DRAFTKINGS INC. The following discussion and analysis should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (the "Report") and the section entitled "Risk Factors." Unless otherwise indicated, the terms "DraftKings ," "we," "us," or "our" refer toDraftKings Inc. , aNevada corporation, together with its consolidated subsidiaries. Forward-Looking Statements This Report contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 that reflect future plans, estimates, beliefs and expected performance. The forward-looking statements depend upon events, risks and uncertainties that may be outside of our control. The words "anticipate," "believe," "continue," "could," "estimate," "expect," "intends," "may," "might," "plan," "possible," "potential," "predict," "project," "should," "would" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. You are cautioned that our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control, and, consequently, our actual results may differ materially from those projected. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled "Risk Factors" included elsewhere in this Report. Any statements contained herein that are not statements of historical fact may be forward-looking statements. •factors relating to our business, operations and financial performance, including: •our ability to effectively compete in the global entertainment and gaming industries; •our ability to successfully acquire and integrate new operations; •our ability to obtain and maintain licenses with gaming authorities; •our inability to recognize deferred tax assets and tax loss carryforwards; •market and global conditions and economic factors beyond our control, including the potential adverse effects of the ongoing global coronavirus ("COVID-19") pandemic on capital markets, general economic conditions, unemployment and our liquidity, operations and personnel; •intense competition and competitive pressures from other companies worldwide in the industries in which we operate; •our ability to raise financing in the future; •our success in retaining or recruiting officers, key employees or directors; and •litigation and the ability to adequately protect our intellectual property rights. These risks and other factors include those set forth under the caption "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , as filed with theSEC onFebruary 26, 2021 and as amended on Form 10-K/A onMay 3, 2021 (the "2020 Annual Report") and in our Form 10-Q for the quarter endedMarch 31, 2021 filed with theSEC onMay 7, 2021 . Due to the uncertain nature of these factors, management cannot assess the impact of each factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any of these statements to reflect events or circumstances occurring after the date of this Report. New factors may emerge and it is not possible to predict all factors that may affect our business and prospects. Our Business We are a digital sports entertainment and gaming company. We provide users with daily fantasy sports ("DFS"), sports betting ("Sportsbook") and online casino ("iGaming") opportunities, as well as media and other online consumer product offerings. We are also involved in the design, development, and licensing of sports betting and casino gaming software for online and retail Sportsbooks and casino gaming products, as well as other online consumer product offerings. 25 -------------------------------------------------------------------------------- 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 DFS, Sportsbook and iGaming. We are also highly focused on our responsibility as a steward of this new era in real-money gaming. Our ethics guide our decision making, both with respect to the tradition and integrity of sports and in our investments in regulatory compliance and consumer protection. 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) create replicable and predictable state-level unit economics in sports betting and iGaming and (d) 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 maintain favorable relationships with regulators. We expect to improve our profitability over time (excluding the impact of amortization of acquired intangibles) through cost synergies and new opportunities driven by our completed vertical integration ofSBTech's technology and expertise. Our path to profitability is based on the acceleration of positive contribution profit growth driven by marketing efficiencies as we continue the 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 business-to-consumer ("B2C") business and our business-to-business ("B2B") business. B2C Our B2C business is comprised of the legacy business ofDraftKings Inc. , aDelaware corporation ("Old DK"), 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 primarily comprised 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 andthe United States . Previously,SBTech offered its services through a reseller model inAsia . OnApril 1, 2021 , the agreement with the reseller was terminated, with a transition period that has already ended. 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. Beginning in 2020 and continuing into 2021, the COVID-19 pandemic adversely 26 -------------------------------------------------------------------------------- impacted many different industries. The ongoing COVID-19 pandemic could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the extent and the duration of the impact of COVID-19. The COVID-19 pandemic therefore presents material uncertainty and risk with respect to us and our performance and could affect our financial results in a materially adverse way. Since the start of the COVID-19 pandemic, the primary impacts to us have been the suspension, cancellation and rescheduling of sports seasons and sporting events. Beginning inMarch 2020 and continuing into the first month of the third quarter of 2020, many sports seasons and sporting events, including the MLB regular season, domestic soccer leagues and European Cup competitions, the NBA regular season and playoffs, 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 of 2020 and continuing into the fourth quarter of 2020, major professional sports leagues resumed their activities, many of which were held at limited or reduced capacity. 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 suspension and alteration of sports seasons and sporting events in 2020 reduced customers' use of, and spending on, our Sportsbook and DFS product offerings and caused us to issue refunds for canceled events. In the nine months endedSeptember 30, 2021 , many sports seasons continued and most sporting events were held as planned, including the NFL regular season, the NFL Playoffs and Superbowl LV, the NBA regular season and NBA playoffs, the NHL regular season and the NHL Stanley Cup, the NASCAR Cup Series, variousNCAA football bowl games, theNCAA college basketball season and tournament, and the UEFA European Football Championship. The continued return of major sports and sporting events 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. Our revenue varies based on sports seasons and sporting events amongst other factors, and cancellations, suspensions or alterations resulting from COVID-19 have the potential to adversely affect 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 developing more innovative 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 and simulatedNASCAR . A significant or prolonged decrease in consumer spending on entertainment or leisure activities would also 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 materially disruptive resurgence of COVID-19 cases or the emergence of additional variants or strains of COVID-19 could cause other widespread or more severe impacts depending on where infection rates are highest. As steps taken to mitigate the spread of COVID-19 necessitated a shift away from a traditional office environment for many employees, we implemented business continuity programs to ensure that employees were safe and that our business continued to function with minimal disruptions to normal work operations while employees worked remotely. We will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19. Financial Highlights and Trends The following table sets forth a summary of our financial results for the periods indicated: Three months ended September 30, Nine months ended September 30, (amounts in thousands) 2021 2020 2021 2020 Revenue (1)$ 212,819 $ 132,836 $ 822,700 $ 292,309 Pro Forma Revenue (2) 212,819 132,836 822,700 321,279 Net Loss (1) (545,028) (395,661) (1,196,898) (989,139) Pro Forma Net Loss (2) (545,028) (395,661) (1,196,898) (1,000,360) Adjusted EBITDA (3) (313,603) (197,079) (548,167) (304,035) Pro Forma Adjusted EBITDA (3) (313,603) (197,079) (548,167) (307,956)
(1)Due to the timing of the Business Combination, the nine months ended
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(2)Assumes that the Business Combination was consummated on January 1, 2019 . See
"-Comparability of Financial Information" 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.
