Fantasy Aces Daily Fantasy Sports Corp. - Modyo

Fantasy Aces Daily Fantasy Sports Corp.Only Pure-Play Listed Daily Fantasy Sports Operator

Company Description Fantasy Aces Daily Fantasy Sports Corp. (“Fantasy Aces”, the “Company”) is a United States based company offering online fantasy sports contests. The Company’s core product is Daily Fantasy Sports (DFS) contests, where users compete against one another to win cash prizes, on a daily basis. Fantasy Aces offers daily and weekly fantasy sports contests for the following sports: baseball (MLB), football (NFL and College Football), basketball (NBA), hockey (NHL), and golf (PGA).(Read more about Fantasy Aces and its business model on page 10)

Investment ThesisWith the introduction of fantasy sports, sports fans gained an exciting new way of experiencing sports entertainment through building a roster of athletes and competing for points against friends. The DFS industry, pioneered by FanDuel in 2009, became a complimentary service to the more well-known ‘season long’ fantasy sport game type, creating a unique form of entertain-ment for players. The fantasy sports industry now has over 56 million players, with a potential market size of US$26.4 billion.

Fantasy Aces, the only pure-play, publicly-traded DFS operator, merged with DraftTeam (October 1, 2015) to become the third-largest player in the indus-try. It offers an enhanced service, in comparison to industry rivals, by provid-ing user-based tools, unique game types, and Live Final Championships. The Company has grown its user base by 400% over the past year to 25,000, with payouts over US$8.4 million, and revenues in excess of US$700,000.(Read more about the Investment Thesis on page 3)

CatalystsFantasy Aces has closed its merger with DraftTeam on October 1st, 2015, and has yet to release consolidated financial statements. As guided by its exceptional performance during the first three weeks of the 2015 NFL season, with total prize payouts just below $2.0 million, we can expect the quarterly financials to be positive news for the Company. In addition, smaller industry players are potential acquisition targets for the top two DFS industry leaders DraftKings and FanDuel, as illustrated by several recent acquisitions in the market. Lastly, marketing is a huge determinant factor for user acquisition success within fantasy sports, and we can expect the Company to gain higher traction during the upcoming Live Final Championships for college football and NFL fans, taking place in November and December of 2015, respectively.(Read more about the Company’s Catalysts on page 13)

Financial PerformanceWe expect the Company to obtain 67,750 active users by the end of 2016, and 158,615 users by the end of 2017. This would translate into revenues of $2.7 million in 2016 and $7.5 million in 2017, with operating margins at 11.4% and 12.5%, respectively.(Read more about the Company’s Financial Performance and Outlook on page 14)

Equity Research Daily Fantasy Sports | Canadian Small Cap October 29, 2015

Market DataPrice (October 28, 2015) $0.07Symbol TSXV: FAS52 Week Range CAD $0.04 - $0.24Market Cap (MM) $5.7Shares Outstanding (MM) 80.8Free Float 95%Average Daily Volume (30 days) 1,012,710Total Debt (MM) $0.2Cash & ST Inv. (MM) $0.3Total Assets (MM) $3.1

Financial Data (MM): 2015E 2016E 2017ERevenues $1.5 $2.7 $7.5Operating Income ($1.1) $0.4 $0.9Net Income ($1.1) $0.2 $0.7

All figures in CAD unless otherwise stated.Thomson Reuters 10/28/2015

Alex [email protected]

Stefan MuchalSenior [email protected]

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

Daily

Vol

ume

(tho

usan

ds)

Executive Summary

Fantasy sports is a game where users assemble imaginary/virtual teams of real players of a professional sport, and users earn points based on the statistical performance of those selected players in actual games. The concept of fantasy sports dates back to the 1950s within the sport of golf. Each player selected a team of professional golfers and the person with the lowest combined total strokes at the end of the tournament would win. It wasn’t until the Internet boom that interest really surged, when online fantasy sports became a popular way to enhance the enjoyment of the game – initially developing season-long game formats. Fast forward another half decade to 2009, when FanDuel pioneered the first concepts of DFS. Since then, the fantasy sports industry has grown from 15 million users in 2003, to over 56 million users currently, creating a multi-billion dollar market.

DFS had a big impact on the industry, by not only increasing the size of the fantasy sports market, but by also helping increase the size of the overall sports entertain-ment market (including TV viewership, merchandise sales, and other increased meth-ods of sport consumption). The concept of watching sports is just another method of entertainment. With the introduction of fantasy sports, however, TV viewership of sports spiked due to the fact that consumers had yet another reason to follow the game – to see how their chosen roster performed. Over time, fantasy sports became a game of competition and skill, driving tremendous amount of popularity and con-verting 30% of sport watchers into fantasy sport fanatics.

The difference between ‘season long’ fantasy sports and DFS is that a sports fan gets to choose their respective player rosters on a daily basis. With no season-long commitment, players get to win cash prizes on a daily basis. This is a different to the season style of playing fantasy sports, as sports fans don’t have to be committed to one roster per season. DraftKings and FanDuel, companies with a combined user base of about 5 million, dominate the DFS industry. However, the lucrative industry and the growing market size has enticed others to join, with DraftTeam beginning operations in 2013, and Fantasy Aces in 2012. Although DraftKings and FanDuel are clear leaders of the industry, it is worth pointing out that they have only penetrated 5% of the entire North American sports fan community, leaving much of the pie left for players wishing to get in on the action. Those wishing to invest in the industry have only one publicly-traded company to invest in – Fantasy Aces.

