The following discussion and analysis should be read in conjunction with other sections of this Annual Report, including "Item 1. Business," "Item 6. Selected Financial Data," and the accompanying Consolidated Financial Statements and related Notes included elsewhere in this Report. Unless otherwise indicated, the terms "DraftKings ," "we," "us," or "our" refer toDraftKings Inc. , aNevada corporation, together with its consolidated subsidiaries.
Restatement of Previously Issued Financial Statements
The following information has been adjusted to reflect the restatement and revision of our consolidated financial statements as described in the "Explanatory Note" at the beginning of this Amended Annual Report and in Note 2, "Summary of Significant Accounting Policies and Practices," in Notes to the Consolidated Financial Statements of this Amended Annual Report.
Our Business
We are a digital sports entertainment and gaming company. We provide users with DFS, Sportsbook and iGaming opportunities, and we are also involved in the design, development, and licensing of sports betting and casino gaming software for online and retail sportsbook and casino gaming products.
Our mission is to make life more exciting by responsibly creating the world's favorite real-money games and betting experiences. We accomplish this by creating an environment where our users can find enjoyment and fulfillment through daily DFS, Sportsbook and iGaming.
We make deliberate and substantial investments in support of our mission and long-term growth. For example, we have invested in our products and technology in order to continually launch new product innovations, improve marketing, merchandising, and operational efficiency through data science, and deliver a great user experience. We also make significant investments in sales and marketing and incentives to grow and retain our paid user base, including personalized cross-product offers and promotions, and promote brand awareness to attract the "skin-in-the-game" sports fan. Together, these investments have enabled us to create a leading product offering built on scalable technology, while attracting a user base that has resulted in the rapid growth of our business. Our priorities are to (a) continue to invest in our products and services, (b) launch our product offerings in new geographies, (c) effectively integrateSBTech to form a vertically integrated business, (d) create replicable and predictable state-level unit economics in sports betting and iGaming and (e) expand our consumer offerings. When we launch Sportsbook and iGaming offerings in a new jurisdiction, we invest in user acquisition, retention and cross-selling until the new jurisdiction provides a critical mass of users engaged across our product offerings. Our current technology is highly scalable with relatively minimal incremental spend required to launch our product offerings in new jurisdictions. We will continue to manage our fixed-cost base in conjunction with our market entry plans and focus our variable spend on marketing, user experience and support and regulatory compliance to become the product of choice for users and the partner of choice for regulators. We expect to further improve our profitability (excluding the impact of amortization of acquired intangibles) through cost synergies and new opportunities driven by vertical integration withSBTech's technology and expertise. Our path to profitability is based on the acceleration of positive contribution profit growth driven by marketing efficiencies as we transition from local to regional to national advertising and scale benefits on the technology development component of our cost of revenue. On a consolidated Adjusted EBITDA basis, we expect to achieve profitability when total contribution profit exceeds the fixed costs of our business, which depends, in part, on the percentage of theU.S. adult population that has access to our product offerings and the other factors summarized in the section entitled "Cautionary Statement Regarding
Forward-Looking Statements". Basis of Presentation
We operate two complementary business segments: our B2C business and our B2B business.
53 B2C Our B2C business is comprised of the legacyDraftKings business, which includes our DFS, Sportsbook and iGaming product offerings. Across these principal offerings, we offer users a single integrated product that provides one account, one wallet, a centralized payment system and responsible gaming controls. Currently, we operate our B2C segment primarily inthe United States . B2B
Our B2B business is comprised of the entirety of the operations ofSBTech , which we acquired onApril 23, 2020 . Our B2B segment's principal activities involve the design and development of sports betting and casino gaming software. Our B2B services are delivered through our proprietary software, and our complementary service offerings include trading and risk management and support for reporting, customer management and regulatory reporting requirements. The operations of our B2B segment are concentrated mainly inEurope andAsia , with a growing presence inthe United States . Impact of COVID-19 The COVID-19 pandemic has adversely impacted global commercial activity, disrupted supply chains and contributed to significant volatility in financial markets. In 2020, 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. To date, the primary impacts of the COVID-19 pandemic to us have been the suspension, cancellation and rescheduling of sports seasons and sporting events. Beginning in March and continuing through the end of the second quarter, many sports seasons and sporting events, including the MLB regular season, domestic soccer leagues and European Cup competitions, the NBA regular season and playoffs, theNCAA college basketball tournament, the Masters golf tournament, and the NHL regular season and playoffs, were suspended or cancelled. The suspension of sports seasons and sporting events reduced customers' use of, and spending on, our Sportsbook and DFS product offerings. Starting in the third quarter and continuing into the fourth quarter of our fiscal year, major professional sports leagues resumed their activities. The 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 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. The return of major sports and sporting events, as well as the unique and concentrated sports calendar, generated significant user interest and activity in our Sportsbook and DFS product offerings. However, the possibility remains that sports seasons and sporting events may be suspended, cancelled or rescheduled due to COVID-19 outbreaks. The suspension and alteration of sports seasons and sporting events earlier in the year reduced customers' use of, and spending on, our Sportsbook and DFS product offerings and caused us to issue refunds for canceled events. Additionally, while retail casinos where we have branded Sportsbooks and DFS have reopened, they continue to operate with reduced capacity. Our revenues vary based on sports seasons and sporting events amongst other things, and cancellations, suspensions or alterations resulting from COVID-19 have the potential to adversely affect our revenue, possibly materially. However, our product offerings that do not rely on sports seasons and sporting events, such as iGaming, may partially offset this adverse impact on revenue.DraftKings is also innovating to develop more products that do not rely on traditional sports seasons and sporting events, for example, products that permit wagering and contests on events such as eSports, simulatedNASCAR andLeague of Legends . A significant or prolonged decrease in consumer spending on entertainment or leisure activities would likely have an adverse effect on demand for our product offerings, reducing cash flows and revenues, and thereby materially harming our business, financial condition and results of operations. In addition, a recurrence of COVID-19 cases or an emergence of additional variants or strains 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 have necessitated a shift away from a traditional office environment for many employees, we have business continuity programs in place to ensure that employees are safe and that the business continues to function with minimal disruptions to normal work operations while employees work remotely. We will continue to monitor developments relating to disruptions and uncertainties
caused by COVID-19. 54
Financial Highlights and Trends
The following table sets forth a summary of our financial results for the
periods indicated and is derived from our consolidated financial statements for
the years ended
Year Ended December 31, (amounts in thousands) 2020 2019 2018 (Restated) Revenue (1)$ 614,532 $ 323,410 $ 226,277 Pro Forma Revenue (2) 643,502 431,834 n/a Net Loss (1) (1,231,835 ) (142,734 ) (76,220 ) Pro Forma Net Loss (2) (1,242,761 ) (173,962 ) n/a Adjusted EBITDA (3) (391,919 ) (98,640 ) (58,850 )
Pro Forma Adjusted EBITDA (3) (395,928 ) (78,224 ) n/a
n/a = not applicable
(1) Due to the timing of the Business Combination (as defined below), the
twelve-month period ended
from
2019 and 2018 do not reflect any B2B/SBTech activity.
