DRAFTKINGS INC. The following discussion and analysis should be read in conjunction with other sections of this Annual Report, including "Item 1. Business" 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.
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") products, 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.
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, as well as media and other online consumer
product offerings. 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, with
respect to both the tradition and integrity of sports and 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 other online consumer product 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 also expect to improve our
profitability over time through cost synergies and new opportunities driven by
the continued optimization of our technology infrastructure.
Our path to profitability is based on the acceleration of positive contribution
profit growth driven primarily by marketing efficiencies as we continue the
transition from local to regional to national advertising as well as scale
benefits from investments in our product and technology and general and
administrative functions. 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 the U.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, as well as our other online consumer 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 . 53 --------------------------------------------------------------------------------
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 through 2021, the COVID-19 pandemic adversely impacted many different industries. The ongoing COVID-19 pandemic, including the emergence of new variants or strains of COVID-19, 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. 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 year endedDecember 31, 2021 , many sports seasons continued and most sporting events were held as planned (including sporting events postponed from 2020), including the NFL regular season, the NFL Playoffs and Superbowl LV, MLB regular season and the World Series, 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 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. 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. 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) 2021 2020 2019
Revenue (1) $ 1,296,025 $ 614,532 $ 323,410
Pro Forma Revenue (2) 1,296,025 643,502 431,834
Net Loss (1) (1,523,195) (1,231,835) (142,734)
Pro Forma Net Loss (2) (1,523,195) (1,242,761) (173,962)
Adjusted EBITDA (3) (676,133) (391,919) (98,640)
Pro Forma Adjusted EBITDA (3) (676,133) (395,928) (78,224)
(1)Due to the timing of the Business Combination (as defined below), the
twelve-month period ended December 31, 2020 reflects B2B/SBTech activity from
April 24, 2020 onwards, and the twelve-month period ending December 31, 2019
does not reflect any B2B/SBTech activity.
(2)Assumes that the Business Combination was consummated on
(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
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. InMarch 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
Due to fair value changes throughout 2021 and 2020, we recorded a gain on
remeasurement of warrant liabilities of
The following discussion of our results of operations for 2021 includes the
financial results of
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segment results, presented and discussed below, are comparable to
To facilitate comparability between periods, we have included in this Report a supplemental discussion of our results of operations for 2021 compared with our unaudited pro forma results of operations for 2020 . The pro forma results for 2020 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 engagement with one of our B2C product offerings such as a 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 into 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 chart below presents our MUPs for 2019, 2020 and 2021:
[[Image Removed: deac-20211231_g3.jpg]]
Average Revenue per MUP ("ARPMUP"). ARPMUP is the average B2C segment revenue
per MUP. This key metric represents our ability to drive usage and monetization
of our B2C product offerings. The chart below presents our ARPMUP for 2019, 2020
and 2021:
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[[Image Removed: deac-20211231_g4.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.
The increase in MUPs for 2021, compared to 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. In addition, MUPs were positively impacted as the
suspension and cancellation of major sporting events due to COVID-19 in the
prior year did not reoccur to the same degree in 2021. ARPMUP increased in 2021
primarily due to a continued mix shift into our Sportsbook and iGaming product
offerings and cross-selling our customers into more products, as well as
continued strong customer engagement.
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 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, 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 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 and advocacy and other related legal expenses), non-cash expenditures (for 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 57 --------------------------------------------------------------------------------
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
Adjusted EBITDA
The table below presents our Adjusted EBITDA reconciled to our net loss, the
closest
Year Ended December 31,
(amounts in thousands) 2021 2020 2019
Net Loss $
(1,523,195)
121,138 77,410 13,636
Interest (income) expense, net (1,957) 1,070 (1,348)
Income tax provision (benefit) 8,269 (622) 58
Stock-based compensation (2) 683,293 325,038 17,613
Transaction-related costs (3) 25,316 36,406 10,472
Litigation, settlement, and related costs (4) 10,392 6,839 3,695
Advocacy and other related legal expenses (5) 40,415 - -
(Gain) loss on remeasurement of warrant liabilities (30,065) 387,565 -
Other non-recurring, special project and non-operating (income) costs (6)
(9,739) 6,210 (32)
Adjusted EBITDA $ (676,133) $ (391,919) $ (98,640)
Adjusted EBITDA by segment:
B2C $ (654,432) $ (393,461) $ (98,640)
B2B $ (21,701) $ 1,542 $ -
(1)The amounts include the amortization of acquired intangible assets of $80.1
million , $50.5 million and $0.0 million for 2021, 2020 and 2019, respectively.
(2)The amounts for 2021, 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 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 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, change in fair value of certain
financial assets and our equity method share of the investee's losses.