- 2 - October 29, 2015Fantasy Aces (TSXV: FAS)

- 3 -

Investment ThesisFantasy Aces has recently completed a merger with DraftTeam, forming a respect-ably-sized competitor within the DFS industry. Its success will be greatly aided by the aggressive growth of the entire industry, overall expanding the pie, which does not force the Company to strictly fight for market share.

• It is estimated that there are over 56 million fantasy sport players in the United States and Canada

• The industry achieved a 10-year CAGR of 14.1% in the number of fantasy sport users

• In Canada and the U.S. alone, there are an estimated 186.4 million sport fans, which represents the attainable market for fantasy sports providers

• On average, it is estimated that a fantasy sport player spends a total of $465 a year on fantasy sports and fantasy sport materials

• DFS spending accounts for a larger chunk of the total $465 spend, at $257 per year

• In total, the size of the fantasy sport market is currently estimated at $26.4 billion, with DFS accounting for $14.6 billion

Fantasy Aces itself has seen impressive growth over the last 12 months. The Compa-ny achieved such growth with a fairly small marketing budget, indicating strong po-tential for additional growth when marketing expenses increase. The following figures represent Y/Y growth for Fantasy Aces:

• 1,000% growth in total payouts, with over $6.2 million in prize payouts (LTM as of July 31, 2015)

• 900% growth in total revenues, with over $600,000 in revenue (LTM as of as of July 31, 2015) and ~$225,000 in revenue over the last three weeks of Sep-tember 2015

• 250% growth in the number of users, totaling ~12,000 currently

• 300% growth in total deposits, totaling just over $3.0 million currently

• 400% growth in the number game entries

Fantasy Aces is the only public company purely focused on fantasy sports. Fantasy Aces also differs significantly from other DFS providers due to its unique game fea-tures and great user engagement. The Company’s Live Final Championship events have been hugely successful, creating buzz and word of mouth, while also develop-ing an extremely loyal user base. The following bullets showcase some of the features that make Fantasy Aces unique:

• The Company provides a different salary-cap format in fantasy sports, with less stringent roster selection criteria restrictions

• SalaryPro is a game type allowing for a flexible salary cap, effectively eliminat-ing the strict salary cap requirement

• The Scout tool is a custom player research tool helping users make more dil-igent roster selections

• The Company is hosting a $500,000 Live Final Football Championship taking place in December 2015

Fantasy Aces (TSXV: FAS) October 29, 2015

- 4 -

Figure 1: Fantasy Sports Interface

Source: Company website

Size of the Market

It is estimated that there are over 56 million fantasy sport players in the United States and Canada alone. The industry has come a long way, having only 15 million players in 2003. This represents a 10-year annual growth rate of 14.1%. The Industry is pro-jected to grow at a 12% CAGR over the next 3 years, to reach 79.8 million users by 2018. It is also worth noting that the growth in DFS players is much higher than the growth in total fantasy players, accounting for much of the increase in fantasy players over the last three years.

Industry Overview

Fantasy sports is an industry defined by consumers, sport fans that assemble virtual teams of real players of a professional sport in the hopes that these players perform well in actual real life games, and suppliers, the online fantasy game providers. The industry can, so far, be classified into two branches: season-long fantasy sports, and daily fantasy sports (DFS).

Figure 2: Number of Fantasy Sport Players (millions, US & Canada)

Source: Fantasy Sports Trade Association


http://fsta.org/research/industry-demographics/

- 5 -

Figure 3: Annual Fantasy Sports Spending per Player

It is important to compare this figure to the total attainable market size, which in this case is best represented by the total number of sport fans. A 2013 report published by TV Sports Markets estimated the number of adult sports fans in the U.S. at 170.1 million, representing 71% of the country’s adult population. In Canada and the U.S. alone, there are an estimated 186.4 million sport fans. The 56.8 million fantasy play-ers taken as a percentage of the sport-fan population, represents just 30%. It is also important to point out that the sport fan population is fairly stagnant, and the growth in fantasy sport users will need to come from conversions of sport fans into fantasy sport fans (a trend rapidly evolving). Based on these figures, we can see that despite the dominant market share of the Number 1 and 2 industry players, DraftKings and FanDuel, the market is swiftly expanding, with 70% of the market currently untapped.

On average, it is estimated that a fantasy sport player spends a total of $465 a year on fantasy sports and fantasy sport materials. This is a large increase over the $80 a year expenditure examined in 2012, as indicated in Figure 3. Interestingly enough, DFS account for a larger chunk of that spending at $257/year. In total, the size of the fantasy sport market is currently estimated at US$26.4 billion, with DFS accounting for $14.6 billion

Source: Fantasy Sports Trade Association

Fantasy Sports is Legal: Federal Government Does Not Define Fantasy Sports as Gambling

The Unlawful Internet Gambling Enforcement Act of 2006 included “carve out” lan-guage that clarified the legality of fantasy sports. It was passed by Congress and signed into law on October 13, 2006, by President George W. Bush. The act makes transactions from banks or similar institutions to online gambling sites illegal, with the notable exceptions of fantasy sports, online lotteries, and horse/harness racing.