(2) Assumes that the Business Combination was consummated on
See "Comparability of Financial Results" below. (3) Adjusted EBITDA and Pro Forma Adjusted EBITDA are non-GAAP financial
measures. See "Non-GAAP Information" below for additional information about
these measures and a reconciliation of these measures. In 2020, revenue grew by$291.1 million over 2019, of which$75.6 million was attributable to the acquisition ofSBTech and$215.5 million reflected the strong performance of our B2C product offerings in the first quarter prior to the outbreak of COVID-19, several new state launches for our Sportsbook and iGaming product offerings and, in the third and fourth quarters of 2020, increased engagement with our Sportsbook and iGaming product offerings as well as growth in DFS revenues when sporting events resumed.
Pro forma revenue increased by
Comparability of Financial Results
OnApril 23, 2020 , we completed the business combination, by and among DEAC, Old DK andSBTech (the "Business Combination"). The Business Combination resulted in, among other things, a considerable increase in amortizable intangible assets and goodwill. The amortization of acquired intangibles has materially increased our consolidated cost of sales (and adversely affected our consolidated gross profit margin) for periods after the acquisition and is expected to continue to do so for the foreseeable future. As a result of the Business Combination, we became a public company listed onThe Nasdaq Stock Market LLC and have hired personnel and incurred costs that are necessary and customary for our operations as a public company, which has contributed to, and is expected to continue to contribute to, higher general and administrative costs.
In
OnJuly 7, 2020 , we redeemed all of our outstanding public warrants that had not been exercised as ofJuly 2, 2020 , which resulted in the exercise of 17.6 million public warrants for proceeds to us of$201.5 million and the redemption of 78 thousand public warrants at a redemption price of$0.01 per warrant.
In
We had cash on hand, excluding cash held on behalf of customers, of
We recorded a loss on remeasurement warrant liabilities of$387.6 million in 2020 due to fair value changes in the warrant liability. We did not have similar instruments in 2019 or 2018 and therefore no loss on remeasurement was recorded in the prior periods. 55
The following discussion of our results of operations for 2020 includes the financial results ofSBTech fromApril 24, 2020 , the day following the completion of the Business Combination, throughDecember 31, 2020 . Accordingly, our consolidated results of operations for 2020 are not comparable to our consolidated results of operations for prior periods and may not be comparable with our consolidated results for future periods. Our B2C segment results, presented and discussed below, are comparable toDraftKings' legacy operations and our reported consolidated results for prior periods. To facilitate comparability between periods, we have included in this Annual Report a supplemental discussion of our unaudited pro forma results of operations for 2020 compared with 2019. Those pro forma results were prepared giving effect to the Business Combination as if it had been consummated onJanuary 1, 2019 , and are based on estimates and assumptions, which we believe are reasonable and consistent with Article 11 of Regulation S-X.
Key Performance Indicators - B2C Operations
Monthly Unique Payers ("MUPs"). MUPs is the average number of unique paid users ("unique payers") that use our B2C product offerings on a monthly basis.
MUPs is a key indicator of the scale of our B2C user base and awareness of our brand. We believe that year-over-year MUPs is also generally indicative of the long-term revenue growth potential of our B2C segment, although MUPs in individual periods may be less indicative of our longer-term expectations. We expect the number of MUPs to grow as we attract, retain and re-engage users in new and existing jurisdictions and expand our product offerings to appeal to a wider audience. We define MUPs as the number of unique payers per month who had a paid engagement (i.e., participated in a real-money DFS contest, sports bet, or casino game) across one or more of our product offerings via our technology. For reported periods longer than one month, we average the MUPs for the months
in the reported period. A "unique paid user" or "unique payer" is any person who had one or more paid engagements via our B2C technology during the period (i.e., a user that participates in a paid engagement with one of our B2C product offerings counts as a single unique paid user or unique payer for the period). We exclude users who have made a deposit but have not yet had a paid engagement. Unique payers or unique paid users include users who have participated in a paid engagement with promotional incentives, which are fungible with other funds deposited in their wallets on our technology. The number of these users included in MUPs has not been material to date and a substantial majority of such users are repeat users who have had paid engagements both prior to and after receiving incentives.
56
The chart below presents our MUPs for the years ended 2020, 2019, and 2018 respectively:
[[Image Removed]] Average Revenue per MUP ("ARPMUP"). ARPMUP is the average B2C segment revenue per MUP, and this key metric represents our ability to drive usage and monetization of our B2C product offerings. The chart below presents our ARPMUP for 2020, 2019, and 2018 respectively: [[Image Removed]] We define and calculate ARPMUP as the average monthly B2C segment revenue for a reporting period, divided by MUPs (i.e., the average number of unique payers) for the same period. 57 Our period-on-period increase in MUPs for 2020 compared to 2019 reflects growth in DFS, the expansion of our Sportsbook and iGaming product offerings into new states and increased response rates to our advertising spending, partially offset by the negative impact of COVID-19 on our MUPs for Sportsbook and DFS primarily during the second quarter and early in the third quarter. ARPMUP increased in 2020 compared to 2019 due to our continued focus on driving engagement across our B2C product offerings, specifically with our Sportsbook and iGaming products being offered in additional jurisdictions. As a result, we experienced a favorable change in revenue mix as a higher percentage of our total customers engaged with our Sportsbook and iGaming product offerings.