Revenue increased by $80.0 million and $530.4 million in the three and nine
months ended September 30, 2021 , respectively, compared to the three and nine
months ended September 30, 2020 , primarily due to the strong performance of our
B2C segment as a result of robust customer acquisition and retention and the
successful launches of our Sportsbook and iGaming product offerings in
additional jurisdictions since the third quarter of 2020. These increases were
partially offset by planned promotional investments in the launch of our
Sportsbook product offering in two new states in the third quarter of 2021,
Arizona and Wyoming , as well as atypical hold rates primarily from NFL wagering.
In addition, revenue growth for the nine months ended September 30, 2021 ,
compared to the nine months ended September 30, 2020 reflects the resumption of
major sporting events when compared to the same period in 2020, which had
multiple suspensions and cancellations as a result of COVID-19 that resulted in
a reduction in customers' use of, and spending on, our Sportsbook and DFS
product offerings.
Pro forma revenue increased by $501.4 million in the nine months ended
September 30, 2021 , compared to the nine months ended September 30, 2020 , mainly
reflecting the strong performance of our B2C segment, as discussed above, and an
increase in B2B revenues as our B2B business was also negatively impacted in
2020 by COVID-19.
Comparability of Financial Results
On April 23, 2020 , we completed the business combination, by and among DEAC, Old
DK and SBTech (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 on The 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 March 2021 , we issued zero-coupon convertible senior notes in an aggregate
principal amount of $1,265.0 million , which includes proceeds from the full
exercise of the over-allotment option (collectively the "Convertible Notes"). In
connection with the pricing of the Convertible Notes and the exercise of the
option to purchase additional notes, the Company entered into a privately
negotiated capped call transaction ("Capped Call Transactions"). The Capped Call
Transactions are expected generally to reduce potential dilution to our Class A
common stock upon any conversion of the Convertible Notes. The net cost to enter
into the Capped Call Transactions was $124.0 million .
We had cash on hand, excluding cash held on behalf of customers, of $2.4 billion
as of September 30, 2021 , compared to $1.8 billion as of December 31, 2020 .
Due to fair value changes throughout the three and nine months ended
September 30, 2021 , we recorded a gain on remeasurement of warrant liabilities
of $7.1 million and a loss on remeasurement of warrant liabilities of $2.9
million , respectively, and a loss on remeasurement of warrant liabilities of
$47.9 million and $411.3 million for the three and nine months ended
September 30, 2020 , respectively.
The following discussion of our results of operations for the three and nine
months ended September 30, 2021 includes the financial results of SBTech .
Accordingly, our consolidated results of operations for the three and nine
months ended September 30, 2021 are not comparable to our consolidated results
of operations for prior periods. Our B2C segment results, presented and
discussed below, are comparable to DraftKings' legacy operations and our
reported consolidated results for prior periods.
To facilitate comparability between periods, we have included in this Report a
supplemental discussion of our results of operations for the three and nine
months ended September 30, 2021 compared with our unaudited pro forma results of
operations for the three and nine months ended September 30, 2020 . The pro forma
results for the three and nine months ended September 30, 2020 were prepared
giving effect to the Business Combination as if it had been consummated on
January 1, 2019 , and are based on estimates and assumptions, which we believe
are reasonable and consistent with Article 11 of Regulation S-X.
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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 engagement with one of our B2C
product offerings such as 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.