Playing fantasy sports is argued to be a game of skill. Players must take into account a countless number of statistics, facts and game theory in order to be competitive. There are thousands of websites, magazines and other publications that seek to syn-thesize the vast amounts of available fantasy sports information to keep their readers informed. There are noted players who constantly perform in the top 10%, which is definitely not a result of pure chance – rather skill.


http://talentleague.com/wp-content/uploads/2013/09/Global_Sports_Media_report_2013.pdf


http://fsta.org/research/industry-demographics/

- 6 -

Fantasy Aces, specifically, prides itself on offering players “a good standard platform that is legal and compliant in all jurisdictions.” It has abided by the recent ban created in the state of Nevada, and has effectively ended all business practices in the state. However, the Company remains very supportive of the industry and all associations involved.

Business Cyclicality

Playing fantasy sports is driven by the sports industry. If there weren’t any profes-sional sport teams broadcasted on TV, then sport fans would not be playing fantasy sports. It is, therefore, imperative to understand that the business is cyclical in na-ture, gaining more participation during the season for the sports higher in popularity amongst adults. As can be seen from Figure 4, football (i.e. the NFL and College Football) is followed by more than 50% of U.S. adults in 2013, trailed by baseball and basketball at 33% and 29%, respectively. Concurrently, football has a compressed season with only 16 games played by an NFL team. Compared to a 162-game MLB schedule that stretches over six months, or an NBA schedule that encompasses 82 games, the NFL season is less time straining and is relaxed. Football popularity is enhanced by the fact that it is an “event sport,” with built-up anticipation and analysis throughout the week leading up to the game. The readily-available scoring statistics online and in newspapers makes it easy for even the most casual football fan to follow a team. It is, therefore, not surprising to find out that fantasy sport providers generate the largest share of its sales during the football season.

Figure 4: Top 10 Sports Followed in the US

Source: Global Sports Media Consumption Report 2013



- 7 -

Figure 5: Competition Matrix

Source: Ubika Research

Competition

The industry is dominated by DraftKings and FanDuel, the Coca-Cola and Pepsi equivalent of the fantasy sports industry. The two control an estimated 97% of the DFS market, yet the battle for market share in this growing industry is exacerbated by companies such as Fantasy Aces, and other newly-emerging participants such as Yahoo. The race for third place is definitely on, with no current leader in the pack of many DFS providers. Some of the other competition in the industry includes DraftPot, DraftDay, StarsDraft, and a few other small players.

DraftKings FanDuel Fantasy Aces Yahoo! DraftPot

User Interface

Number of Users

Sports Offered

Size of Payouts

Interesting Qualities

Offers more frequent games. Expanded into e-games in October 2015.

Very modern looking web-site.

Great features such as a scout-ing tool, salary pro, live final championships, and preferred roster setup.

Already has a large sea-son-long fan-tasy user base. May convert these users into DFS players.

Has fanta-sy pools for e-games: League of Leg-ends

It is also interesting to note that none of the fantasy sports providers are implement-ing ads on their websites – a potential revenue generator for companies. The average fantasy player is 37 years of age, with males representing a larger 66% share. More than half (57%) the players have a college degree, and 47% have a household income greater than $75k. The fantasy sports platform therefore presents a large captive au-dience for marketers to target.

In terms of valuation, DraftKings’ most recent financing round of $300 million, valued the Company at over $1.2 billion. This represents at least a 30.0x Revenue multiple, given that the company reported $40 million in revenue for 2014. As for FanDuel, the company’s most recent $275 million round in July, values the Company at $1.28 bil-lion, and 22.3x Revenues of $57.3 million in 2014. On the other hand, Fantasy Aces is currently valued at a 3.1x 2015E Revenues – much lower than their private com-petitors.


http://bostinno.streetwise.co/2015/07/27/boston-unicorns-draftkings-valuation-1b-in-fox-investment/

http://bostinno.streetwise.co/2015/07/27/boston-unicorns-draftkings-valuation-1b-in-fox-investment/

http://www.wsj.com/articles/fantasy-sports-create-billion-dollar-startups-1436846402

http://www.wsj.com/articles/fantasy-sports-create-billion-dollar-startups-1436846402

http://www.bizjournals.com/newyork/blog/techflash/2015/01/fanduel-triples-revenue-draws-1-million-users-in.html

- 8 -

Large Investor Backing

The following tables represent the large investor backing into the two major players for DFS. It is important to note that they have both started from small sums of mon-ey, but over time grew to significant proportions. These investments are, however, fundamentally different than an investment into Fantasy Aces, as it is the only public pure-play DFS company, and does provide shareholders with liquidity.

