Problems For FanDuel: Audit Questions Daily Fantasy Company’s Ability To Raise Money Amid Financial Struggles

Posted on October 13, 2017
Posted By on October 13, 2017

[toc]The future of daily fantasy sports site FanDuel has been cast into doubt after results posted with the UK’s Companies House showed the operator’s auditors have issued a ‘going concern’ warning. That comes after the company posted losses for the six months to December 2015 of $186 million and other information about the company’s status in 2016 and 2017.

The “going concern” language is common in audits of companies where venture capital is involved and where unresolved debts exist. But the audit also concluded that FanDuel might have difficulty raising the money required for continuing in the long term.

If FanDuel were to become a profitable endeavor in the short term — from a purely operational standpoint — that could alleviate some of those concerns and could encourage the environment for further funding or acquisition. However, there would still be obligations on the books from 2015 and later.

A FanDuel spokesperson told Legal Sports Report in the wake of the audit that it would be “profitable this quarter and certainly in 2018.”

The DFS provider’s accounts for the period to June 2016 are now also overdue, according to a notice on the Companies House website.

In the notes from auditors Deloitte the report states that the company had $19.5 million of cash on the balance sheet as of the end of August this year and that despite injection of $26.4 million in September, it would “not fully bridge the potential funding gap.”

You can see the full document, which was released this week, here.

The report continues: “If the group is unable to obtain additional financing or the group is unable to generate sufficient cash flow from operations, the directors intend to take additional steps to improve its liquidity position through further reducing expenditures.

“However, these uncertainties represent a material uncertainty that casts significant doubt on the group’s ability to continue as a going concern, and therefore its ability to realise its assets and discharge its liabilities in the normal course of business.”

The company said that in 2016 and in the year-to-date it has incurred more losses, though “on a smaller scale” than in 2015. The statement added that in the 2016 financial year it had sought to fund its operating losses through two convertible notes secured financings totaling $82.5 million.

Other interesting notes on FanDuel

The report presented a lot of information about the business of FanDuel, up to and including almost present day:

  • FanDuel authorized $30 million in fixed rate unsecured convertible notes in September of this year. (That resulted in the $26.4 million in cash mentioned above).
    The termination of the merger agreement with DraftKings triggered a clause in which that DFS company must pay FanDuel $2 million within 90 days or $3 million within six months.
  • The merger termination also indicated that FanDuel and DraftKings would have to pay $5.5 to $6 million on “joint lobbying efforts” if certain conditions were met.
  • FanDuel CEO Nigel Eccles wrote in a “directors’ report” that they “believe additional financing will be available to support future operations.” However, Deloitte notes that “there is a risk that the Group is unable to obtain the levels of additional financing required.”
  • FanDuel laid off 60 employees in October last year.
  • For the final six months of 2015, there were nearly 2.2 million users that “entered at least one paid contest.” No data on the userbase beyond that was in the report.

Regulatory impact for FanDuel

The company said these losses were “primarily the result of lower than expected revenue, legal costs incurred as a result of regulatory issues… and the group’s continued investment in new customer acquisition.”

The report added that the regulatory environment in the US has “impacted the number of active users,” stating that it now operators in 40 states as opposed to the previous 45.

It was already evident at the time of the collapsed merger in July this year with DraftKings that FanDuel was in a perilous financial state. According to figures unearthed at the time, it showed that FanDuel made a EBITDA loss in the period January to October 2016 of $59 million.

By way of contrast, DraftKings made an operating loss of half a billion dollars in 2015.

As part of the ongoing financial troubles at the firm, FanDuel recently went through a share reorganization that handed more equity to the company’s private equity backers at the expense of the founders and management.

Diluted ownership

According to newspaper reports in the summer, recent filings show that private equity owners including KKR and Shamrock Capital have seen the value of their investment increase at the expense of founders, husband and wife team Nigel and Lesley Eccles. The Eccles have also seen their voting rights curtailed. Lesley Eccles has since ceased to be a director of the business.

The last non-emergency fund raise for FanDuel came in 2015, when a consortium of investors led by KKR came up with a total of $275 million.

Not all the metrics were bad for FanDuel. The number of paid active players soared to 2.2 million in the six months after June 2015, from 1.25 million in the previous 18-month period. Total fees gathered came in at $64.4 million for the six-month period to December 2015, compared with $87.7 million in the 18 months previously.

This was a record revenue figure for any six-month period in the company’s history. Still administrative expenses rose significantly to $336 million for the six months.

On the regulatory front, the results state that the company has “long been a leader in calling for legal clarity for fantasy sports” and believes that active dialogue is the key to unlocking more potential new states.

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Scott Longley

Scott Longley has been a journalist since the early noughties covering personal finance, sport and gambling. He has worked for a number of publications including Investor's Week, Bloomberg Money, Football First, eGaming Review and Gambling Compliance. He now runs his own editorial consultancy Clear Concise Media and writes for a number of online and print titles.

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