The charts below present our MUPs for the three and nine months ended
September 30, 2021 and 2020:
[[Image Removed: deac-20210930_g2.jpg]]
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[[Image Removed: deac-20210930_g3.jpg]]
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 charts below present our ARPMUP
for the three and nine months ended September 30, 2021 and 2020:
[[Image Removed: deac-20210930_g4.jpg]]
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[[Image Removed: deac-20210930_g5.jpg]]
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.
Our period-on-period increase in MUPs for the three and nine months ended
September 30, 2021 , compared to the same periods in 2020, primarily reflects
strong unique payer retention and acquisition across our Sportsbook and iGaming
product offerings as well as the expansion of our Sportsbook and iGaming product
offerings into new states. Year-over-year growth in MUPs in the nine months
ended September 30, 2021 was also positively impacted by the suspension and
cancellation of major sporting events beginning in March of 2020 as a result of
COVID-19.
ARPMUP increased in the three and nine months ended September 30, 2021 primarily
due to strong customer engagement, a continued mix shift into our Sportsbook and
iGaming product offerings and cross-selling our customers into more products. In
addition, ARPMUP was positively impacted in the nine months ended September 30,
2021 as the suspension and cancellation of major sporting events that resulted
from COVID-19 in the prior year did not reoccur in 2021.
Non-GAAP Information
This 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 with U.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-listed U.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 any U.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, non-recurring advocacy and other related legal expenses,
remeasurement of warrant liabilities, and certain other non-recurring, non-cash
or 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 on January 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 with U.S. GAAP
because they are non-recurring items (for example, in the case of
transaction-related costs and advocacy and other related legal expenses),
non-cash expenditures (for
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example, in the case of depreciation, amortization, remeasurement of warrant
liabilities 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 on January 1, 2019 .
Adjusted EBITDA
The table below presents our Adjusted EBITDA reconciled to our net loss, the
closest U.S. GAAP measure, for the periods indicated:
Three months ended September 30, Nine months ended September 30,
(amounts in thousands) 2021 2020 2021 2020
Net loss $ (545,028) $
(395,661)
30,356 26,595 88,600 49,967
Interest expense (income), net 1,556 (686) (1,071) 2,253
Income tax provision (benefit) 3,845 (13) 1,654 319
Stock-based compensation (2) 175,664 117,034 499,246 176,362
Transaction-related costs (3) 4,348 3,585 15,261 34,492
Litigation, settlement, and related costs (4) 4,712 2,419 8,933 5,771
Advocacy and other related legal expenses (5) 16,667 - 27,702 -
(Gain) loss on remeasurement of warrant
liabilities (7,091) 47,908 2,905 411,269
Other non-recurring costs, special project costs
and non-operating costs (6) 1,368 1,740 5,501 4,671
Adjusted EBITDA $ (313,603) $ (197,079) $ (548,167) $ (304,035)
Adjusted EBITDA by segment:
B2B $ (5,903) $ 4,376 $ (6,854) $ 854
B2C $ (307,700) $ (201,455) $ (541,313) $ (304,889)
(1)The amounts include the amortization of acquired intangible assets of $20.2
million and $18.8 million for the three months ended September 30, 2021 and
2020, respectively, and $59.9 million and $32.0 million for the nine months
ended September 30, 2021 and 2020, respectively.
(2)The amounts for the three and nine months ended September 30, 2021 primarily
reflect stock-based compensation expenses resulting from the issuance of awards
under long-term incentive plans. The amounts for the three and nine months ended
September 30, 2020 , primarily reflect stock-based compensation expenses
resulting from the issuance of awards under long-term incentive plans and, for
the nine months ended September 30, 2020 , the issuance of our Class B shares
(which have no economic or conversion rights) to our Chief Executive Officer.
(3)Includes capital markets advisory, consulting, accounting and legal expenses
related to evaluation, negotiation and integration costs incurred in connection
with pending or completed transactions and offerings. These costs include those
relating to the Business Combination for the three and nine months ended
September 30, 2020 .
(4)Includes primarily external legal costs related to litigation and litigation
settlement costs deemed unrelated to our core business operations.
(5)Includes certain non-recurring costs relating to advocacy efforts and other
legal expenses in jurisdictions where we do not operate certain products and are
actively seeking licensure, or similar approval, for those products. For 2021,
those costs primarily relate to California and Florida . The amount excludes
other recurring costs relating to advocacy efforts and other legal expenses
incurred in jurisdictions where related legislation has been passed and we
currently operate.
(6)Includes primarily consulting, advisory and other costs relating to
non-recurring items and special projects, including the implementation of
internal controls over financial reporting, as well as our equity method share
of the investee's losses.
