ ( 346,344 ) Other comprehensive (loss) income: Foreign currency translation adjustments arising during period, net of nil tax — ( 27,318 ) Comprehensive loss $ ( 467,693 ) $ ( 373,662 ) See accompanying notes to unaudited condensed consolidated financial statements. 4 DRAFTKINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Amounts in thousands) Class A Common Stock Class B Common Stock Additional Paid in Capital Accumulated Deficit Accumulated Other Comprehensive Income Treasury Stock Amount Total Stockholders’ Equity Shares Amount Shares Amount Balances at December 31, 2021 407,781 $ 41 393,014 $ 39 $ 5,702,388 $ ( 3,753,814 ) $ 36,488 $ ( 306,614 ) $ 1,678,528 Exercise of stock options 913 — — — 1,770 — — — 1,770 Stock-based compensation expense — — — — 187,077 — — — 187,077 Purchase of treasury stock ( 793 ) — — — — — — ( 14,083 ) ( 14,083 ) Restricted stock unit vesting 9,327 1 — — — — — — 1 Net loss — — — — — ( 467,693 ) — — ( 467,693 ) Balances at March 31, 2022 417,228 $ 42 393,014 $ 39 $ 5,891,235 $ ( 4,221,507 ) $ 36,488 $ ( 320,697 ) $ 1,385,600 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Income Treasury Stock Amount Total Stockholders’ Equity Shares Amount Shares Amount Balances at December 31, 2020 396,303 $ 40 393,014 $ 39 $ 5,067,135 $ ( 2,230,619 ) $ 83,534 $ ( 288,784 ) $ 2,631,345 Exercise of stock options 2,857 — — — 7,638 — — 7,638 Stock-based compensation expense — — — — 151,843 — — — 151,843 Purchase of capped call options — — — — ( 123,970 ) — — — ( 123,970 ) Equity consideration issued for acquisition 464 — — — 29,399 — — — 29,399 Shares issued for exercise of warrants 138 — — — 1,761 — — — 1,761 Purchase of treasury stock ( 48 ) — — — — — — ( 3,124 ) ( 3,124 ) Restricted stock unit vesting 178 — — — — — — — — Foreign currency translation, net of nil tax — — — — — — ( 27,318 ) — ( 27,318 ) Net loss — — — — — ( 346,344 ) — — ( 346,344 ) Balances at March 31, 2021 399,892 $ 40 393,014 $ 39 $ 5,133,806 $ ( 2,576,963 ) $ 56,216 $ ( 291,908 ) $ 2,321,230 See accompanying notes to unaudited condensed consolidated financial statements. 5 DRAFTKINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) Three months ended March 31, 2022 2021 Operating Activities: Net loss $ ( 467,693 ) $ ( 346,344 ) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation and amortization 32,225 28,193 Non-cash interest expense 654 112 Stock-based compensation expense 187,077 151,843 Loss from equity method investment 2,351 153 (Gain) loss on remeasurement of warrant liabilities ( 12,681 ) 26,980 Gain on equity securities and other financial assets ( 37,433 ) — Deferred income taxes 256 ( 8,104 ) Other expenses, net ( 768 ) — Change in operating assets and liabilities, net of effect of business combination: Receivables reserved for users ( 3,997 ) 6,213 Accounts receivable ( 2,347 ) ( 4,180 ) Prepaid expenses and other current assets ( 30,887 ) ( 519 ) Deposits and other non-current assets ( 493 ) ( 1,527 ) Operating leases, net ( 125 ) ( 239 ) Accounts payable and accrued expenses ( 16,087 ) 71,392 Other long-term liabilities 1,507 2,968 Long-term income tax liability ( 178 ) 1,522 Liabilities to users ( 8,099 ) 11,800 Net cash flows used in operating activities ( 356,718 ) ( 59,737 ) Investing Activities: Purchases of property and equipment ( 8,614 ) ( 2,389 ) Cash paid for internally developed software costs ( 13,195 ) ( 8,686 ) Acquisition of gaming licenses ( 267 ) ( 305 ) Cash paid for acquisitions, net of cash acquired — ( 40,541 ) Other investing activities ( 989 ) — Net cash flows used in investing activities ( 23,065 ) ( 51,921 ) Financing Activities: Proceeds from issuance of convertible notes, net — 1,248,025 Purchase of capped call options — ( 123,970 ) Proceeds from shares issued for warrants — 199 Purchase of treasury stock ( 14,083 ) ( 3,124 ) Proceeds from exercise of stock options 1,770 7,638 Net cash flows (used in) provided by financing activities ( 12,313 ) 1,128,768 Effect of foreign exchange rates on cash and cash equivalents and restricted cash — 1,774 Net (decrease) increase in cash and cash equivalents and restricted cash ( 392,096 ) 1,018,884 Cash and cash equivalents and restricted cash at the beginning of period 2,629,842 2,104,976 Cash and cash equivalents and restricted cash, end of period $ 2,237,746 $ 3,123,860 Disclosure of cash, cash equivalents and restricted cash: Cash and cash equivalents $ 1,772,892 $ 2,818,128 Cash reserved for users 464,854 305,732 Total cash, cash equivalents and restricted cash, end of period $ 2,237,746 $ 3,123,860 6 DRAFTKINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands) Three