Figure 6: FanDuel Financing Activity

Source: FanDuel brand tracking study, December 2014

Date Type Amount Investors

1-Nov-07 Angel Undisclosed Undisclosed

14-Jan-09 Series A $1,200,000 Scottish Investment Bank, Pentech Ventures

1-Jul-11 Seed Undisclosed Fabrice Grind

7-Sep-11 Series B $4,000,000 Pentech Ventures

30-Jan-13 Series C $11,000,000 Comcast Ventures, Scottish Investment Bank, Bullpen Capital, Pentech Ventures, Piton Capital

2-Sep-14 Series D $70,000,000 Karlani Capital, Scottish Investment Bank, Bullpen Capital, Pentech Ventures, Comcast Ventures, KKR, NBC Sports Ventures, Shamrock Capital Advisors

13-Jul-15 Series E $275,000,000 KKR, Google Capital, Time Marner Investments, Shamrock Capital, NBC Sports, Comcast Ventures, Bullpen Capital, Pentech Ventures and Piton Capital

Figure 7: DraftKings Financing Activity


Date Type Amount Investors

19-Jul-12 Seed $1,400,000 Jordan Mendell, Atlas Venture

6-May-13 Series A $7,000,000 BDS Venture Fund, Jordan Mendell, Atlas Venture

6-Aug-13 Seed $3,000,000 Undisclosed

26-Nov-13 Series B $24,000,000 BDS Venture Fund, Jordan Mendell, Redpoint Ven-tures, GGV Capital, Atlas Ventures

25-Aug-14 Series C $41,000,000 Atlas Venture, GGV Capital, Repoint Venture, The Raine Group

26-Jul-15 Series D $300,000,000 Fox Sports, NBC Sports Ventures, National Basketball Association


http://www.fstaconference.com/docs/09-McClain-Eggles-Demographics.pdf


DFS Increases TV consumption

While the NFL initially feared the connection with gambling, they now embrace fanta-sy football on their NFL.com website, offering fantasy advice and updates. The DFS industry is reportedly increasing the sport consumption, having 67% of DFS players watch more games, 55% watch more sports-related shows, 66% reading more sport news, and 64% using more games related applications.

- 9 -

Figure 8: DFS industry increasing overall sport consumption



http://www.forbes.com/sites/leighsteinberg/2014/08/29/the-fantasy-football-explosion/


- 10 -

Company Overview

Fantasy Aces is a pure-play DFS company offering daily competitions in five major sports: baseball (MLB), football (NFL and College Football), basketball (NBA), hockey (NHL), and golf (PGA). The Company had its launch on the opening day of the 2013 MLB season. On October 1st, 2015, the company closed a merger with DraftTeam, a competitor, to form a larger player in the DFS industry. The Company is making strong strides into taking the Number Three spot in the industry, attaining ~25,000 total users (out of which ~12,000 are active) and handing prize payouts in excess of $6 million annually.

Figure 9: Fantasy Aces roster selection user interface


Business Model & Company Highlights

Fantasy Aces is the only publicly listed Company with a strict focus on the DFS mar-ket. Users of the Fantasy Aces platform select a roster of professional sport athletes, which earn the user points if selected player perform relatively well in the chosen sports game. Roster selection is usually capped at a “salary” (say $50,000) and users have to abide by this salary cap, creating player selections tradeoffs and different game strategies to maximize on higher point totals. The users enter into various game types, in which case they pay an entry fee (say $3.00), and they are put together in a lobby full of other users, with set money payouts for the users achieving the most fantasy points at the end of a game. Fantasy Aces makes money on the difference between the ‘Entry Fees’ and ‘Total Payouts’, which has trended around 10% of total entry fees. This revenue is quoted as the ‘Management Fee’.

The Company offers unique game features in comparison to industry rivals, such as Salary Pro, Scout tool, and Live Final Championships. It is these game enhancements that make users more willing to play on Fantasy Aces’ platform, rather than another competitors’.


- 11 -

Figure 10: Fantasy Aces roster selection & scoring rules (left) and games lobby (right)


Salary CapThe Company provides the only true salary-cap fantasy sports game format. Instead of restricting the roster selection to match the exact required positions of players in the professional sport game, Fantasy Aces allows for various aggregations of player positions, with the only restriction being the salary cap.

Examples of this includes:

• Having two quarterback spots within a roster selection (as opposed to Draft-Kings only allowing for one quarterback)

• Allowing for two pitchers on a baseball roster

• The shortstop and second basemen positions are interchangeable

• Having a utility player (effectively allowing for three first basemen)

These features are much different than the roster restrictions offered at competitive sites, which only allow exact sporting positions matched by fantasy roster selections.

SalaryProSalaryPro is a game type allowing for a flexible salary cap format. Effectively, if a user doesn’t spend their entire salary cap, they will start the game with a positive fantasy points balance. Alternatively, if they exceed the salary cap, then they will start with a negative points balance. SalaryPro is an extremely skill-based format, which requires great knowledge of professional athletes. It rewards those who fill their roster with undervalued players and stay under the salary cap with bonus points and penalizes for those who go over the salary cap by filling their roster with expensive players.

ScoutThe Scout tool is a custom player research tool, designed for players of any skill level, to be able to quickly screen through numerous sports athletes (based on per-formance metrics such as Batting Average in baseball), and have a more diligently selected roster.


- 12 -

Live Final ChampionshipsFantasy Aces prides itself on building an experience for its users, rather than simply providing a DFS platform. It achieves this by offering a once in a year (per sport) Live Final Championship, which selects a group of current Fantasy Aces players, and sends them on a multi-day vacation to enjoy the finals of a sporting season (such as the Stanley Cup playoffs for hockey), while also providing for a chance to win a large amount of cash prizes. The tradition began in 2014, and has grown significantly ever since.