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The table below presents our Actual Non-GAAP Adjusted EBITDA reconciled to net loss for the nine months endedSeptember 30, 2021 , compared to a similar reconciliation of our Non-GAAP Pro Forma Adjusted EBITDA to our pro forma net income for the same period in 2020:
Nine months ended
2021 2020
(amounts in thousands) Actual Pro Forma
Net loss $ (1,196,898) $ (1,000,360)
Adjusted for:
Depreciation and amortization (1) 88,600 73,252
Interest (income) expense, net (1,071) 2,713
Income tax provision (benefit) 1,654 3,904
Stock-based compensation (2) 499,246 187,239
Transaction-related costs (3) 15,261 3,585
Litigation, settlement, and related costs (4) 8,933 5,771
Advocacy and other related legal expenses (5) 27,702 -
Loss on remeasurement of warrant liabilities 2,905 411,269
Other non-recurring costs, special project costs and non-operating costs (6)
5,501 4,671
Pro forma Adjusted EBITDA $ (548,167) $ (307,956)
(1)The amounts include the amortization of acquired intangible assets of $59.9
million and $54.1 million for the nine months ended September 30, 2021 and 2020,
respectively.
(2)The amounts for the three and nine months ended September 30, 2020 , primarily
reflect stock-based compensation expenses resulting from the issuance of awards
under long-term incentive plans and, for the nine months ended September 30,
2020 , the issuance of our Class B shares (which have no economic or conversion
rights) to our Chief Executive Officer and the satisfaction of the performance
condition, immediately prior to the consummation of the Business Combination, on
stock-based compensation awards granted to SBTech employees in prior periods.
(3)Includes capital markets advisory, consulting, accounting and legal expenses
related to evaluation, negotiation and integration costs incurred in connection
with pending or completed transactions and offerings. The transaction costs
related to the Business Combination described in footnote 1 to the preceding
table have been eliminated in calculating our pro forma net income for the nine
months ended September 30, 2020 pursuant to the principles of Article 11 of
Regulation S-X.
(4)Includes primarily external legal costs related to litigation and litigation
settlement costs deemed unrelated to our core business operations.
(5)Includes certain non-recurring costs relating to advocacy efforts and other
legal expenses in jurisdictions where we do not operate certain products and are
actively seeking licensure, or similar approval, for those products. For 2021,
those costs primarily relate to California and Florida . The amount excludes
other recurring costs relating to advocacy efforts and other legal expenses
incurred in jurisdictions where related legislation has been passed and we
currently operate.
(6)Includes primarily consulting, advisory and other costs relating to
non-recurring items and special projects, including the implementation of
internal controls over financial reporting, as well as our equity method share
of the investee's losses.
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Results of Operations
Three Months Ended September 30, 2021 Compared to the Three Months Ended
September 30, 2020
The following table sets forth a summary of our consolidated results of
operations for the interim periods indicated, and the changes between periods.
Three months ended September 30,
(amounts in thousands, except percentages) 2021 2020 $ Change % Change
Revenue $ 212,819 $ 132,836 $ 79,983 60.2 %
Cost of revenue 170,749 96,569 (74,180) (76.8) %
Sales and marketing 303,658 203,339 (100,319) (49.3) %
Product and technology 65,222 53,909 (11,313) (21.0) %
General and administrative 219,706 127,376 (92,330) (72.5) %
Loss from operations (546,516) (348,357) (198,159) (56.9) %
Interest (expense) income, net (1,556) 686 (2,242) (326.8) %
Gain (loss) on remeasurement of warrant
liabilities 7,091 (47,908) 54,999 114.8 %
Loss before income tax provision (benefit) and
loss from equity method investment (540,981) (395,579) (145,402) (36.8) %
Income tax provision (benefit) 3,845 (13) (3,858) (29,676.9) %
Loss from equity method investment 202 95 (107) (112.6) %
Net loss $ (545,028) $ (395,661) $ (149,367) (37.8) %
Revenue. Revenue increased $80.0 million , or 60.2%, to $212.8 million in the
three months ended September 30, 2021 , from $132.8 million in the three months
ended September 30, 2020 . The increase was attributable to $85.4 million in
incremental B2C segment revenue, partially offset by a decrease of B2B segment
revenue of $5.5 million .
The $85.4 million increase in our B2C segment revenue was primarily attributable
to our online gaming revenues which increased $76.8 million , or 77.2%, to $176.3
million in the three months ended September 30, 2021 , from $99.5 million in the
three months ended September 30, 2020 . The remaining increase in our B2C segment
revenue was attributable to "Other" revenues, which primarily includes media and
retail Sportsbooks.
Online gaming revenue grew in the three months ended September 30, 2021 due to
MUPs increasing by 31.2% and ARPMUP increasing by 37.6% as compared to the three
months ended September 30, 2020 .
Compared to the prior year period, online gaming revenue increased in the three
months ended September 30, 2021 due to the ongoing legalization of online sports
betting and iGaming throughout the country. Since the three months ended
September 30, 2020 , we launched our online Sportsbook product offering in
Arizona , Michigan , Tennessee , Virginia and Wyoming , our iGaming product offering
in Michigan , and we continued to increase customer engagement with our
Sportsbook and iGaming product offerings in previously launched states. These
increases were partially offset by planned promotional investments in launches
of our Sportsbook product offering in two new states in the third quarter of
2021, Arizona and Wyoming , as well as atypical hold rates primarily from NFL
wagering.
Cost of Revenue. Cost of revenue increased $74.2 million , or 76.8%, to $170.7
million in the three months ended September 30, 2021 , from $96.6 million in the
three months ended September 30, 2020 . Of this increase, $5.7 million was
attributable to the B2B segment.