months ended March 31, 2022 2021 Supplemental Disclosure of Noncash Investing and Financing Activities: Equity consideration issued for acquisitions $ — $ 29,399 Acquisition of property and equipment, internally developed software and other investments included in accounts payable and accrued expenses 7,604 680 Convertible notes financing costs included in accounts payable and accrued expenses — 1,024 Acquisition of gaming licenses included in accounts payable and accrued expenses — ( 100 ) Supplemental Disclosure of Cash Activities: (Decrease) increase in cash reserved for users ( 12,096 ) 18,014 Cash paid for interest — — See accompanying notes to unaudited condensed consolidated financial statements. 7 DRAFTKINGS INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except loss per share data, unless otherwise noted) 1. Description of Business DraftKings Inc. is a digital sports entertainment and gaming company. The Company’s business-to-consumer (“B2C”) segment provides users with daily fantasy sports (“DFS”), sports betting (“Sportsbook”) and online casino (“iGaming”) products, as well as media and other online consumer products. The Company’s business-to-business (“B2B”) segment is involved in the design, development and licensing of sports betting and casino gaming software for its Sportsbook and casino gaming products. As further discussed in Note 3 hereof entitled “Acquisition of Golden Nugget Online Gaming, Inc.,” on August 9, 2021, DK Crown Holdings Inc. (formerly known as DraftKings Inc.), a Nevada corporation (“Old DraftKings”), and Golden Nugget Online Gaming, Inc. (“GNOG”) entered into a definitive agreement and plan of merger (the “Merger Agreement”) for DraftKings to acquire GNOG in an all-stock transaction, which we refer to as the GNOG Transaction. On May 5, 2022 (the “Closing Date”), Old DraftKings consummated the GNOG Transaction and, in connection therewith, 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,” or the “Company” 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 March 31, 2022, 29 U.S. states, the District of Columbia and Puerto Rico have legalized some form of sports betting. Of those 31 legal jurisdictions, 24 have legalized online sports betting. Of those 24 jurisdictions, 20 are live, and DraftKings operates in 17 of them. The jurisdictions with statutes legalizing iGaming are Connecticut, Delaware, Michigan, New Jersey, Pennsylvania and West Virginia. As of March 31, 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 of March 31, 2022, the Company offers iGaming products in Connecticut, Michigan, New Jersey, Pennsylvania and West Virginia. The Company also has arrangements in place with land-based casinos to expand operations into additional states upon the passing of relevant legislation, the issuance of related regulations and the receipt of required licenses. The novel coronavirus (“COVID-19”) has adversely impacted global commercial activity, disrupted supply chains and contributed to significant volatility in financial markets. Beginning in 2020 and continuing into 2022, the COVID-19 pandemic adversely impacted many different industries. The ongoing COVID-19 pandemic could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the extent and the duration of the impact of COVID-19. The COVID-19 pandemic therefore presents material uncertainty and risk with respect to us and our performance and could affect our financial results in a materially adverse way. Since the start of the COVID-19 pandemic, the primary impacts to the Company have been the suspension, cancellation and rescheduling of sports seasons and sporting events. Beginning in March 2020 and continuing into the first month of the third quarter of 2020, 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. Starting in the third quarter of 2020 and continuing into the fourth quarter of 2020, major professional sports leagues resumed their activities, many of which were held with shortened seasons. MLB began its season after a three-month delay and also completed the World Series, the NHL resumed its season and completed the Stanley Cup Playoffs, the Masters golf tournament was held, most domestic soccer leagues resumed and several European cup competitions were held, and the NFL 8 season began on its regular schedule. During this period, the NBA also resumed its season, completed the NBA Finals and commenced its 2020-2021 season. In the three months ended March 31, 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, the NHL regular season, the NASCAR Cup Series, various NCAA football bowl games and the NCAA college basketball regular season and tournament. The continued return of major sports and sporting events has 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 or rescheduled 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 its 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. 