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--------------------------------------------------------------------------------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 December 31,
(amounts in thousands) 2021 2020
Net Loss $ (1,523,195) $ (1,242,761)
Adjusted for:
Depreciation and amortization (1) 121,138 100,455
Interest (income) expense, net (1,957) 1,530
Income tax provision 8,269 3,074
Stock-based compensation (2) 683,293 335,660
Transaction-related costs (3) 25,316 5,500
Litigation, settlement, and related costs (4) 10,392 6,839
Advocacy and other related legal expenses (5) 40,415 -
(Gain) loss on remeasurement of warrant liabilities (30,065) 387,565
Other non-recurring, special project and non-operating (income) costs (6)
(9,739) 6,210
Adjusted EBITDA $ (676,133) $ (395,928)
(1)The amounts include the amortization of acquired intangible assets of $80.1
million and $72.4 million for 2021 and 2020, respectively.
(2)The amounts for 2021 and 2020 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 Chief Executive Officer, and $10.9 million due to 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. These costs include those
relating to the Business Combination for 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, change in fair value of certain
financial assets and our equity method share of the investee's losses.
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, ten 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
59
--------------------------------------------------------------------------------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, 2021 , 29 U.S. states, theDistrict of Columbia andPuerto Rico have legalized either retail or online sports betting. Of these 31 legal jurisdictions, 23 have legalized online sports betting. Of those 23 jurisdictions, 18 are live, andDraftKings operated in 15 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 cost of revenue. States that have established state-run monopolies may limit opportunities for private sector participants like us. We nonetheless believe our proprietary B2B software allows us to become a partner of choice to power state-run sportsbooks. States impose taxes 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 product 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.
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 we may not always be able to do so successfully, particularly over
short periods, which can result in financial losses as well as revenue
volatility.
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--------------------------------------------------------------------------------Results of Operations
2021 Compared to 2020
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,
(amounts in thousands, except percentages) 2021 2020 $ Change % Change
Revenue $ 1,296,025 $ 614,532 $ 681,493 110.9 %
Cost of revenue 794,162 346,589 (447,573) (129.1) %
Sales and marketing 981,500 495,192 (486,308) (98.2) %
Product and technology 253,655 168,633 (85,022) (50.4) %
General and administrative 828,325 447,374 (380,951) (85.2) %
Loss from operations (1,561,617) (843,256) (718,361) 85.2 %
Interest income (expense), net 1,957 (1,070) 3,027 282.9 %
Gain (loss) on remeasurement of warrant
liabilities 30,065 (387,565) 417,630 107.8 %
Other income, net 11,951 - 11,951 100.0 %
Loss before income tax (benefit) provision (1,517,644) (1,231,891) (285,753) 23.2 %
Income tax provision (benefit) 8,269 (622) (8,891) (1,429.4) %
(Gain) loss from equity method investment (2,718) 566 3,284 580.2 %
Net Loss $ (1,523,195) $ (1,231,835) $ (291,360) (23.7) %
Revenue. Revenue increased
The$659.7 million increase in our B2C segment revenue was primarily attributable to our online gaming revenues which increased$627.9 million , or 121.3%, to$1,145.5 million in 2021, from$517.6 million in 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 2021 due to MUPs increasing by 69.2% and ARPMUP increasing by 30.9% as compared to 2020 as a result of the ongoing legalization of online sports betting and iGaming throughout the country. Since 2020, we launched our online Sportsbook product offering inArizona ,Connecticut ,Michigan ,Tennessee ,Virginia andWyoming and our iGaming product offering inConnecticut andMichigan . We also continued to increase customer engagement with our Sportsbook and iGaming product offerings in previously launched states. This increase in revenue was partially offset by planned promotional investments in the launches of our Sportsbook and iGaming product offering in new states. Cost of Revenue. Cost of revenue increased$447.6 million , or 129.1%, to$794.2 million in 2021, from$346.6 million in 2020. Of this increase,$53.1 million was attributable to the B2B segment. Excluding the impact of our B2B segment, the cost of revenue increase would have been$394.5 million , reflecting growth in revenue from the expanded product and geographic footprint of our B2C segment, including the launch of our Sportsbook and iGaming product offerings in several states in 2021. The$394.5 million cost of revenue increase in our B2C segment can be primarily attributed to an increase in our variable expenses such as product taxes and payment processing fees, which increased$203.4 million and$73.1 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 decreased by 1.0% percentage point to 55.4% in 2021 from 56.4% in 2020. This improvement reflected the partial year benefit of the transition to our in-house sports betting technology infrastructure.