Non-GAAP Information
This Annual Report includes Adjusted EBITDA and Pro Forma Adjusted EBITDA, which are non-GAAP performance measures that we use to supplement our results presented in accordance withU.S. GAAP. We believe Adjusted EBITDA and Pro Forma Adjusted EBITDA are useful in evaluating our operating performance, similar to measures reported by our publicly-listedU.S. competitors, and regularly used by security analysts, institutional investors and other interested parties in analyzing operating performance and prospects. Adjusted EBITDA and Pro Forma Adjusted EBITDA are not intended to be a substitute for anyU.S. GAAP financial measure. As calculated, it may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry. We define and calculate Adjusted EBITDA as net loss before the impact of interest income or expense, income tax expense or benefit, depreciation and amortization, and further adjusted for the following items: stock-based compensation, transaction-related costs, non-core litigation, settlement and related costs, remeasurement of warrant liabilities and certain other non-recurring, non-cash and non-core items, as described in the reconciliation below. We define and calculate Pro Forma Adjusted EBITDA as pro forma net loss (giving effect to the Business Combination as if it were consummated onJanuary 1, 2019 ) before the impact of interest income or expense, income tax expense or benefit and depreciation and amortization, and further adjusted for the same items as Adjusted EBITDA. We include these non-GAAP financial measures because they are used by management to evaluate our core operating performance and trends and to make strategic decisions regarding the allocation of capital and new investments. Adjusted EBITDA excludes certain expenses that are required in accordance withU.S. GAAP because they are non-recurring items (for example, in the case of transaction-related costs), non-cash expenditures (for example, in the case of depreciation, amortization, and stock-based compensation), or are not related to our underlying business performance (for example, in the case of interest income and expense and litigation settlement and related costs). Pro Forma Adjusted EBITDA excludes the same categories of expenses and is prepared to give effect to the Business Combination as if it occurred onJanuary 1, 2019 . Adjusted EBITDA
The table below presents our Adjusted EBITDA reconciled to our net loss, the
closest
Year Ended December 31, (amounts in thousands) 2020 2019 2018 (Restated) Net Loss$ (1,231,835 ) $ (142,734 ) $ (76,220 ) Adjusted for: Depreciation and amortization (excluding acquired intangibles) 26,894 13,636 7,499 Amortization of acquired intangibles 50,516 - - Interest expense (income), net 1,070 (1,348 ) (666 ) Income tax (benefit) provision (622 ) 58 105 Stock-based compensation (1) 325,038 17,613 7,210 Transaction-related costs (2) 36,406 10,472 - Litigation, settlement, and related costs (3) 6,839 3,695 3,222 Loss on remeasurement of warrant liabilities 387,565 - - Other non-recurring costs and special project costs (4) 5,644 2,489 - Other non-operating costs (5) 566 (2,521 ) - Adjusted EBITDA$ (391,919 ) $ (98,640 ) $ (58,850 ) Adjusted EBITDA by segment: B2C$ (393,461 ) $ (98,640 ) $ (58,850 ) B2B$ 1,542 $ - $ - 58
(1) The amounts for 2020, 2019, and 2018 primarily reflect stock-based
compensation expenses resulting from the issuance of awards under long-term
incentive plans and, in 2020, the issuance of our Class B shares (which have
no economic or conversion rights) to our CEO.
(2) Includes capital markets advisory, consulting, accounting and legal expenses
related to evaluation, negotiation and integration costs incurred in
connection with transactions and offerings, including the Business
Combination. Also includes bonuses, paid in the second quarter of 2020, to
certain employees in connection with the consummation of the Business Combination.
(3) Includes primarily external legal costs related to litigation and litigation
settlement costs deemed unrelated to our core business operations.
(4) Includes primarily consulting, advisory and other costs relating to
non-recurring items and special projects, including, for 2020, the
implementation of internal controls over financial reporting and tax advisory
costs and, for 2019, the cost of our move to our new
executive search costs.
(5) Includes our equity method share of the investee's losses in 2020 and, in
2019, a gain recorded upon a contribution of assets to an equity method investee, net of our equity method share of the investee's losses. Pro Forma Adjusted EBITDA
The table below presents our Non-GAAP Pro Forma Adjusted EBITDA reconciled to our pro forma net loss, for the periods indicated:
Year
Ended
(amounts in thousands) 2020
2019
(Restated)
Net Loss$ (1,242,761 ) $ (173,962 ) Adjusted for: Depreciation and amortization (excluding acquired intangibles) 28,024 16,933 Amortization of acquired intangibles 72,431 71,079 Interest expense (income), net 1,530 (1,173 ) Income tax provision (benefit) 3,074 (13,118 ) Stock-based compensation (1) 335,660 18,354 Transaction-related costs (2) 5,500 - Litigation, settlement, and related costs (3) 6,839 3,695 Loss on remeasurement of warrant liabilities 387,565 - Other non-recurring costs and special project costs (4) 5,644 2,489 Other non-operating costs (5)
566 (2,521 ) Adjusted EBITDA$ (395,928 ) $ (78,224 )
(1) The amounts for 2020 and 2019 primarily reflect stock-based compensation
expenses resulting from the issuance of awards under long-term incentive
plans, and, in 2020, the issuance of our Class B shares (which have no
economic or conversion rights) to our CEO, and
satisfaction of the performance condition, immediately prior to the
consummation of the Business Combination, on stock-based compensation awards
granted toSBTech employees in prior periods.
(2) Includes capital markets advisory, consulting, accounting and legal expenses
related to evaluation, negotiation and integration costs incurred in
connection with transactions and offerings. The transaction costs related to
the Business Combination described in Note 3 of the Consolidated Financial
Statements included elsewhere in this Annual Report have been eliminated in
calculating our pro forma net income for 2020 pursuant to the principles of
Article 11 of Regulation S-X.
(3) Includes primarily external legal costs related to litigation and litigation
settlement costs deemed unrelated to our core business operations.
(4) Includes primarily consulting, advisory and other costs relating to
non-recurring items and special projects, including, for 2020, the
implementation of internal controls over financial reporting and tax advisory
costs and, for 2019, the cost of our move to our new
executive search costs.