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. The Company will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19. 2. Summary of Significant Accounting Policies and Practices Basis of Presentation and Principles of Consolidation These unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“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. Certain amounts from a prior period, which are not material, have been reclassified to conform with the current period presentation. Prior to the second quarter of 2021, the Company (a) included changes in “cash reserved for users” as a component within the change in operating assets and liabilities on its condensed consolidated statement of cash flows as the Company historically viewed the change in cash reserved for users as offsetting the change in player liabilities and (b) presented “cash reserved for users” separate from cash and cash equivalents on the condensed consolidated balance sheet. Beginning with the second quarter of 2021, to reflect the Company’s total cash position (“cash and cash equivalents” and “cash reserved for users”) and to conform to Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230) — Restricted Cash , the Company revised its presentation to exclude changes in “cash reserved for users” from the “change in operating assets and liabilities” and instead present the total balance as a component of cash and cash equivalents and restricted cash on its condensed consolidated statement of cash flows. This revision does not have a material impact on the Company’s presentation of cash flows as the change in cash reserved for users will continue to be presented as a supplemental disclosure in the condensed consolidated statement of cash flows. In 9 addition, the Company will continue to present cash reserved for users as a separate line item on the Company’s condensed consolidated balance sheet. These revisions have no impact on the Company’s previously reported consolidated statements of operations or consolidated balance sheets, including the Company’s cash and cash equivalents and cash reserved for user balances. Prior period amounts have been revised to conform to the current period presentation. The following table presents the condensed consolidated statement of cash flows line items after giving effect to the revision of presentation as discussed above for the three months ended March 31, 2021. Three months ended March 31, 2021 Reported Adjustments Revised Adjustments to reconcile net loss to net cash flows used in operating activities: Change in operating assets and liabilities, net of effect of business combinations: Cash reserved for users $ ( 18,014 ) $ 18,014 $ — Net cash flows used in operating activities ( 77,751 ) 18,014 ( 59,737 ) Net increase in cash, cash equivalents and restricted cash 1,000,870 18,014 1,018,884 Cash and cash equivalents and restricted cash at the beginning of period 1,817,258 287,718 (a) 2,104,976 Cash and cash equivalents and restricted cash, end of period $ 2,818,128 $ 305,732 $ 3,123,860 (a) Represents the cash reserved for user balance as of December 31, 2020 as previously included in the Company’s 2021 Annual Report. Foreign Currency During the three months ended March 31, 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 as of March 31, 2022. Recently Issued Accounting Pronouncements Not Yet Adopted In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update 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, if any, on its consolidated financial statements. 3. Business 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 (the “GNOG Transaction”). On May 5, 2022 (the “Closing Date”), 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 0.365 shares of New DraftKings’ Class A common stock for each share of GNOG that they held on the Closing Date. The Company issued approximately 29.3 million shares of its Class A common stock will be issued in connection with the consummation of the GNOG Transaction. The Company is currently in the process of finalizing the preliminary accounting for the GNOG Transaction and expects to complete its preliminary accounting of the assets acquired and liabilities assumed by the end of the second quarter of 2022. New DraftKings is the registrant filing this Report as the successor registrant for Old DraftKings. 