Figure 11: $250,000 Baseball Live Championship Event held at the Angel Stadium in Anaheim (August 2015)


Some examples of past and upcoming championships:

• $250,000 World Baseball Championship event, which was held at Angel Sta-dium in Anaheim in August of 2015. 20 qualified fantasy payers enjoyed an on-field experience before competing in a live one-day final at the ballpark’s exclusive Ketel One Club.

• $500,000 Live Final Football Championship taking place on December 13, 2015 in Newport Beach, California. Qualifiers and their guests will enjoy three, luxury-filled nights. This is a large upgrade from last year’s $100,000 Live Football Championship.

• $100,000 Live Final College Football Championship taking place in Newport Beach, California, on November 21, 2015. The event will host 13 finalists squaring off for the top prize. The finalists and their guests will enjoy two nights at the luxurious Balboa Bay Resort, a sunset harbor cruise aboard a deluxe 100-foot motor yacht and a gourmet dinner reception. Then, the 13 finalists will be the featured guests at a VIP party while they battle it out on college game day at the famous American Junkie sports bar on the Newport Beach Peninsula.

• $250,000 NBA Live Final Championship with details TBA

• $50,000 NHL Live Final Championship with details TBA

These live events are a unique marketing strategy, which draw plenty of attention from existing and prospective fantasy players, leaving global word-of-mouth buzz about its excitement. “Whether they finish in first place or last place, every finalist tells us that they plan to do whatever it takes to qualify for another Fantasy Aces live event” says co-founder Bryan Frisina. The Company tries to create an event that de-velops an extremely loyal user base, and leaves them to tell all their friends about it.


- 13 -

Catalysts

Synergies from Business Combination & Release of Consolidated Financials

Fantasy Aces and DraftTeam have officially merged and resumed trading under the ticker symbol “FAS” on the TSXV as of October 6th, 2015. The Boards of both com-panies expect the following advantages as a result of this Business Combination:

• Creation of a well-capitalized corporation, which is solely focused on DFS

• An increase in the size and diversity of tournament types and breadth of ap-peal

• A strong industry player that has shown an industry-leading conversion rate of new members to depositing players of over 50%

• Expanding user acquisition model while prominently diversifying marketing and promotional activity

• Increasing the number and frequency of its industry renowned Live Champi-onship Events at unique and memorable sports-themed venues across the country

• Establish affiliations with professional sports teams, leagues and athletes

• Business expansion opportunities using its technology into International mar-kets

In addition to these synergies, we are also expecting consolidated financial state-ments to have a material change on the stock price. Although vague growth metrics and rough user data have already been presented for Fantasy Aces, other financial info still remains to be seen.

Industry Consolidation

There have been several acquisitions already made within the market, in an effort for the large players to gain market share and stay competitive. Similarly, Fantasy Aces can grow its operations through additional M&A activity. Notable consolidation within the industry includes:

• DraftKings acquired StarStreet, a DFS competitor, in August 2014

• DraftKings acquired DraftStreet, the third-largest DFS Company at the time, in July 2014

• FanDuel acquired sports analytics company NumberFire in August 2015

• FanDuel acquired AlphaDraft, a site that offers fantasy contests pegged to competitive video gaming, in September 2015

Advertising in a growing market really matters

In September 2012, three years after FanDuel began operating, the DFS industry looked like this: FanDuel had captured about 60% of the DFS market, followed by DraftStreet and Draft Day. DraftKings acquired DraftStreet two years later. But in 2012, DraftKings was barely a blip on the daily fantasy sports screen. Now, it has tak-en over the entire U.S. population’s television screen, consistently sitting at or around the top of all TV advertisement spenders since the start of the 2015 NFL season. This was a remarkable feat, since DraftKings was a much newer company (only being founded in early 2011) and was operating on a seed round of $1.4 million from July 2012. This shows the immense power of advertising, especially in a growing market – an option that is easily viable for Fantasy Aces.


Financial Analysis2015 NFL Season paving the way for huge growth

The 2015 NFL season kicked off on September 10, 2015. After just three weeks of football, Fantasy Aces reported total prize payouts of just under $2 million, a Y/Y increase of 880% over September 2014. Assuming a 10% management fee (fairly standard in the industry), this implies that the company generated roughly $200,000 - $250,000 in revenue over the three weeks.

Since Fantasy Aces just recently went through the merger with DraftTeam, the com-bined financial statements for the merged Company have not yet been released. However, we would like to point out that the revenue received during the first three weeks of the 2015 NFL season is three times greater than the combined Q1 and Q2 2015 revenues DraftTeam reported. This revenue is also larger than the total revenue reported by Fantasy Aces in 2014 (which was $220,440 – unaudited).

After speaking with Tom Frisina, CEO of Fantasy Aces, and other senior executives, we were provided with the Company’s most recently-noted growth figures. Specifi-cally:

Growth figures (Year over Year, LTM)

• 1,000% growth in total payouts

• 900% growth in total revenues

• 250% growth in the number of users

• 300% growth in total deposits

• 400% growth in the number game entries

Although these growth figures present remarkable traction in the Company’s busi-ness, readers should be aware that as the Company matures, growth will subside considerably to double-digit figures.

Fantasy Aces users spend much more than the average DFS player

As per the operational update provided by the Company on August 24, 2015, we note that the Company paid out over $6.2 million in cash prizes over the LTM period ending July 31, 2015. This represents revenues of over $600,000. Using the reported active users figure of 9,340 (as of May 2015), this financial data represents roughly $66 in revenue per active user. In addition, it is also interesting to point out that each active user spent roughly $730 in contest entry fees per year. This spending is almost triple that of the $257 reported by the FSTA.