Sales and Marketing. Sales and marketing expense increased$486.3 million , or 98.2%, to$981.5 million in 2021, from$495.2 million in 2020. Our B2C segment accounted for substantially all of this increase with$367.8 million of the increase resulting from activities to acquire and retain players, such as marketing costs including advertising and developing marketing 61 --------------------------------------------------------------------------------
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$85.0 million , or 50.4%, to$253.7 million in 2021 from$168.6 million in 2020, of which$39.2 million was attributable to our B2B segment. The remaining increase primarily reflects additions to our product operations and engineering headcount in our B2C segment, including an increase in stock-based compensation expense of$26.0 million from the issuance of awards granted under our long-term incentive plans. General and Administrative. General and administrative expense increased$381.0 million , or 85.2%, to$828.3 million in 2021 from$447.4 million in 2020. Our B2C segment accounted for substantially all of this increase, primarily driven by an increase in stock-based compensation expense of$267.5 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 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. Gain (loss) on Remeasurement of Warrant Liabilities. We recorded a gain on remeasurement of warrant liabilities of$30.1 million in 2021, compared to a loss of$387.6 million in 2020 primarily due to changes in the underlying share price of our class A common stock.
Net Loss. Net loss increased by
2020 Compared to 2019
A discussion of changes in our results of operations in 2020 compared to 2019 has been omitted from this Form10-K, but it may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Amendment No. 1 on Form 10-K/A for the fiscal year endedDecember 31, 2020 , filed with theSEC onMay 3, 2021 , which is available free of charge on theSEC's website at www.sec.gov and at www.DraftKings.com.
Supplemental Unaudited Pro Forma Results for 2021 Compared to 2020
Set forth below are our pro forma results of operations for the year endedDecember 31, 2021 compared with the year endedDecember 31, 2020 . These pro forma results assume that the Business Combination, including our acquisition ofSBTech , which comprises the entirety of our 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,
(amounts in thousands, except percentages) 2021 2020 $ Change % Change Revenue$ 1,296,025 $ 643,502 $ 652,523 101.4 % Cost of revenue 794,162 377,191 (416,971) (110.5) % Sales and marketing 981,500 499,342 (482,158) (96.6) % Product and technology 253,655 186,204 (67,451) (36.2) % General and administrative 828,325 430,791 (397,534) (92.3) % Loss from operations (1,561,617) (850,026) (711,591) (83.7) % Interest income (expense), net 1,957 (1,530) 3,487 227.9 % Gain (loss) on remeasurement of warrant liabilities 30,065 (387,565) 417,630 107.8 % Other income, net 11,951 - 11,951 100.0 % Loss before income taxes (1,517,644) (1,239,121) (278,523) 22.5 % Income tax provision 8,269 3,074 5,195 169.0 % (Gain) loss from equity method investment (2,718) 566 3,284 580.2 % Net Loss$ (1,523,195) $ (1,242,761) $ (280,434) 22.6 % 62
-------------------------------------------------------------------------------- Revenue. Pro forma revenue increased by$652.5 million , or 101.4%, to$1,296.0 million in 2021 from pro forma revenue of$643.5 million in 2020. Of this increase,$659.7 million was attributable to the performance of our B2C segment, as discussed above, partially offset by a slight decrease in revenue in our B2B segment. Cost of Revenue. Cost of revenue increased$417.0 million , or 110.5%, to$794.2 million in 2021 from pro forma cost of revenue of$377.2 million in 2020. Of this increase,$394.5 million was attributable to the performance of our B2C segment, as discussed above. Sales and Marketing. Sales and marketing expense increased$482.2 million , or 96.6%, to$981.5 million in 2021, from pro forma sales and marketing expense of$499.3 million in 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$67.5 million , or 36.2%, to$253.7 million in 2021, from pro forma product and technology expense of$186.2 million in 2020. Of this increase,$61.2 million was attributable to the performance of our B2C segment, as discussed above. The remaining increase was attributable to the pro forma performance of our B2B segment, driven mainly by an increase in stock-based compensation awards and increased headcount. General and Administrative. General and administrative expense increased$397.5 million , or 92.3%, to$828.3 million in 2021, from pro forma general and administrative expense of$430.8 million in 2020, Substantially all of the increase was attributable to the performance of our B2C segment, as discussed above. Gain (loss) on Remeasurement of Warrant Liabilities. We recorded a gain on remeasurement of warrant liabilities of$30.1 million in 2021, compared to a loss of$387.6 million in 2020 primarily due to changes in the underlying share price of our class A common stock.
Net Loss. Net loss increased by
63
--------------------------------------------------------------------------------Quarterly Performance Trend and Seasonality
Our user engagement and financial performance is seasonal in nature, as indicated by the following chart, which presents our MUPs and ARPMUP for the last eight quarters, and the explanations that follow.