10 4. Intangible Assets Intangible Assets The Company has the following intangible assets, net as of March 31, 2022: Weighted-Average Remaining Amortization Period Gross Carrying Amount Accumulated Amortization Net Amortized intangible assets: Developed technology 6.1 years $ 422,900 $ ( 99,806 ) $ 323,094 Internally developed software 2.7 years 126,873 ( 54,047 ) 72,826 Gaming licenses 7.2 years 54,709 ( 15,827 ) 38,882 Trademarks, tradenames and other 4.3 years 31,863 ( 7,699 ) 24,164 Customer relationships 3.0 years 99,728 ( 38,553 ) 61,175 736,073 ( 215,932 ) 520,141 Indefinite-lived intangible assets: Digital assets Indefinite-lived 2,882 — 2,882 Intangible assets, net $ 738,955 $ ( 215,932 ) $ 523,023 The Company had the following intangible assets, net as of December 31, 2021: Weighted-Average Remaining Amortization Period Gross Carrying Amount Accumulated Amortization Net Amortized intangible assets: Developed technology 6.4 years $ 422,900 $ ( 87,089 ) $ 335,811 Internally developed software 2.6 years 117,953 ( 52,607 ) 65,346 Gaming licenses 7.3 years 54,442 ( 13,466 ) 40,976 Trademarks and tradenames 4.5 years 30,639 ( 5,952 ) 24,687 Customer relationships 3.3 years 99,728 ( 33,526 ) 66,202 725,662 ( 192,640 ) 533,022 Indefinite-lived intangible assets: Digital assets Indefinite-lived 1,995 — 1,995 Intangible assets, net $ 727,657 $ ( 192,640 ) $ 535,017 Amortization expense was $ 28.1 million and $ 25.2 million for the three months ended March 31, 2022 and 2021, respectively. 5. Current and Long-term Liabilities Revolving Line of Credit In October 2016, 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 $ 60.0 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) 1.00 % above the prime rate then in effect and (ii) 6.50 %, and the Credit Agreement requires monthly, interest-only payments. In addition, the Company is required to pay quarterly in arrears a fee equal to 0.25 % per annum of the unused portion of the revolving line of 11 credit. As of March 31, 2022 and December 31, 2021, the Credit Agreement provided a revolving line of credit of up to $ 60.0 million. There was no principal outstanding as of March 31, 2022 or December 31, 2021. Net facility available from the Credit Agreement as of March 31, 2022 and December 31, 2021 totaled $ 56.0 million and $ 55.8 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 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 $ 1,265.0 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 $ 17.0 million of lender fees and $ 1.7 million of debt financing costs. The Convertible Notes represent senior unsecured obligations of the Company, which are being amortized through the Notes Maturity Date. The Convertible Notes are convertible at an initial conversion rate of 10.543 shares of the Company’s Class A common stock per $1,000 principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $ 94.85 per share of 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. The Company will satisfy any conversion election by paying or delivering, as the case may be, cash, shares of Class A common stock or a combination of cash and shares of Class A common stock. During the three months ended March 31, 2022, the conditions allowing holders of the Convertible Notes to convert their Convertible Notes were not met. 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 $ 94.85 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 $ 135.50 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 $ 124.0 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 $ 907.6 million and $ 953.8 million as of March 31, 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 hieraarchy. Indirect Taxes Taxation of e-commerce is becoming more prevalent and could negatively affect the Company’s business as it pertains to DFS and its users. The ultimate impact of indirect taxes on the Company’s business is uncertain, as is the period required to resolve this uncertainty. The Company’s estimated contingent liability for indirect taxes represents the Company’s best estimate of tax liability in jurisdictions in which the Company believes taxation is probable. The Company frequently reevaluates its tax positions for appropriateness. 