(5) Includes our equity method share of the investee's losses in 2020 and, in
2019, a gain recorded upon a contribution of assets to an equity method investee, net of our equity method share of the investee's losses. 59
Key Factors Affecting Our Results
Our financial position and results of operations depend to a significant extent on the following factors:
Industry Opportunity and Competitive Landscape
We operate within the global entertainment and gaming industries, which are comprised of diverse products and offerings that compete for consumers' time and disposable income. Our short-to-medium term focus is on the North American regulated gaming industry, particularly the opportunity in online sports betting and iGaming. We believe our industry-leading product offerings, strong technology services, nine years ofU.S. online and mobile gaming experience, established brand and vertically integrated solutions make us a partner of choice for state regulators, professional sports leagues and teams, gaming companies, retail and online sportsbooks, and other sports entertainment and related businesses. As we prepare to enter new jurisdictions, we expect to face significant competition from other established industry players, some of which may have more experience in sports betting and iGaming and access to more resources. We believe our analytics and technology, and the lessons learned from our DFS operations and prior launches of our online Sportsbook and iGaming product offerings will enable us to capture significant market share in newly available jurisdictions.
Legalization, Regulation and Taxation
Our financial prospects depend on legalization of online sports betting and iGaming across more ofthe United States , a trend that we believe is in its infancy after theU.S. Supreme Court struck down PASPA inMay 2018 . Our strategy is to expand our Sportsbook and iGaming offerings in new jurisdictions as they are legalized and become accessible. As ofDecember 31, 2020 , 22 U.S. states and theDistrict of Columbia have legalized either retail or online sports betting. Of these 23 legal jurisdictions, 15 have legalized online sports betting. Of those 15 jurisdictions, 13 are live, andDraftKings operated in ten them. The process of securing the necessary licenses or partnerships to operate in each jurisdiction may take longer than we anticipate. In addition, legislative or regulatory restrictions and product taxes may make it less attractive or more difficult for us to operate in a particular jurisdiction. For example, certain jurisdictions require us to have a relationship with a retail operator for online sportsbook access, which tends to increase our costs of revenue. States that have established state-run monopolies may limit opportunities for private sector participants like us. We nonetheless believe our acquisition ofSBTech allows us to become a partner of choice to power state-run sportsbooks, as exemplified bySBTech's agreement with theOregon State Lottery . States impose tax on regulated offerings, the rates of which may vary substantially between states and product offerings. Sales taxes may also apply in certain jurisdictions. We are also subject to a federal excise tax of 25 basis points on the amount of each sportsbook bet. Our growth prospects may suffer if we are unable to develop successful offerings or if we fail to pursue additional offerings. In addition, if we fail to make the right investment decisions in our offerings and technology products and services, we may not attract and retain key users and our revenue and results of operations may decline.
Ability to Acquire, Retain and Monetize Users
We grow our business by attracting new paid users to our products and offerings and increasing their level of engagement with our product offerings over time. To effectively attract and retain paid users and to re-engage former paid users, we invest in a variety of marketing channels in combination with personalized customer promotions, most of which can be used across all of our product offerings (such as free contest entries or bets or matching deposits). These investments and personalized promotions are intended to increase consumer awareness and drive engagement. While we are continuing to assess the efficiency of our marketing and promotion activities, our limited operating history and the relative novelty of theU.S. online sports betting and iGaming industries makes it difficult for us to predict when we will achieve our longer-term profitability objectives. 60 Managing Betting Risk Sports betting and iGaming are characterized by an element of chance. Our revenue is impacted by variations in the hold percentage (the ratio of net win to total amount wagered) on bets placed on, or the actual outcome of, games or events on which users bet. Although our product offerings generally perform within a defined statistical range of outcomes, actual outcomes may vary for any given period, and a single large bet can have a sizeable impact on our short-term financial performance. Our hold is also affected by factors that are beyond our control, such as a user's skill, experience and behavior, the mix of games played, the financial resources of users and the volume of bets placed. As a result of variability in these factors, actual hold rates on our products may differ from the theoretical win rates we have estimated and could result in the winnings of our gaming users exceeding those anticipated. We seek to mitigate these risks through data science and analytics and rules built into our technology, as well as active management of our amounts at risk at a point in time, but may not always be able to do so successfully, particularly over short periods, which can result in financial losses as well as revenue volatility. Results of Operations 2020 Compared to 2019
The following table sets forth a summary of our consolidated results of operations for the years indicated, and the changes between periods.
Year ended December 31, (in thousands, except percentages) 2020 2019
$ Change % Change (Restated) Revenue$ 614,532 $ 323,410 $ 291,122 90.0 % Cost of revenue 346,589 103,889 242,700 233.6 % Sales and marketing 495,192 185,269 309,923 167.3 % Product and technology 168,633 55,929 112,704 201.5 % General and administrative 447,374 124,868 322,506 258.3 % Loss from operations (843,256 ) (146,545 ) (696,711 ) 475.4 %
Interest (expense) income, net (1,070 ) 1,348 (2,418 ) (179.4 )% Loss on remeasurement of warrant liabilities (387,565 ) - (387,565 ) n.m. Gain on initial equity method investment - 3,000 (3,000 ) n.m. Loss before income tax (benefit) provision (1,231,891 ) (142,197 ) (1,089,694 ) 766.3 % Income tax (benefit) provision (622 ) 58 (680 ) (1,172.4 )% Loss from equity method investment 566 479
87 18.2 % Net Loss$ (1,231,835 ) $ (142,734 ) $ (1,089,101 ) 763.0 % n.m. = not meaningful
Revenue. Revenue increased by
Excluding the impact of the acquisition ofSBTech , revenue would have increased by approximately$215.5 in 2020, reflecting the performance of our B2C segment. The increase was attributable to the strong performance of our B2C operations prior to the outbreak of COVID-19. Prior toMarch 11, 2020 , our net revenue was up approximately 60% year-over-year, reflecting the launch of our online Sportsbook offering inIndiana ,New Hampshire ,Pennsylvania andWest Virginia in the third and fourth quarters of 2019, andIowa in the first quarter of 2020. Revenue declined versus the prior year beginning inmid-March 2020 due to the suspension and cancellation of sports seasons and sporting events. Revenue growth resumed when many of these seasons and sporting events returned towards the end of the second quarter and into the third and fourth quarters. Revenue growth also reflected the launch of our online Sportsbook product offering inColorado ,Illinois andTennessee , the launch of our iGaming product offering inPennsylvania andWest Virginia , increased engagement with our Sportsbook and iGaming product offerings in previously launched states, and growth in DFS revenues in the third and fourth quarters. Year-over-year, MUPs for our B2C segment increased by 29.1% while ARPMUP increased by 29.0%.