[[Image Removed: deac-20211231_g5.jpg]]
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 and the introduction of new product offerings.
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 primarily 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 2021, 2020 and 2019 included revenue related to 16, 16
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$2.2 billion in cash and cash equivalents as ofDecember 31, 2021 (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, 64 --------------------------------------------------------------------------------
irrespective of the continuing impact of COVID-19. We will continue to evaluate our long-term operating performance and cash needs and believe we are well positioned to continue to fund the operations of the business long-term.
Our material cash requirements include the following contractual and other obligations.
Debt. InMarch 2021 , we issued zero-coupon convertible senior notes in an aggregate principal amount of$1,265.0 million . The Convertible Notes mature onMarch 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.
Leases. We have lease arrangements for certain corporate office facilities, data
centers, and motor vehicles. As of
Other Purchase Obligations. We have certain non-cancelable contracts with vendors, licensors and others requiring us to make future cash payments. As ofDecember 31, 2021 , these purchase obligations were$1,894.3 million , with$404.3 million payable within 12 months.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
Year ended December 31,
(in thousands) 2021 2020 2019
Net cash used in operating activities $ (419,508) $ (194,157) $ (46,578)
Net cash used in investing activities (195,022) (227,341) (42,271)
Net cash provided by financing activities 1,138,813 2,306,299 79,776
Effect of foreign exchange rates on cash and cash
equivalents and restricted cash 583 (358) -
Net increase (decrease) in cash and cash equivalents and restricted cash
524,866 1,884,443 (9,073)
Cash and cash equivalents and restricted cash at
beginning of period 2,104,976 220,533 229,606
Cash and cash equivalents and restricted cash at end of
period $ 2,629,842 $ 2,104,976 $ 220,533
Operating Activities. Net cash used in operating activities in 2021 was $419.5
million , compared to $194.2 million in 2020, mainly reflecting our $291.4
million higher net loss, for the reasons discussed above, net of non-cash cost
items. Non-cash cost items decreased $44.5 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 by improvements in operating working capital of $110.5 million primarily
due to an increase in cash provided by our accounts payable and accrued expenses
and liabilities due to users.
Net cash used in operating activities in 2020 increased by $147.6 million , or
316.8%, to $194.2 million , from $46.6 million in 2019, mainly reflecting our
$1,089.1 million higher net loss, 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 .
Investing Activities. Net cash used in investing activities in 2021 decreased by
$32.3 million to $195.0 million from $227.3 million in 2020, mainly reflecting
the cash portion of consideration paid to SBTech shareholders in connection with
the Business Combination during the second quarter of 2020, partially offset by
other acquisitions that occurred in 2021 and an increase in cash paid for gaming
licenses.
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 to SBTech shareholders, net of cash acquired, of
$178.6 in connection with the Business Combination.
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Financing Activities. Net cash provided by financing activities in 2021
decreased by $1,167.5 million to $1,138.8 million from $2,306.3 million in 2020.
Although we completed a convertible debt offering during 2021, there were
additional activities that occurred during 2020 that caused cash provided by
financing activities to decrease when comparing these periods. Such activities
that occurred during 2020 include the recapitalization of DEAC shares and net
proceeds of $202.0 million that primarily related to the exercise of our public
warrants, which became exercisable following the Business Combination, and net
proceeds of $1,680.1 million received in connection with public equity
offerings.
Net cash provided by financing activities during 2020 increased by $2,226.5
million to $2,306.3 million 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 $1,680.1 million received in connection with
the public offerings of our Class A common stock in June and October 2020 .
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 and 16 to our Consolidated Financial Statements for more information. 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 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. 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 by comparing the carrying amount to the fair value of the reporting unit. If the carrying amount exceeds the fair value, goodwill will be written down to the fair value and recorded as impairment expense in the consolidated statements of operations. We perform our impairment testing annually and when circumstances change that would more likely than not reduce the fair value of a reporting 66 --------------------------------------------------------------------------------
unit below its carrying value. We performed our annual impairment assessment of
goodwill as of
Business Combinations
We account for business acquisitions in accordance with ASC Topic 805, Business
Combinations ("ASC 805"). 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.
On March 26, 2021 and April 1, 2021 , the Company acquired 100% of the equity of
Vegas Sports Information Network, Inc. and Blue Ribbon Software Ltd. ,
respectively. Both of these acquisitions are accounted for under ASC 805. In
accordance with the acquisition method, we recorded the fair value of assets
acquired and liabilities assumed. The allocation of the consideration to the
assets acquired and liabilities assumed is based on various estimates. As of
December 31, 2021 , we finalized our preliminary purchase price allocations for
both acquisitions.
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 on U.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.
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.
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