12 Indirect tax statutes and regulations are complex and subject to differences in application and interpretation. Tax authorities may impose indirect taxes on Internet-delivered activities based on statutes and regulations which, in some cases, were established prior to the advent of the Internet and do not apply with certainty to the Company’s business. The Company’s estimated contingent liability for indirect taxes may be materially impacted by future audit results, litigation and settlements, should they occur. The Company’s activities by jurisdiction may vary from period to period, which could result in differences in the applicability of indirect taxes from period to period. As of March 31, 2022 and December 31, 2021, the Company’s estimated contingent liability for indirect taxes was $ 49.2 million and $ 47.5 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 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 13.3 million warrants each of which entitles the holder to purchase one share of Class A common stock at an exercise price of $ 11.50 per share (the “Public Warrants”). Simultaneously with the closing of the IPO, DEAC completed the private sale of 6.3 million warrants to DEAC’s sponsor (the “Private Warrants”). As of March 31, 2022, there were no Public Warrants outstanding. As of March 31, 2022, 1.6 million Private Warrants remained outstanding at a fair value of $ 14.2 million. Due to fair value changes throughout the three months ended March 31, 2022 and March 31, 2021, the Company recorded a gain on remeasurement of warrant liabilities of $ 12.7 million and a loss on remeasurement of warrant liabilities of $ 27.0 million, respectively. During the three months ended March 31, 2022, a de minimis number of Private Warrants were exercised. During the three months ended March 31, 2021, 0.1 million Private Warrants were exercised resulting in a reclassification to additional paid-in-capital in the amount of $ 1.8 million, reflecting the reclassification of the warrant liabilities of $ 1.6 million and proceeds upon exercise of $ 0.2 million. 6. Fair Value Measurements Certain assets and liabilities are carried at fair value under U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value 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. • 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. The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value as of March 31, 2022 and December 31, 2021 based on the three-tier fair value hierarchy: 13 March 31, 2022 Level 1 Level 2 Level 3 Total Assets Cash equivalents: Money market funds $ 200,212 (1) $ — $ — $ 200,212 Other non-current assets: Derivative instruments — — 43,283 (4) 43,283 Equity securities 27,650 (2) 7,033 (3) — 34,683 Total $ 227,862 $ 7,033 $ 43,283 $ 278,178 Liabilities Private Warrants $ — $ 14,230 (5) $ — $ 14,230 Total $ — $ 14,230 $ — $ 14,230 December 31, 2021 Level 1 Level 2 Level 3 Total Assets Cash equivalents: Money market funds $ 550,169 (1) $ — $ — $ 550,169 Other non-current assets: Derivative instruments — — 3,850 (4) 3,850 Equity securities 27,200 (2) — — 27,200 Total $ 577,369 $ — $ 3,850 $ 581,219 Liabilities Private Warrants $ — $ 26,911 (5) $ — $ 26,911 Total $ — $ 26,911 $ — $ 26,911 (1) Represents the Company’s money market funds, which are classified as Level 1 because the Company fair values these assets using quoted market prices. (2) Represents the Company’s marketable equity securities, which are classified as Level 1 because the Company fair values these assets using quoted market prices. (3) Represents the Company’s non-marketable equity securities, which are classified as Level 2 because the Company fair values these assets using observable inputs for similar investments of the same issuer. The Company has elected the remeasurement alternative for these assets. (4) Represents the Company’s derivative instruments held in other public and privately held entities. The Company measures these derivative instruments at fair value using option pricing models and, accordingly, classifies these assets as Level 3. During the three months ended March 31, 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 fair value the Level 3 derivative instruments. A change in these significant unobservable inputs might result in a significantly higher or lower fair value measurement at the reporting date. March 31, 2022 December 31, 2021 Significant Unobservable Input Range (Weighted Average) Underlying stock price $ 11.06 - $ 39.22 ($ 36.69 ) $ 10.88 Volatility 65.0 % - 75.0 % ( 73.4 %) 60.0 % Risk-free rate 1.0 % - 1.4 % ( 1.3 %) 0.3 % (5) The Company measures its Private Warrants at fair value using a binomial lattice model with the significant assumptions being observable inputs and, accordingly, classifies these liabilities as Level 2. 14 For the three months ended March 31, 2022 and 2021, the Company recorded $ 37.4 million and $ 0.0 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 condensed consolidated statements of operations. 