Cost of Revenue. Cost of revenue increased by
61 Excluding the impact of the SBTech Acquisition, the increase would have been$165.4 million in 2020, reflecting the expanded product and geographic footprint of our B2C segment. This increase can be primarily attributed to an increase in product taxes due to expansion into new states and growth in existing states, an increase in technology costs and revenue share arrangements due to our expanded footprint and increased customer engagement and an increase in processing fees resulting from additional customer deposits. B2C segment cost of revenue as a percentage of B2C revenue increased by 24.3 percentage points to 56.4% in 2020 from 32.1% in 2019, mainly due to a change in revenue mix towards products with higher cost of revenue, investment in new geographies, and the adverse revenue impact of COVID-19 primarily in the second quarter of 2020. In general, our iGaming and Sportsbook product offerings produce revenue at a higher cost per revenue dollar relative to our more mature DFS offering. Sales and Marketing. Sales and marketing expense increased by$309.9 million , or 167.3%, to$495.2 million in 2020 from$185.3 million in 2019. Our B2C segment accounted for substantially all of this increase, reflecting higher advertising and marketing spend to increase awareness and user acquisition for our Sportsbook and iGaming offerings, particularly in newly launched states; higher headcount; marketing technology and support costs; and an increase in stock-based compensation expense. While we decreased our advertising spending upon the outbreak of COVID-19 in mid-March of 2020, we increased advertising and customer acquisition marketing spending beginning inMay 2020 and ramped up this spending inJuly 2020 with the resumption of major sports including the MLB, the NBA and the NHL, as well as the beginning of the NFL season inSeptember 2020 . Product and Technology. Product and technology expense increased by$112.7 million , or 201.5%, to$168.6 million in 2020 from$55.9 million in 2019. Of this increase,$43.0 million was attributable toSBTech . Excluding the impact of the SBTech Acquisition, the increase would have been$69.7 million , driven by an increase in stock-based compensation expense and an increase in product operations and engineering headcount. General and Administrative. General and administrative expense increased by$322.5 million , or 258.3%, to$447.4 million in 2020 from$124.9 million in 2019. Of this increase,$13.8 million was attributable toSBTech . Excluding the impact of the SBTech Acquisition, the increase would have been$308.7 million , driven by an increase in stock-based compensation expense, an increase in transaction costs, including transaction-related employee bonuses, and an increase in general and administrative headcount.
Interest (Expense) Income. Interest expense was
Loss on Remeasurement of Warrant Liabilities. The loss on remeasurement of
warrant liabilities of
Net Loss. Net loss increased by
62
Supplemental Unaudited Pro Forma Results for the Year Ended
Set forth below are our pro forma results of operations for the year endedDecember 31, 2020 compared with the year endedDecember 31, 2019 . These pro forma results assume that the Business Combination, including our acquisition ofSBTech , which comprises the entirety of our new B2B segment, occurred onJanuary 1, 2019 , and are based on estimates and assumptions, which we believe are reasonable. They are not the results that would have been realized had the Business Combination actually occurred onJanuary 1, 2019 and are not indicative of our consolidated results of operations for future periods. Pro Forma Information Year ended December 31, (in thousands, except percentages) 2020 2019
$ Change % Change (Restated) Revenue$ 643,502 $ 431,834 $ 211,668 49.0 % Cost of revenue 377,191 202,768 174,423 86.0 % Sales and marketing 499,342 194,672 304,670 156.5 % Product and technology 186,204 95,454 90,750 95.1 % General and administrative 430,791 129,714 301,077 232.1 % Loss from operations (850,026 ) (190,774 ) (659,252 ) 345.6 %
Interest (expense) income, net (1,530 ) 1,173 (2,703 ) (230.4 )% Loss on remeasurement of warrant liabilities (387,565 ) - (387,565 ) n.m. Gain on initial equity method investment - 3,000 (3,000 ) (100.0 )% Loss before income taxes (1,239,121 ) (186,601 ) (1,052,520 ) 564.0 % Income tax provision (benefit) 3,074 (13,118 ) 16,192 123.4 % Loss from equity method investment 566 479
87 18.2 % Net Loss$ (1,242,761 ) $ (173,962 ) $ (1,068,799 ) 614.4 % n.m. = not meaningful
Revenue. Pro forma revenue increased by$211.7 million , or 49.0%, to$643.5 million in 2020 from$431.8 million in 2019. Our B2C segment contributed$215.5 million of the pro forma revenue increase as discussed above, partially offset by a$3.8 million pro forma revenue decrease in our B2B segment, reflecting the suspension and cancellation of sports seasons and sporting events in 2020 due to COVID-19.