Outlook

It is estimated that the Company currently has ~12,000 active members. The Com-pany’s financial position relies extensively on its ability to attract, gain, and maintain users of its platform. User acquisition is generally guided by the cyclicality of the sporting seasons, along with the Company’s ability to successfully market their prod-uct. September – December is the busier season, due to the start of the NFL and col-lege football seasons. The company’s growth has also picked up by the NHL season launch in September and the NBA season launch in October.

- 14 -Fantasy Aces (TSXV: FAS) October 29, 2015

- 15 -

Figure 12: Major Sport Seasons


Figure 13: Projects Number of Active Users for Fantasy Aces


Sports schedulesJanuary February March April May June July August September October November December

NFL NFL PlayoffsNHLNBAMLB MLB PlayoffsCollege Football CF Playoffs

NFL SeasonNHL Season

MLB SeasonCF Season

NHL Season NHL PlayoffsNBA SeasonNBA Season NBA Playoffs

We expect the Company to see significant gains in users during the start of the sport-ing seasons, as well as during playoffs. We also expect the Company to add addition-al marketing expenditure during these busier times, in order to boost user acquisition.

We forecast that the Company will be able to attain 67,750 active users by the end of 2016, and 158,615 active users by the end of 2017. We define ‘active users’ as players which actually deposit money onto the Fantasy Aces platform, and play a cash game at least once in the past 12 months. This is much different than ‘total us-ers’ (most often quoted by other DFS operators), which combines active users and non-active users who simply sign up to the site without depositing money and play-ing games. Observing the Company’s past performance, about 40% of new users become active. In relation to the millions of total users reported by DraftKings and FanDuel, we believe the above estimates to be a fair and conservative representation of the Company’s future growth prospects.

13,800

67,750

158,615

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Moreover, we expect to see users spend about $700 on average, per year, with the management collecting a 10% fee. Gross margins are assumed to average 25%. Marketing spent is forecast on the basis of timing of each sports season, with more marketing dollars spent during the football seasons. The company has been involved heavily in promotional activity through fantasy-specific news blogs and media chan-nels, such as Fantasy Alarm, FantasyPros and 4for4. The Company also has plans for broadcast marketing across several DirectTV channels and radio stations.

Overall, we forecast revenues to top $2.7 million in 2016 and $7.5 million in 2017, with operating margins at 11.4% and 12.5%, respectively.


- 16 -

Income Statement AssumptionsFY 2016 FY 2017

Average spent per user $700Revenue: $2,741,911 $7,543,598 Management fee 10%

Gross Margin ~25%Cost of Goods Sold $2,056,433 $5,657,699Gross Profit: $675,478 $1,895,900

Operating Expenses:G&A $274,191 $754,360Sales and Marketing $87,500 $195,000

Total Operating Expenses: $361,691 $949,360

Operating Income: $313,787 $946,540Operating Profit % 11.4% 12.5%

Figure 14: Financial Forecasts for Fantasy Aces


Fantasy Aces (TSXV: FAS)

Assumptions

Average spent per user $700Management fee 10%Gross Margin ~25%

October 29, 2015

- 17 -

Risks

Regulation

Although the fantasy sports industry is currently 100% legal, we could expect some form of regulatory policies to restrict certain industry practices. An example of pos-sible regulation is a ban of employees within fantasy sport companies from playing fantasy sports, as they might be open to more data than the public, and therefore, make betting decisions based on the public’s fantasy picks. This situation arose with several DraftKings employees, after which the Company had to issue an explanatory press release while also restricting its employees from playing.

The risk of regulation has deepened with the recently-placed ban on all fantasy sport activity by the state of Nevada. Federal and state investigations began digging through the legalities of fantasy sports, and the NBA Commissioner, Adam Silver, went on record to say that “daily fantasy sports needs regulation.”

Although the state of Nevada ban on all fantasy sports activity is a mere fraction of Fantasy Aces’ business, we do note the potential effect of regulation being levied on the industry as highly material.

Ability to Attract the Mass Market

A large risk for the DFS industry is whether it can attract mass market appeal and avoid becoming too “hardcore.” Namely, fantasy sports runs the risk of becoming over run by algo’s & quants, which could preclude industry from ever penetrating mass market and achieving large revenue projections. There needs to be a delicate balance between “grinders” and “casual” players as the industry matures.

Large Overlays

“Overlays” is industry terminology for describing the difference between the guar-anteed money in prize winnings and the amount covered by entry fees. Effectively, it is the money that the DFS provider would have to pay out from its own pockets if not enough players register for a fantasy draw (since most prize payout are concrete and not dependent on the player sign-ups). The glory days of 2013-2015 will likely be remembered as the hey-day for DFS from a player perspective due to large overlay opportunities and noticeable skill gap between “grinders” and “casual” players. We do not expect this to last, as the market becomes more efficient over time.