7. Revenue Recognition Deferred Revenue The Company included deferred revenue within accounts payable and accrued expenses and liabilities to users in the condensed consolidated balance sheets. The deferred revenue balances were as follows: Three months ended March 31, 2022 2021 Deferred revenue, beginning of the period $ 91,554 $ 30,627 Deferred revenue, end of the period 95,402 41,849 Revenue recognized in the period from amounts included in deferred revenue at the beginning of the period 51,680 24,493 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 Disaggregation of revenue for the three months ended March 31, 2022 and 2021 is as follows: Three months ended March 31, 2022 2021 Online gaming $ 386,678 $ 272,661 Gaming software 13,495 31,429 Other 17,032 8,186 Total Revenue $ 417,205 $ 312,276 Online gaming includes DFS, iGaming and Sportsbook, which have certain similar attributes and patterns of recognition. Sources of other revenue primarily include media, marketplace and other online consumer products. The following table presents the Company’s revenue by geographic region for the periods indicated: Three months ended March 31, 2022 2021 United States $ 402,597 $ 280,117 International 14,608 32,159 Total Revenue $ 417,205 $ 312,276 8. Stock-Based Compensation The Company, historically, has issued three types of stock-based compensation: Time-Based awards, Long Term Incentive Plan (“LTIP”) awards and Performance-Based Stock Compensation Plan (“PSP”) awards. Time-Based awards are equity awards which generally vest over a 4 -year period. LTIP awards are performance-based equity awards that are used to establish longer-term performance objectives and incentivize management to meet those objectives. PSP awards are short-term performance-based equity awards which establish performance objectives related to one or two particular fiscal years. LTIP awards generally vest when 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. 15 The following table shows restricted stock unit (“RSU”) and stock option activity for the three months ended March 31, 2022: Time-based PSP LTIP Total Weighted Average Exercise Price of Options Weighted Average FMV of RSUs Options RSUs Options RSUs Options RSUs Outstanding at December 31, 2021 14,695 4,195 2,354 1,488 11,671 19,343 53,746 $ 5.46 $ 49.94 Granted 200 8,013 — 2 — 173 8,388 31.40 23.30 Exercised options / vested RSUs ( 869 ) ( 405 ) ( 44 ) ( 2,671 ) — ( 6,251 ) ( 10,240 ) 1.94 46.15 Change in awards due to performance-based multiplier — — — 1,806 — — 1,806 — 33.69 Forfeited ( 21 ) ( 116 ) — ( 1 ) — ( 50 ) ( 188 ) 4.12 41.41 Outstanding at March 31, 2022 14,005 11,687 2,310 624 11,671 13,215 53,512 $ 5.76 $ 41.68 As of March 31, 2022, total unrecognized stock-based compensation expense of $ 731.2 million related to granted and unvested share-based compensation arrangements is expected to be recognized over a weighted-average period of 2.0 years. The following table shows stock compensation expense for the three months ended March 31, 2022 and 2021: Three months ended March 31, 2022 Three months ended March 31, 2021 Options RSUs Total Options RSUs Total Time Based (1) $ 3,864 $ 21,786 $ 25,650 $ 2,433 $ 14,268 $ 16,701 PSP (2) — 43,367 43,367 — 16,314 16,314 LTIP (2) — 118,060 118,060 — 118,828 118,828 Total $ 3,864 $ 183,213 $ 187,077 $ 2,433 $ 149,410 $ 151,843 (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 $ 20.7 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. Income Taxes The Company’s provision for income taxes for the three months ended March 31, 2022 and 2021 is as follows: Three months ended March 31, 2022 2021 Income tax provision (benefit) $ 469 $ ( 4,595 ) The effective tax rates for the three months ended March 31, 2022 and 2021 were ( 0.1 )% and 1.3 %, respectively. The difference between the Company’s effective tax rates for the three month periods in 2022 and 2021 and the U.S. statutory tax rate of 21% was primarily due to a full valuation allowance related to the Company’s net U.S. deferred tax assets, offset partially by current state tax and current foreign tax. Additionally, the Company recorded a discrete income tax benefit of $ 6.8 million during the first quarter of 2021, which is attributable to a non-recurring partial release of the Company’s U.S. valuation allowance as a result of the preliminary purchase price accounting of Vegas Sports Information Network, LLC (“VSiN”). 