Excluding the impact of our B2B segment, the cost of revenue increase would have
been $68.5 million , reflecting growth in revenue from the expanded product and
geographic footprint of our B2C segment, including the launch of our Sportsbook
product offering in Wyoming and Arizona in the three months ended September 30,
2021 . The $68.5 million cost of revenue increase can be primarily attributed to
an increase in our variable expenses such as product taxes and payment
processing fees, which increased $32.5 million and $14.2 million , respectively.
The remaining increase was primarily attributable to variable platform costs and
revenue share arrangements resulting from additional customer activity.
B2C segment cost of revenue as a percentage of B2C revenue increased by
6.3 percentage points to 72.5% in the three months ended September 30, 2021 from
66.2% in the three months ended September 30, 2020 , reflecting our changed
revenue mix from our more mature DFS product offering to our iGaming and
Sportsbook product offerings as well as higher promotional investment in new
geographies. In addition, the launch of our Sportsbook product offering in
Wyoming and
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Arizona resulted in negative revenue in the three months ended September 30,
2021 . However, as a result of customer activity in these states we incurred
variable expenses that are not based on net revenue including payment processing
fees and revenue share arrangements. In general, our iGaming and Sportsbook
product offerings produce revenue at a higher cost per revenue dollar relative
to our more mature DFS product offering.
Sales and Marketing. Sales and marketing expense increased $100.3 million , or
49.3%, to $303.7 million in the three months ended September 30, 2021 , from
$203.3 million in the three months ended September 30, 2020 . Our B2C segment
accounted for substantially all of this increase with $72.8 million of the
increase resulting from activities to acquire and retain players, such as
marketing costs including advertising and development of marketing campaigns, as
well as headcount and technology associated with analyzing, developing and
deploying those campaigns. The remainder of the increase primarily resulted from
an increase in various team and league sponsorships.
Product and Technology. Product and technology expense increased $11.3 million ,
or 21.0%, to $65.2 million in the three months ended September 30, 2021 from
$53.9 million in the three months ended September 30, 2020 , of which $6.1
million was attributable to our B2B segment. The remaining increase of $5.2
million primarily reflects additions to our product operations and engineering
headcount in our B2C segment.
General and Administrative. General and administrative expense increased $92.3
million , or 72.5%, to $219.7 million in the three months ended September 30,
2021 from $127.4 million in the three months ended September 30, 2020 . Our B2C
segment accounted for substantially all of this increase, primarily driven by an
increase in stock-based compensation expense of $47.8 million from the issuance
of awards granted under our long-term incentive plans. The remainder of the
increase was primarily attributable to an increase in personnel costs reflecting
headcount growth and an increase in certain non-recurring costs relating to
advocacy efforts and other legal expenses in jurisdictions where we do not
operate certain products and are actively seeking licensure, or similar
approval, for those products.
Interest (Expense) Income. Interest expense was $1.6 million in the three months
ended September 30, 2021 compared to interest income of $0.7 million in the
three months ended September 30, 2020 .
Gain (Loss) on Remeasurement of Warrant Liabilities. We recorded a gain on
remeasurement of warrant liabilities of $7.1 million in the three months ended
September 30, 2021 , compared to a loss of $47.9 million in the three months
ended September 30, 2020 primarily due to changes in the underlying share price
of our class A common stock.
Net Loss. Net loss increased by $149.4 million to $545.0 million in the three
months ended September 30, 2021 from $395.7 million in the three months ended
September 30, 2020 , for the reasons discussed above.
Nine Months Ended September 30, 2021 Compared to the Nine Months Ended September
30, 2020
The following table sets forth a summary of our consolidated results of
operations for the interim periods indicated, and the changes between periods.
Nine months ended September 30,
(amounts in thousands, except percentages) 2021 2020 $ Change % Change
Revenue $ 822,700 $ 292,309 $ 530,391 181.4 %
Cost of revenue 540,980 187,315 (353,665) (188.8) %
Sales and marketing 703,056 303,233 (399,823) (131.9) %
Product and technology 184,016 102,499 (81,517) (79.5) %
General and administrative 587,509 274,180 (313,329) (114.3) %
Loss from operations (1,192,861) (574,918) (617,943) (107.5) %
Interest income (expense), net 1,071 (2,253) 3,324 147.5 %
Loss on remeasurement of warrant liabilities (2,905) (411,269) 408,364 99.3 %
Loss before income tax provision and loss from
equity method investment (1,194,695) (988,440) (206,255) (20.9) %
Income tax provision 1,654 319 (1,335) (418.5) %
Loss from equity method investment 549 380 (169) (44.5) %
Net loss $ (1,196,898) $ (989,139) $ (207,759) (21.0) %
Revenue. Revenue increased $530.4 million , or 181.4%, to $822.7 million in the
nine months ended September 30, 2021 , from $292.3 million in the nine months
ended September 30, 2020 . The increase was partially attributable to $38.4
million in
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incremental B2B segment revenue primarily related to a full period of SBTech's
results in the nine months ended September 30, 2021 compared to a partial period
of SBTech's results in the nine months ended September 30, 2020 (SBTech was
acquired on April 23, 2020 ).