Cost of Revenue. Pro forma cost of revenue increased by$174.4 million , or 86.0%, to$377.2 million in 2020 from$202.8 million in 2019. Of this increase,$165.4 million was attributable to the performance of our B2C segment, as described above. The remaining$9.0 million of the increase was attributable to the pro forma performance of the B2B segment, driven by higher data provider and amortization costs. Sales and Marketing. Pro forma sales and marketing expense increased by$304.7 million , or 156.5%, to$499.3 million in 2020 from$194.7 million in 2019. Substantially all of the increase was attributable to the performance of our B2C segment, as discussed above. Our B2B pro forma segment sales and marketing costs remained steady between periods, reflecting a modest headcount increase that was offset by a substantial decrease in conferences and other marketing spending following the outbreak of COVID-19. Product and Technology. Pro forma product and technology expense increased by$90.8 million , or 95.1%, to$186.2 million in 2020 from$95.5 million in 2019. Of this increase,$69.7 million was attributable to the performance of our B2C segment, as discussed above. The remaining$21.1 million was attributable to the pro forma performance of the B2B segment, driven mainly by product operations and engineering headcount additions reflecting investment in technology innovation and the launch of new operations inthe United States , as well as higher stock-based compensation including the satisfaction of the performance condition on awards previously granted toSBTech employees. General and Administrative. Pro forma general and administrative expense increased by$301.1 million , or 232.1%, to$430.8 million in 2020 from$129.7 million in 2019. Pro forma general and administrative expense excludes approximately$30.7 million in transaction costs related to the Business Combination, including transaction-related bonuses, pursuant to the principles of Article 11 of Regulation S-X, which are included in our consolidated results of operations for 2020 discussed above. Most of the increase in general and administrative expense was related to higher stock-based compensation and B2C segment headcount additions, as discussed above. B2B segment pro forma general and administrative expense increased by$12.4 million , mainly reflecting higher stock-based compensation including the satisfaction of the performance condition, immediately prior to the consummation of the Business Combination, increased headcount, bad debt expense related to the insolvency of two customers, and costs related to the remediation of a cybersecurity incident. 63
Interest Income (Expense). Pro forma interest expense was
Loss on Remeasurement of Warrant Liabilities. The loss on remeasurement of
warrant liabilities of
Net Loss. Pro forma net loss increased by
Previously Issued Interim Financial Statements
The classification of our warrants as liabilities rather than equity also impacted our quarterly results of operations for the three month periods endedJune 30 andSeptember 30, 2020 in a manner consistent with the results of operations for the year endedDecember 31, 2020 . As a result, our loss on remeasurement of warrant liabilities increased by$363.4 million and$47.9 million for three month periods endedJune 30 andSeptember 30, 2020 , respectively, and loss before income taxes and net loss both increased by the same amounts for the three month periods endedJune 30 andSeptember 30, 2020 . As we did not have similar instruments in 2019 there was no impact to the comparable periods.
In addition, the classification of our warrants as liabilities rather than equity did not have any effect on our previously reported revenue, operating expenses or cash flows.
2019 Compared to 2018
The following table sets forth a summary of our consolidated results of operations for the years indicated, and the changes between periods.
Year ended December, 31 (in thousands, except percentages) 2019 2018 $ Change % Change Revenue$ 323,410 $ 226,277 $ 97,133 42.9 % Cost of revenue 103,889 48,689 55,200 113.4 % Sales and marketing 185,269 145,580 39,689 27.3 %
Product and technology 55,929 32,885 23,044 70.1 % General and administrative 124,868 75,904
48,964 64.5 % Loss from operations (146,545 ) (76,781 ) (69,764 ) 90.9 % Interest income, net 1,348 666 682 102.4 %
Gain on initial equity method investment 3,000 - 3,000 n.m. Loss before income tax provision (142,197 ) (76,115 ) (66,082 ) 86.8 % Income tax provision 58 105 (47 ) (44.8 )% Loss from equity method investment 479 -
479 n.m. Net Loss$ (142,734 ) $ (76,220 ) $ (66,514 ) 87.3 % n.m. = not meaningful
Revenue. Revenue increased by$97.1 million , or 42.9%, to$323.4 million in 2019 from$226.3 million in 2018. The increase was attributable primarily to a full year of revenue from our new Sportsbook and iGaming product offerings inNew Jersey . The revenue trend reflected growth in MUPs, which increased 13.8% period-on-period, and ARPMUP, which increased 25.5% period-on-period. Cost of Revenue. Cost of revenue increased by$55.2 million , or 113.4%, to$103.9 million in 2019 from$48.7 million in 2018, reflecting our product expansion described above. The increase was primarily due to product taxes, technology costs and payment processing fees and chargebacks. In addition, revenue share arrangements, reflecting higher market access costs relating to our Sportsbook and iGaming product offerings, contributed to the increase. Cost of revenue as a percentage of revenue increased by 10.6 percentage points to 32.1% in 2019 from 21.5% in 2018, reflecting the relative increase of customer engagement with our Sportsbook and iGaming products, which have a lower relative gross margin. In general, we expect our Sportsbook and iGaming product offerings to produce substantially higher revenue dollars but at a higher cost per revenue dollar relative to our DFS offering. Sales and Marketing. Sales and marketing expense increased by$39.7 million , or 27.3%, to$185.3 million in 2019 from$145.6 million in 2018. The increase was mainly due to increased advertising and marketing spending to raise awareness and user acquisition for our Sportsbook and iGaming product offerings, particularly in newly launched states.
Product and Technology. Product and technology expense increased by
General and Administrative. General and administrative expense increased by$49.0 million , or 64.5%, to$124.9 million in 2019 from$75.9 million in 2018. The increase was due primarily to higher personnel costs, reflecting headcount growth, an increase in stock-based compensation, and an increase in costs related to the Business Combination recorded in the fourth quarter of 2019, as well as additions to our indirect tax loss contingency reserves and higher rent and facilities costs following our headquarters move. 64
Net Loss. Net loss increased by
Quarterly Performance Trend and Seasonality
Our user engagement and financial performance is seasonal in nature, as indicated in the following chart, which presents our MUPs and ARPMUP for the last eight quarters, and the explanations that follow.
[[Image Removed]] Our business experiences the effects of seasonality based on the relative popularity of certain sports. Although our technology supports contests and betting on sporting events throughout the year, the fourth quarter is when our users tend to be most engaged, primarily due to the overlapping time frame of the NFL and NBA seasons. As a result, we have historically generated higher revenues in our fourth quarter compared to other quarters. We anticipate that this trend will continue, though our mix of revenues in each quarter and our key performance indicators will also be impacted by the timing of new jurisdiction launches, the introduction of new product offerings and our integration ofSBTech . In addition, as seen with the impact of COVID-19 on our 2020 financial performance, revenue and key performance indicators for a given quarter or fiscal year may differ substantially due to professional sports season scheduling, including the frequency of play. For example, during the NFL season, our user engagement and revenue is generally highest on Sundays. The number of Sundays in a fiscal reporting period may differ from quarter to quarter and year to year, resulting in revenue volatility between comparative periods. For example, our fiscal years 2020, 2019 and 2018 included revenue related to 16, 17 and 17 Sundays of regular season NFL play, respectively. In contrast, the MLB season, which traditionally falls in our second and third quarters, is characterized by numerous, daily games throughout the season, which tends to result in higher DFS user engagement and more Sportsbook bets per paid user relative to the NFL season. Historically, MLB play has attracted a more dedicated but smaller user base to our product offerings. The timing of the MLB season in combination with these factors has tended to result in lower MUPs in our second quarter, but a higher ARPMUP.