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. Segment Information The Company operates its business and reports its results through two operating and reportable segments: B2C and B2B, in accordance with ASC Topic 280, Segment Reporting. The B2C segment provides users with DFS, Sportsbook and iGaming products, as well as media and other online consumer products. The B2B segment is involved in the design, development and 16 licensing of sports betting and casino gaming software for its Sportsbook and casino gaming products, which is primarily comprised of 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. We define and calculate Adjusted EBITDA as net loss before the impact of interest income or expense, income tax expense and depreciation and amortization, and further adjusted for the following items: stock-based compensation, transaction-related costs, litigation, settlement and related costs and certain other non-recurring, non-cash and non-core items, as described in the reconciliation below. A measure of segment assets and liabilities has not been currently provided to the Company’s CODM and therefore is not shown below. Summarized financial information for the Company’s segments is shown in the following table: Three months ended March 31, 2022 2021 Revenue: B2C $ 403,710 $ 280,847 B2B 13,495 31,429 Total revenue 417,205 312,276 Adjusted EBITDA: B2C ( 269,171 ) ( 141,355 ) B2B ( 20,338 ) 2,093 Total adjusted EBITDA ( 289,509 ) ( 139,262 ) Adjusted for: Depreciation and amortization 32,225 28,193 Interest income, net ( 148 ) ( 985 ) Income tax provision (benefit) 469 ( 4,595 ) Stock-based compensation 187,077 151,843 Transaction-related costs 3,774 3,023 Litigation, settlement and related costs 1,950 622 (Gain) loss on remeasurement of warrant liabilities ( 12,681 ) 26,980 Other non-recurring costs and non-operating (income) costs ( 34,482 ) 2,001 Net loss attributable to common shareholders $ ( 467,693 ) $ ( 346,344 ) 11. Loss Per Share The computation of loss per share and weighted-average shares of the Company’s Class A common stock outstanding for the periods presented are as follows: Three months ended March 31, 2022 2021 Net loss $ ( 467,693 ) $ ( 346,344 ) Basic and diluted weighted-average common shares outstanding 411,066 397,621 Loss per share attributable to common stockholders: Basic and diluted $ ( 1.14 ) $ ( 0.87 ) 17 There were no preferred or other dividends declared for the three months ended March 31, 2022. For the periods presented, the following securities were not required to be included in the computation of diluted shares outstanding: Three months ended March 31, 2022 2021 Warrants 1,613 1,812 Stock options and RSUs 53,512 59,187 Convertible notes 13,337 13,337 Total 68,462 74,336 12. Related-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 months ended March 31, 2022 and 2021, the Company incurred no fees payable to the 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 March 31, 2022 and December 31, 2021, the Company had $ 0.5 million and $ 0.6 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 the consolidated balance sheets. The Company has committed to invest up to $ 17.5 million into DBDK Venture Fund I, LP, a Delaware limited partnership and a subsidiary of DKFS LLC. As of March 31, 2022, the Company had invested a total of $ 3.5 million of the total commitment. Transactions with a Shareholder and their Immediate Family Members As of March 31, 2022 and December 31, 2021, the Company had $ 3.8 million of receivables due from former shareholders of SBTech, which includes a current director and shareholder of the Company. For the three months ended March 31, 2022 and March 31, 2021, the Company had $ 0.6 million and $ 1.4 million in sales, respectively, to an immediate family member of a current director of the Company. The Company had an associated accounts receivable balance of $ 0.2 million as of March 31, 2022 and December 31, 2021 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 months ended March 31, 2022, the Company incurred $ 0.7 million of expense for use of the aircraft under these chartering services. In March 2022, the Company entered into a one-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 $ 0.6 million for a one-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. 