Excluding the impact of our B2B segment, revenue would have increased by $491.9
million in the nine months ended September 30, 2021 , which is primarily
attributable to our online gaming revenues which increased $468.6 million , or
196.4%, to $707.1 million in the nine months ended September 30, 2021 from
$238.6 million in the nine months ended September 30, 2020 . The remaining
increase in revenue was attributable to "Other" revenues, which primarily
includes media and retail Sportsbook.
Online gaming revenue grew in the nine months ended September 30, 2021 due to
MUPs increasing by 96.6% and ARPMUP increasing by 50.9% as compared to the nine
months ended September 30, 2020 .
Compared to the prior year period, online gaming revenue increased in the nine
months ended September 30, 2021 due to the ongoing legalization of online sports
betting and iGaming throughout the country. Since the September 30, 2020 , we
launched our online Sportsbook product offering in Arizona , Michigan , Tennessee ,
Virginia and Wyoming , our iGaming product offering in Michigan , and we continued
to increase customer engagement with our Sportsbook and iGaming product
offerings in previously launched states.
Cost of Revenue. Cost of revenue increased $353.7 million , or 188.8%, to $541.0
million in the nine months ended September 30, 2021 , from $187.3 million in the
nine months ended September 30, 2020 . Of this increase, $52.3 million was
attributable to our B2B segment, including an increase of $27.9 million in
amortization of acquired intangibles.
Excluding the impact of our B2B segment, the cost of revenue increase would have
been $301.4 million , reflecting the growth in revenue from our expanded product
and geographic footprint of our B2C segment including the launch of our
Sportsbook product offering in Wyoming and Arizona in the nine months ended
September 30, 2021 . The $301.4 million cost of revenue increase can be primarily
attributed to an increase in our variable expenses such as product taxes and
payment processing fees, which increased $155.1 million and $51.7 million ,
respectively. The remaining increase was primarily attributable to variable
platform costs and revenue share arrangements resulting from additional customer
activity.
B2C segment cost of revenue as a percentage of B2C revenue increased by
3.1 percentage points to 59.7% in the nine months ended September 30, 2021 from
56.6% in the nine months ended September 30, 2020 , reflecting our changed
revenue mix from our more mature DFS product offering to our iGaming and
Sportsbook product offerings as well as higher promotional investment in new
geographies. In addition, the launch of our Sportsbook product offering in
Wyoming and Arizona resulted in negative revenue in the nine months ended
September 30, 2021 . However, as a result of customer activity we incurred
variable expenses that are not based on net revenue including payment processing
fees and revenue share arrangements. In general, our iGaming and Sportsbook
product offerings produce revenue at a higher cost per revenue dollar relative
to our more mature DFS product offering.
Sales and Marketing. Sales and marketing expense increased $399.8 million , or
131.9%, to $703.1 million in the nine months ended September 30, 2021 , from
$303.2 million in the nine months ended September 30, 2020 . Our B2C segment
accounted for substantially all of this increase with $305.9 million of the
increase resulting from activities to acquire and retain players, such as
marketing costs including advertising and development of marketing campaigns, as
well as headcount and technology associated with analyzing, developing and
deploying those campaigns. The remainder of the increase primarily resulted from
an increase in various team and league sponsorships.
Product and Technology. Product and technology expense increased $81.5 million ,
or 79.5%, to $184.0 million in the nine months ended September 30, 2021 from
$102.5 million in the nine months ended September 30, 2020 , of which $38.3
million was attributable to the B2B segment. Excluding the impact of our B2B
segment, the increase would have been $43.3 million and primarily reflects an
increase in stock-based compensation expense of $26.5 million . The remainder of
the increase primarily reflects additions to our product operations and
engineering headcount in our B2C segment.
General and Administrative. General and administrative expense increased $313.3
million , or 114.3%, to $587.5 million in the nine months ended September 30,
2021 from $274.2 million in the nine months ended September 30, 2020 . Of this
increase, $14.2 million was attributable to the B2B segment. Excluding the
impact of our B2B segment, the increase would have been $299.1 million . Our B2C
segment accounted for substantially all of this increase, primarily driven by an
increase in stock-based compensation expense of $243.5 million from the issuance
of awards granted under our long-term incentive plans. The remainder of the
increase was primarily attributable to an increase in personnel costs reflecting
headcount growth and an
36
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increase in certain non-recurring costs relating to advocacy efforts and other
legal expenses in jurisdictions where we do not operate certain products and are
actively seeking licensure, or similar approval, for those products.
Interest Income (Expense). Interest income was $1.1 million in the nine months
ended September 30, 2021 compared to interest expense of $2.3 million in the
nine months ended September 30, 2020 .
Loss on Remeasurement of Warrant Liabilities. We recorded a loss on
remeasurement of warrant liabilities of $2.9 million in the nine months ended
September 30, 2021 , compared to a loss of $411.3 million in the nine months
ended September 30, 2020 primarily due to changes in the underlying share price
of our class A common stock.