The suspension, postponement and cancellation of major sports seasons and sporting events may materially impact our results of operations for the current quarter and, potentially, future quarters.
Liquidity and Capital Resources
We had$1.8 billion in cash and cash equivalents as ofDecember 31, 2020 (excluding player cash, which we segregate from our operating cash balances on behalf of our paid users for all jurisdiction and products). We believe our cash on hand is sufficient to meet our current working capital and capital expenditure requirements for a period of at least twelve months from the date of this filing, irrespective of the continuing impact of COVID-19. 65 Debt
We had no debt as ofDecember 31, 2020 . We have a revolving credit facility withPacific Western Bank with a current limit of$60.0 million . The facility is scheduled to mature onMarch 1, 2022 . As ofDecember 31, 2020 ,$4.2 million of the amount available under the facility was applied to the issuance of letters of credit in connection with our office leases and$55.8 million was available for borrowing under the revolving credit facility as of the date of this Report. We are in compliance with our covenants under the revolving credit facility. Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year ended December 31, 2020 2019 2018 (in thousands) Net cash used in operating activities$ (337,875 ) $ (78,880 ) $ (45,579 ) Net cash used in investing activities (227,341 ) (42,271 ) (26,672 ) Net cash provided by financing activities 2,306,299 79,776 140,892 Effect of foreign exchange rates on cash and cash equivalents (358 ) - - Net increase (decrease) in cash and cash equivalents 1,740,725 (41,375 ) 68,641 Cash and cash equivalents at beginning of period 76,533
117,908 49,267
Cash and cash equivalents at end of period
Operating Activities. Our cash used in operating activities includes the impact of changes in cash reserved for users, user cash receivables and liabilities to users. Cash reserved for users is comprised of deposits by our users. We treat this cash as the property of our users and segregate it from our operating cash balances. When we receive a user deposit, we record it as cash reserved for users on our balance sheet. In certain cases, a payment processor may delay the remittance of deposits to us for risk management or other reasons, in which case we grant our users access to those funds and record the deposits as a receivable reserved for users. The sum of the changes in cash reserved for users, and changes in receivables reserved for users, are approximately equal to the change in liabilities owed to users for any given period. While on deposit with us, cash reserved for users earns interest, which is recorded as interest income on our statement of operations and is included in our operating cash flows. This interest income has not been material to date. Net cash used in operating activities in 2020 increased by$259.0 million , or 328.3% to$337.9 million , from$78.9 million in 2019, mainly reflecting our$1,089.1 million higher net loss, for the reasons discussed above, net of non-cash cost items, partially offset by an improvement in operating working capital. Non-cash cost items increased$759.5 million period-over-period, driven primarily by the remeasurement of our warrant liabilities of$387.6 million and an increase in stock-based compensation expense of$307.4 million and amortization of acquired intangibles of$50.5 million . Net cash used in operating activities in 2019 increased by$33.3 million , or 73.1%, to$78.9 million from$45.6 million in 2018, reflecting our higher net loss, for the reasons discussed above, net of non-cash cost items (which increased by$15.2 million between years), partially offset by an improvement in operating working capital. The operating working capital improvement was driven mainly by an increase in accounts payable and accrued expenses of$22.2 million between periods primarily related to increased advertising and marketing spend, as discussed above. Investing Activities. Net cash used in investing activities during 2020 increased by$185.1 million to$227.3 million from$42.3 million during 2019, mainly reflecting the cash portion of consideration paid toSBTech shareholders, net of cash acquired, of$178.6 in connection with the Business Combination. Net cash used in investing activities in 2019 increased by$15.6 million , or 58.5%, to$42.3 million from$26.7 million in 2018. The increase reflected mainly higher state licensing fees, an increase in purchases of property and equipment (mainly attributable to leasehold improvements related to our newBoston headquarters, computer equipment and software purchases and office furniture) and higher capitalization of internal-use software costs. 66
Financing Activities. Net cash provided by financing activities during 2020 increased by$2.2 billion to$2.3 billion from$79.8 million during the same period in 2019. The increase was driven by$669.8 million related to the recapitalization of DEAC shares, net proceeds of$202.0 million related to the exercise of our public warrants, which became exercisable following the Business Combination, and net proceeds of approximately$1.7 billion received in connection with the public offerings of our Class A common stock in June andOctober 2020 . Net cash provided by financing activities in 2019 decreased by$61.1 million , or 43.4%, to$79.8 million from$140.9 million in 2018. The 2019 amount mainly included net proceeds of$68.1 million from the issuance of Convertible Notes, as discussed above.
Off-Balance Sheet Commitments and Arrangements
As ofDecember 31, 2020 , we hold a variable interest in a nonconsolidated entity accounted for under the equity method of accounting. We are not the primary beneficiary of the entity and therefore are not required to consolidate the entity. We do not guarantee any of the entity's obligations and have no further funding commitments. We do not have any off-balance sheet commitments of the type required to be disclosed pursuant toSEC rules.
As of
Contractual Obligations, Commitments and Contingencies
The following table and the information that follows summarizes our contractual
obligations as of
Less than More than (in thousands) Total 1 year 2-3 Years 4-5 Years 5 Years Operating lease obligations (1)$ 100,814 $ 17,288 $ 31,495 $ 23,759 $ 28,272 Other contractual obligations (2) 916,110 146,748 252,686 206,776 309,900 Total$ 1,016,924 $ 164,036 $ 284,181 $ 230,535 $ 338,172 (1) Includes operating leases including for our headquarters inBoston, Massachusetts , the lease for which expires in 2029.
(2) Includes obligations under non-cancelable contracts with vendors, licensors
and others requiring us to make future cash payments.