Data Breach and Bad Industry Reputation

Although the industry is played by millions of fans around the world, negative pub-licity can put a limit on potential growth. In addition, the possibility of potential hacks and data breaches is also a concern.


http://www.nytimes.com/2015/10/06/sports/fanduel-draftkings-fantasy-employees-bet-rivals.html?smid=tw-nytimes&smtyp=cur&_r=2

http://www.nytimes.com/2015/10/06/sports/fanduel-draftkings-fantasy-employees-bet-rivals.html?smid=tw-nytimes&smtyp=cur&_r=2

Conclusion

Daily Fantasy Sports is a subset of the overall fantasy sports market. DFS was pi-oneered back in 2009, and the whole fantasy sports industry has grown to over 56 million users in North America alone. DFS is played by sports fans looking to not only make money, but to also boost their level of excitement and engagement for a sport. Although two major players largely dominate the industry, huge opportunity still re-mains as the industry is encountering a growth spurt. Fantasy Aces, the only public pure-play DFS provider, is attacking the space in an effort to gain third-place status. They have successfully gone through a public business merger with DraftTeam, and the company is ready to channel marketing and sales efforts into gaining user growth, attracting investors, and building up shareholder value. We believe that the Compa-ny is positioned to tackle this growing market, while providing retail and institutional investors the possibility of investing into the fantasy sports industry. The success of Fantasy Aces is largely aided by the overall prospects of the growing fantasy sports market, and we therefore wish to reiterate the catalysts this industry brings to the Company.

Critical Insights from the DFS industry:

• DFS introduces new users to fantasy (building a bigger fantasy market), en-hances the overall excitement of the sports experience, and increases overall sports consumption

• 83% of DFS players also play season-long fantasy (reinforcing the idea be-hind DFS being a compliment to season-long fantasy sports)

• Reported that 63% of DFS players play in order to “make watching games more fun and interesting,” while 72% of season-long fantasy players also agreed with this statement

• Different demand drivers for season-long vs. one-day fantasy sports, (season long: a social activity to do with friends; daily: a way to make money, and flexibility)

• Ultimately, playing DFS makes watching sports more exciting, driving addi-tional TV viewership and expanding the sports entertainment industry


Appendix A: ManagementTom Frisina - Chairman and Chief Executive Officer

Tom Frisina has over three decades of experience in the Interactive Digital Media industry, while founding and leading three game publishers and as a key executive at Electronic Arts for 15 years. He is currently Executive Chairman of Tilting Point, a prominent NYC based multi-platform mobile gaming enterprise.

Bryan Frisina - Director of Operations

Bryan Frisina was a General Manager with LA Fitness Sports Clubs where he excelled for 9 years operating multiple locations throughout Southern California. Bryan over-sees the day to day operations of Fantasy Aces and is an integral part of training and developing talent within the Fantasy Aces team. Bryan Frisina was a star defensive back at Division II National Champion Azusa Pacific University.

Trent Frisina - Creative Director

Trent was the visionary of Fantasy Aces LLC in 2012 and designed and oversaw the engineering implementation. Along with running the daily operations with Bryan, he was also the lead on all creative aspects of the Fantasy Aces product.

Mike Olsen - Chief Financial Officer

Mike Olsen has over 15 years of accounting and finance experience and has worked in all aspects of a business after receiving a Master’s Degree in Accountancy. Most recently he has worked with a number of small businesses and has helped them de-velop the best financial tools for their businesses to increase their success rate.

Aaron Crecy - Director of Marketing

Mr. Crecy has 20 years worth of experience as a senior sports marketing executive. He has founded and sold a multi million dollar sportswear brand.

Nick Kuhn - Director of Technology

Mt. Kuhn is an expert in high performance web applications. He has enterprise level experience with some of the largest names in media.

Thomas Cipolla - Director

Mr. Cipolla was a former vice president at Electronic Arts. He has over 25 years of executive level experience in the digital gaming industry, and extensive experience in digital sales, trade marketing, and strategic planning.

David Antony - Director

David Antony is the current CEO of DraftTeam with over 20 years of experience in assisting companies in structuring transactions, accessing capital, and corporate governance. He is currently also the CEO and director of Blackhawk Resource Corp., and Africa Hydrocarbons Inc., Valencia Ventures Inc. and Iron Tank Resources Corp.

John Rak - Director

Mr. Rak has extensive experience in the Canadian investment banking industry and venture capital markets having previously held executive roles at a midsize Canadian investment bank as well as multiple public companies.


Appendix B: Recent NewsFantasy Aces Daily Fantasy Sports Corp. Launching 2015-16 NBA Season & Announces Investor Conference CallCompany will be launching the start of the NBA season on October 27th, 2015. The tip-off is set for 2015-16 NBA season and Fantasy Aces is excited for the upcoming months. Its plans include $250,000 NBA Live Final Championship, awarding in excess of $7,000,000 in total prize payouts during the season, and a marketing budget aimed at continuing its tremendous growth as seen in NHL, NFL and CFB in 2015.

Fantasy Aces Daily Fantasy Sports Corp. Will Not Be Applying for a Gaming License in the State of Nevada and Strongly Supports Its Industry in Allowing all Players in Nevada and Elsewhere to Play DFS

Fantasy Aces Daily Fantasy Sports Corp. Removes all Nevada Users from Further Par-ticipation on their SiteAt the request of the Nevada Gaming Control Board, it has banned all players in Nevada from using the site.

Fantasy Aces Daily Fantasy Sports Corp. Discusses Employee Control PracticesFantasy Aces has maintained since inception very close control over each employee having access to sensitive user data. None of the company’s employees are utilizing any Fantasy Aces data or information other than that required for customer service and product related issues.