Net Loss. Net loss increased by $207.8 million to $1,196.9 million in the nine
months ended September 30, 2021 from $989.1 million in the nine months ended
September 30, 2020 , for the reasons discussed above.
Results of Operations for the Nine Months Ended September 30, 2021 Compared to
the Supplemental Unaudited Pro Forma Results of Operations for the Nine Months
Ended September 30, 2020
Set forth below are our results of operations for the nine months ended
September 30, 2021 , compared with the pro forma results of operations for the
nine months ended September 30, 2020 . These pro forma results assume that the
acquisition of SBTech , which is the primary component of our B2B segment,
occurred on January 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 acquisition of SBTech actually occurred on January 1, 2019 and are not
indicative of our consolidated results of operations for future periods.
Nine months ended
2021 2020 $ Change % Change
(amounts in thousands, except percentages) Actual Pro Forma
Revenue $ 822,700 $ 321,279 $ 501,421 156.1 %
Cost of revenue 540,980 218,177 (322,803) (148.0) %
Sales and marketing 703,056 307,530 (395,526) (128.6) %
Product and technology 184,016 120,070 (63,946) (53.3) %
General and administrative 587,509 257,596 (329,913) (128.1) %
Loss from operations (1,192,861) (582,094) (610,767) (104.9) %
Interest income (expense), net 1,071 (2,713) 3,784 139.5 %
Loss on remeasurement of warrant liabilities (2,905) (411,269) 408,364 99.3 %
Loss before income tax provision and loss from
equity method investment (1,194,695) (996,076) (198,619) (19.9) %
Income tax provision 1,654 3,904 2,250 57.6 %
Loss from equity method investment 549 380 (169) (44.5) %
Net loss $ (1,196,898) $ (1,000,360) $ (196,538) (19.6) %
Revenue. Revenue increased $501.4 million , or 156.1%, to $822.7 million in the
nine months ended September 30, 2021 from pro forma revenue of $321.3 million in
the nine months ended September 30, 2020 . Of this increase, $491.9 million was
attributable to the performance of our B2C segment, as discussed above.
Cost of Revenue. Cost of revenue increased $322.8 million , or 148.0%, to $541.0
million in the nine months ended September 30, 2021 from pro forma cost of
revenue of $218.2 million in the nine months ended September 30, 2020 . Of this
increase, $301.4 million was attributable to the performance of our B2C segment,
as discussed above.
Sales and Marketing. Sales and marketing expense increased $395.5 million , or
128.6%, to $703.1 million in the nine months ended September 30, 2021 , from pro
forma sales and marketing expense of $307.5 million in the nine months ended
September 30, 2020 . Substantially all of the increase was attributable to the
performance of our B2C segment, as discussed above.
Product and Technology. Product and technology expense increased by $63.9
million , or 53.3%, to $184.0 million in the nine months ended September 30,
2021 , from pro forma product and technology expense of $120.1 million in the
nine months ended September 30, 2020 . Of this increase, $43.3 million was
attributable to the performance of our B2C segment, as discussed above. The
remaining increase was attributable to the pro forma performance of the B2B
segment, driven mainly by an increase in stock-based compensation awards and
increased headcount.
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General and Administrative. General and administrative expense increased $329.9
million , or 128.1%, to $587.5 million in the nine months ended September 30,
2021 , from pro forma general and administrative expense of $257.6 million in the
nine months ended September 30, 2020 . Of this increase, $299.1 million was
attributable to the performance of our B2C segment, as discussed above. The
remaining increase was attributable to the pro forma performance of the B2B
segment, driven primarily by an increase in stock-based compensation awards and
increased headcount.
Interest Income (Expense). Interest income was $1.1 million in the nine months
ended September 30, 2021 , compared to pro forma interest expense of $2.7 million
in the nine months ended September 30, 2020 .
Loss on Remeasurement of Warrant Liabilities. We recorded a loss on
remeasurement of warrant liabilities of $2.9 million in the nine months ended
September 30, 2021 , compared to a loss of $411.3 million in the nine months
ended September 30, 2020 primarily due to changes in the underlying share price
of our class A common stock.
Net Loss. Net loss increased by $196.5 million to $1,196.9 million in the nine
months ended September 30, 2021 , from pro forma net loss of $1,000.4 million in
the nine months ended September 30, 2020 , for the reasons discussed above.
Liquidity and Capital Resources
We had $2.4 billion in cash and cash equivalents as of September 30, 2021
(excluding player cash, which we segregate from our operating cash balances on
behalf of our paid users for all jurisdictions 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.
Debt
In March 2021 , we issued zero-coupon convertible senior notes in an aggregate
principal amount of $1,265.0 million . The Convertible Notes mature on March 15,
2028 , subject to earlier conversion, redemption or repurchase. In connection
with the pricing of the Convertible Notes and the exercise of the option to
purchase additional Convertible Notes, we entered into privately negotiated
capped call transactions ("Capped Call Transactions"). The Capped Call
Transactions are expected generally to reduce potential dilution to our Class A
common stock upon any conversion of the Convertible Notes. The net cost of
$124.0 million incurred to enter into the Capped Call Transactions was recorded
as a reduction to additional paid-in capital on the Company's consolidated
balance sheet.