18 13. Leases, 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 assured. Our lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. As of March 31, 2022, the Company’s lease agreements typically have terms not exceeding ten 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. The components of lease cost are as follows: Three months ended March 31, 2022 2021 Operating lease cost $ 4,230 $ 4,133 Short term lease cost 1,755 426 Variable lease cost 806 701 Sublease income ( 230 ) ( 111 ) Total lease cost $ 6,561 $ 5,149 Other information related to leases are as follows: Three months ended March 31, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows used by operating leases $ 4,283 $ 4,378 Right-of-use assets obtained in exchange for new operating lease liabilities $ 619 $ 8,790 The weighted-average remaining lease term and weighted-average discount rate for the Company’s operating leases were 5.7 years and 6.5 % as of March 31, 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. Maturity of lease liabilities are as follows: Years Ending December 31, From April 1, 2022 to December 31, 2022 $ 12,443 2023 15,661 2024 13,167 2025 11,371 2026 9,817 Thereafter 18,294 Total undiscounted future cash flows 80,753 Less: Imputed interest ( 13,385 ) Present value of undiscounted future cash flows $ 67,368 19 As of March 31, 2022, the Company has an additional corporate office lease that has not yet commenced with lease obligations of approximately $ 33.7 million that are not included in the table above. This operating lease is expected to commence in 2022 with a term of approximately 11 years. As of March 31, 2022, the Company had long-lived assets, which consists of operating lease right-of-use assets and property and equipment, net, of $ 79.5 million and $ 31.4 million located in the United States and internationally, respectively. As of December 31, 2021, the company had long-lived assets of $ 77.2 million and $ 32.6 million located in the United States and internationally, respectively. Other Contractual Obligations and Contingencies The Company is a party to several non-cancelable contracts with vendors where the Company is obligated to make future minimum payments under the terms of these contracts as follows: Years Ending December 31, From April 1, 2022 to December 31, 2022 $ 349,135 2023 402,543 2024 344,405 2025 289,543 2026 177,980 Thereafter 349,849 Total $ 1,913,455 Contingencies From time to time, and in the ordinary course of business, the Company may be subject to certain claims, charges and litigation concerning matters arising in connection with the conduct of the Company’s business activities. In Re: Daily Fantasy Sports Litigation (Multi-District Litigation) Between late 2015 and early 2016, certain individuals who allegedly registered and competed in daily sports fantasy contests on our and FanDuel’s websites, and their family members, filed numerous actions (primarily purported class actions) against us, FanDuel, and other related parties in courts across the United States (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 fall 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 seek 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. This settlement agreement became effective on November 5, 2021; as a result, the only remaining plaintiffs are 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. Once the family member settlement agreement becomes effective, the only remaining plaintiff will be the plaintiff who asserted the concerned citizen claims. The Company intends to vigorously defend this case. If the plaintiffs obtain a judgment in their favor in this matter, the Company could be subject to substantial damages and it could be restricted from offering DFS contests in certain states. The Company established an accrual for this matter, but it cannot provide any assurance as to the outcome of this lawsuit. 20 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. 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 two patents and the Company’s Sportsbook product infringes two 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 two patents, our Daily Fantasy Sports product infringes one 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 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 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 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. 21 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 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. 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. 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. 22 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 four 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 seven patents. Colossus amended its complaint on February 7, 2022 to, among other things, add one 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 $ 4.0 million and $ 4.2 million as of March 31, 2022 and December 31, 2021, respectively, for the Company’s leases of office space. 23