FantasyAces Daily Fantasy Sports Corp. Provides Operations Update and Launch of NHL SeasonFor the month of September 2015, Fantasy Aces has had total prize payouts of just un-der $2MM, an increase of 880% over September 2014. The company’s 2015 NHL season plans include: $50,000 Fantasy Aces Hockey Championship Final, awarding in excess of $2,000,000 in prize payouts during the season, and a marketing budget aimed towards ag-gressively growing its hockey fan-base.

DraftTeam and Fantasy Aces Close Business Combination Transaction Prior to the completion of the Business Combination, DraftTeam completed a private place-ment for aggregate gross proceeds of $3,828,000. Shareholders of DraftTeam also approved at the annual and special meeting the name change of the Corporation to “Fantasy Aces Daily Fantasy Sports Corp.” It is anticipated that the Corporation will complete the name change shortly and will trade on the TSXV under the new symbol “FAS”. As a result of the Business Combination and the anticipated conversion of the Subscription Receipts, the Corporation will have approximately 80,809,161 common shares outstanding.

DraftTeam Daily Fantasy Sports Corp. Closes Final Tranche of Private Placement Rais-ing a Total of $3,828,000 in connection with the Business Combination with Fantasy Aces, LLC

Fantasy Aces, LLC and DraftTeam Daily Fantasy Sports Corp. Provide Operations Up-date Following Launch of NFL and College Football SeasonsThrough the first two weeks of September 2015, FA has had total prize payouts of approxi-mately $1 million, an increase of 780% over the same 2014 period. Additionally, in 2015 for the period July 1 through September 14, gross revenue increased 977%, game entries 500% and tournament payouts 910%.

Fantasy Aces and DraftTeam Daily Fantasy Sports Corp. Provide Operations UpdateAs of July 31, 2015 FA has grown its membership base in the last twelve months by over 400% while increasing its prize payouts to over USD$6.2MM , which corresponds to an in-crease in Management Fees to over USD $600,000 . Additionally, FA game entries increased 800% during the period.

June 8, 2015

October 21, 2015

September 16, 2015

September 29, 2015

- 20 -

October 1, 2015

October 19, 2015

October 7, 2015

October 16, 2015

October 9, 2015

August 24, 2015


DisclosuresCopyright

This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoev-er, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of Ubika Corporationtion.

Disclaimer

All Companies mentioned at www.smallcappower.com (“SCP”) have entered into a commercial relationship with Ubika Corpora-tion or our affiliates for capital market services and have paid fees and/or shares or stock options or warrants for being featured on SCP. Hence these “Analyst Covered Companies” at SCP are shown on the website as an advertisement only and any men-tion of these companies does not and will not constitute an offer to buy or sell securities in the featured companies.

Ubika Corporation and its related companies (including its Directors, employees and representatives) or a connected person may have ownership/stock positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time.

Where reference is made to estimates of value or relative value of a specific company, those are based on the covered compa-ny’s guidance and layered on with prudent and standard analysis. There is no guarantee that these estimates are reliable or will materialize. They should not be relied upon in making specific investment decisions and readers should seek advice based on their risk profile and investment requirements from a person qualified and authorized to provide advice.

This report does not constitute an offer or invitation to purchase or acquire any shares in any company or any interest therein, nor shall it form the basis of any contract entered into for the sale of shares in any company.

The information on the highlighted company was provided to Ubika Corporation by the highlighted company. The information in this report is believed to be correct, but its accuracy, timelines or completeness cannot be guaranteed. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibil-ity or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Ubika Corporation did not make an independent investigation or inquiry as to the accuracy of any infor-mation provided by the highlighted company and is relying solely upon information provided by the highlighted company for the accuracy and completeness of all such information.

Readers of this report are advised to conduct their own due diligence before investing in the highlighted company.

Safe Harbour Statement for US Residents/ Investors

The information set forth in this report may contain “forward-looking statements.” Statements in the report, which are not purely historical, are forward-looking and include statements regarding beliefs, plans, expectations or intentions regarding the future.

Except for the historical information presented herein, matters discussed in this document contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, per-formance or achievements expressed or implied by such statements. There can be no assurance that the highlighted company’s efforts will succeed and the company will ultimately achieve sustained commercial success. These forward-looking statements are made as of the date of this document, and neither Ubika Corporation nor the highlighted company assumes any obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The forward looking statements contained in the document have been prepared by management of the highlighted company who believe and have so advised Ubika Corporation, without independent verification by Ubika Corporation that a reasonable basis exists for making such statements.

Investor Quick Links• Investing Newsletter on www.smallcappower.com

• Visit us at www.ubikaresearch.com for more details of our offering

• Reach us at [email protected] for any questions or comments

333 Bay Street, Suite #650Bay-Adelaide Centre

Toronto, ON, Canada, M5H 2R2

http://www.smallcappower.com/companies/products/earth-alive-clean-technologies-cse-eac

http://www.smallcappower.com/signup

http://www.ubikaresearch.com

mailto:info%40ubikacorp.com?subject=

Fantasy Aces Daily Fantasy Sports Corp. - Modyo

Documents

Transcript of Fantasy Aces Daily Fantasy Sports Corp. - Modyo