We also have a revolving credit facility with Pacific Western Bank with a
current limit of $60.0 million . The facility is scheduled to mature on March 1,
2022 . As of September 30, 2021 , $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. $55.8 million was available for borrowing under the revolving
credit facility as of the date of this Report.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Nine months ended September 30,
(amounts in thousands) 2021 2020
Net cash used in operating activities $ (247,261) $ (127,859)
Net cash used in investing activities (118,695) (211,633)
Net cash provided by financing activities 1,134,129 1,515,940
Effect of foreign exchange rates on cash and cash equivalents and restricted cash
1,884 1,358
Net increase in cash and cash equivalents and restricted cash 770,057 1,177,806
Cash and cash equivalents and restricted cash at beginning of period
2,104,976 220,533
Cash and cash equivalents and restricted cash at end of period
Operating Activities. Net cash used in operating activities in the nine months endedSeptember 30, 2021 was$247.3 million , compared to$127.9 million in the nine months endedSeptember 30, 2020 , mainly reflecting our$207.8 million higher net loss, for the reasons discussed above, net of non-cash cost items. Non-cash cost items decreased$59.5 million period-over-period, driven primarily by a decrease in loss on remeasurement of warrants liabilities and partially offset by an increase in stock-based compensation expense and depreciation and amortization. The increase in these cash outflows was partially offset 38 -------------------------------------------------------------------------------- by improvements in operating working capital of$147.9 million primarily due to an increase in cash provided by our accounts payable and accrued expenses and liabilities due to users. Investing Activities. Net cash used in investing activities during the nine months endedSeptember 30, 2021 decreased by$92.9 million to$118.7 million from$211.6 million during the same period in 2020, mainly reflecting the cash portion of consideration paid toSBTech shareholders in connection with the Business Combination during the second quarter of 2020. Financing Activities. Net cash provided by financing activities during the nine months endedSeptember 30, 2021 decreased by$381.8 million to$1,134.1 million from$1,515.9 million during the same period in 2020. Although we completed a convertible debt offering during the nine months endedSeptember 30, 2021 , there were additional activities that occurred during the nine months endedSeptember 30, 2020 that caused cash provided by financing activities to decrease when comparing these periods. Such activities that occurred during the nine months endedSeptember 30, 2020 include the recapitalization of DEAC shares and net proceeds of$201.5 million that primarily related to the exercise of our public warrants, which became exercisable following the Business Combination, and net proceeds of$620.8 million received in connection with a secondary public offering. Commitments and Contingencies Refer to Note 12 of our unaudited condensed consolidated financial statements included elsewhere in this Report for a summary of our commitments as ofSeptember 30, 2021 . Critical Accounting Policies Our financial statements have been prepared in accordance withU.S. GAAP. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results and other assumptions we believe are reasonable. Actual results could differ materially from these estimates. During the three months endedSeptember 30, 2021 , there were no changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , as filed with theSEC onFebruary 26, 2021 and as amended on Form 10-K/A onMay 3, 2021 (the "2020 Annual Report"). For a complete discussion of our critical accounting policies, refer to the 2020 Annual Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no significant changes in our exposure to market risk during the three months endedSeptember 30, 2021 . Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk in our 2020 Annual Report. Item 4. Controls and Procedures. Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as ofSeptember 30, 2021 . As a result of the restatement of our Original Annual Report, the Company has concluded that there was a material weakness in its operation of controls over the classification and accounting for its Warrants in accordance with Accounting Standards Codification 815-40, and solely as a result of the material weakness, its Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as ofSeptember 30, 2021 .
Notwithstanding this material weakness described above, we have concluded that
the Company's condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q present fairly, in all material respects, the
financial position of the Company as of
39
--------------------------------------------------------------------------------Remediation of Material Weakness
To remediate the material weakness, we studied and clarified our understanding
of the accounting for contracts that may be settled in our own stock, such as
warrants, as highlighted in the Staff Statement on Accounting and Reporting
Considerations for Warrants Issued by Special Purpose Acquisition Companies
("SPACs"), issued on April 12, 2021 (the "SEC Statement") and enhanced the
accounting policy, controls and procedures related to the accounting for such
contracts to determine proper accounting in accordance with U.S. GAAP as
clarified by the SEC Statement. We accounted for our Warrants as of and for the
three and nine months ended September 30, 2021 in accordance with the SEC
Statement. While these actions are subject to ongoing management evaluation,
including the validation and testing of internal controls over a sustained
period of financial reporting cycles, we are committed to remediating internal
controls deficiencies as they are identified and committed to the continuous
improvement of its overall controls environment.
Changes in Internal Control Over Financial Reporting
Other than as described above under "Remediation of Material Weakness" above,
there has been no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, as specified above. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met.
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