Refer to Note 15 of our Consolidated Financial Statements included elsewhere in
this Report for a summary of our commitments as of
Critical Accounting Policies
Our Consolidated Financial Statements have been prepared in accordance with theU.S. generally accepted accounting principles ("U.S. GAAP"). Preparation of the financial statements requires our management to make judgments, estimates and assumptions that impact the reported amount of revenue and expenses, assets and liabilities and the disclosure of contingent assets and liabilities. We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on our Consolidated Financial Statements. Our significant accounting policies are described in Note 2 of the Consolidated Financial Statements included elsewhere in this Report. Our critical accounting policies are described below. Loss Contingencies Our loss contingencies, which are included within the "other long-term liabilities" caption on our consolidated balance sheets, are uncertain by nature and their estimation requires significant management judgment as to the probability of loss and estimation of the amount of loss. These contingencies include, but may not be limited to, litigation, regulatory investigations and proceedings and management's evaluation of complex laws and regulations, including those relating to indirect taxes, and the extent to which they may apply to our business and industry. See Note 7 to our Consolidated Financial Statements for more information. 67 We regularly review our contingencies to determine whether the likelihood of loss is probable and to assess whether a reasonable estimate of the loss can be made. Determination of whether a loss estimate can be made is a complex undertaking that considers the judgment of management, third-party research, the prospect of negotiation and interpretations by regulators and courts, among other information. When a loss is determined to be probable, as that term is defined underU.S. GAAP, and the amount of the loss can be reasonably estimated, an estimated contingent liability is recorded. We continually reevaluate our indirect tax and other positions for appropriateness.Goodwill
Goodwill is tested for impairment at the reporting unit level, which is the same or one level below an operating segment. In accordance with ASC Topic 350 Intangibles -Goodwill and Other, our business is classified into three reporting units: B2C (i.e., DFS, iGaming, Online Sportsbook, and Retail Sportsbook), Media and B2B. As ofDecember 31, 2020 , we recorded goodwill of$569.6 million , of which$353.1 million was allocated to our B2C reporting unit and$216.5 million was allocated to our B2B reporting unit. Of the total goodwill recorded on our balance sheet,$564.9 million was attributable to the Business Combination consummated onApril 23, 2020 , including$538.2 million at acquisition date and$26.6 million related to the cumulative translation adjustment as ofDecember 31, 2020 . We review and evaluate our goodwill and indefinite life intangible assets for potential impairment at a minimum annually, in the fourth quarter, or more frequently if circumstances indicate that impairment is possible. In testing goodwill for impairment, we have the option to begin with a qualitative assessment, commonly referred to as "Step 0," to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, including changes in our management, strategy and primary user base. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then perform a quantitative goodwill impairment analysis. Depending upon the results of that measurement, the recorded goodwill may be written down, and impairment expense is recorded in the consolidated statements of operations when the carrying amount of the reporting unit exceeds the fair value of the reporting unit. Based on assessments performed in 2020 and 2019, we determined it was more likely than not that goodwill was not impaired. Business Combinations We account for business acquisitions in accordance with ASC Topic 805, Business Combinations. We measure the cost of an acquisition as the aggregate of the acquisition date fair values of the assets transferred and liabilities assumed and equity instruments issued. Transaction costs directly attributable to the acquisition are expensed as incurred. We record goodwill for the excess of (i) the total costs of acquisition, fair value of any non-controlling interests and acquisition date fair value of any previously held equity interest in the acquired business over (ii) the fair value of the identifiable net assets of the acquired business. The acquisition method of accounting requires us to exercise judgment and make estimates and assumptions based on available information regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets, deferred tax asset valuation allowances, liabilities related to uncertain tax positions and contingencies. We must also refine these estimates over a one-year measurement period, to reflect any new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to retroactively adjust provisional amounts that we have recorded for the fair value of assets and liabilities in connection with an acquisition, these adjustments could materially impact our results of operations and financial position. Estimates and assumptions that we must make in estimating the fair value of future acquired technology, user lists and other identifiable intangible assets include future cash flows that we expect to generate from the acquired assets. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could record impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expenses. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed, which could materially impact our results of operations.
The SBTech Acquisition is accounted for under ASC 805. Pursuant to ASC 805, Old DK was determined to be the accounting acquirer. Refer to Note 3 "Business Combination" of our Consolidated Financial Statements included elsewhere in this Annual Report for more information. In accordance with the acquisition method, we recorded the fair value of assets acquired and liabilities assumed fromSBTech . The allocation of the consideration to the assets acquired and liabilities assumed is based on various estimates. As ofDecember 31, 2020 , we finalized our preliminary purchase price allocation. 68 Stock-based Compensation Our historical and outstanding stock-based compensation awards, including the issuances of options and other stock awards under our equity compensation plans, have typically included service-based, performance-based or market-based vesting conditions. For awards with only service-based vesting conditions, we record compensation cost for these awards using the straight-line method less an assumed forfeiture rate. For awards with performance-based or market-based vesting conditions, we recognize compensation cost on a tranche-by-tranche basis (the accelerated attribution method). Stock-based compensation expense is measured based on the grant-date fair value of the stock-based awards and is recognized over the requisite service period of the awards. Following the Business Combination, the fair value of our Class A common stock is now determined based on the quoted market price. Prior to the Business Combination, our management and board of directors considered various objectives and subjective factors to determine the fair value of Old DK's common stock as of each grant date, including the value determined by a third-party valuation firm. These factors included, among other things, financial performance, capital structure, forecasted operating results and market performance analyses of similar companies in our industry. To estimate the fair value of stock option awards, the Black-Scholes model was used and a Monte Carlo simulation was used to determine the fair value of grants with market-based conditions. Both the Black-Scholes model and the Monte Carlo simulation requires management to make a number of key assumptions, including expected volatility, expected term, risk-free interest rate and expected dividends. The risk-free interest rate is estimated using the rate of return onU.S. treasury notes with a life that approximates the expected term. The expected term assumption used in the Black-Scholes model represents the period of time that the options are expected to be outstanding and is estimated using the midpoint between the requisite service period and the contractual term of the option. For 2020, we recorded$325.0 million of stock-based compensation expense.
The assumptions underlying these valuations represent management's best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and our management uses significantly different assumptions or estimates, our stock-based compensation expense for future periods could be materially different, including as a result of adjustments to stock-based compensation expense recorded for prior period.
© Edgar Online, source