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 ("2020 Annual Report"), filed with theSEC onFebruary 26, 2020 and as amended on Form 10-K/A onMay 3, 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. 20 Table of Contents 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, and we are also involved in the design, development,
and licensing of sports betting and casino gaming software for online and retail
sportsbook and casino gaming products.
Our mission is to make life more exciting by responsibly creating the world's favorite real-money games and betting experiences. We accomplish this by creating an environment where our users can find enjoyment and fulfillment through DFS, Sportsbook and iGaming.
We make deliberate and substantial investments in support of our mission and long-term growth. For example, we have invested in our products and technology in order to continually launch new product innovations, improve marketing, merchandising, and operational efficiency through data science, and deliver a great user experience. We also make significant investments in sales and marketing and incentives to grow and retain our paid user base, including personalized cross-product offers and promotions, and promote brand awareness to attract the "skin-in-the-game" sports fan. Together, these investments have enabled us to create a leading product offering built on scalable technology, while attracting a user base that has resulted in the rapid growth of our business. Our priorities are to (a) continue to invest in our products and services, (b) launch our product offerings in new geographies, (c) effectively integrateSBTech (Global) Limited ("SBTech") to form a vertically integrated business, (d) create replicable and predictable state-level unit economics in sports betting and iGaming and (e) expand our consumer offerings. When we launch Sportsbook and iGaming offerings in a new jurisdiction, we invest in user acquisition, retention and cross-selling until the new jurisdiction provides a critical mass of users engaged across our product offerings. Our current technology is highly scalable with relatively minimal incremental spend required to launch our product offerings in new jurisdictions. We will continue to manage our fixed-cost base in conjunction with our market entry plans and focus our variable spend on marketing, user experience and support and regulatory compliance to become the product of choice for users and maintain favorable relationships with regulators. We expect to further improve our profitability (excluding the impact of amortization of acquired intangibles) through cost synergies and new opportunities driven by vertical integration withSBTech's technology and expertise. Our path to profitability is based on the acceleration of positive contribution profit growth driven by marketing efficiencies as we 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 comprised of the entirety of the operations ofSBTech , which we acquired onApril 23, 2020 . Our B2B segment's principal activities involve the design and development of sports betting and casino gaming software. Our B2B services are delivered through our proprietary software, and our complementary service offerings include trading and risk management and support for reporting, customer management and regulatory reporting requirements. The operations of our B2B segment are concentrated mainly inEurope ,Asia andthe United States .
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Impact of COVID-19
The COVID-19 pandemic has adversely impacted global commercial activity,
disrupted supply chains and contributed to significant volatility in financial
markets. In 2020, the COVID-19 pandemic adversely impacted many different
industries. The ongoing COVID-19 pandemic could have a continued material
adverse impact on economic and market conditions and trigger a period of global
economic slowdown. The rapid development and fluidity of this situation
precludes any prediction as to the extent and the duration of the impact of
COVID-19. The COVID-19 pandemic therefore presents material uncertainty and risk
with respect to us and our performance and could affect our financial results in
a materially adverse way.
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 in March 2020 and continuing through the end of the second
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, the NCAA 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. In the first quarter of 2021, many sports seasons
continued and multiple sporting events were held as planned, including the NFL
regular season, the NFL Playoffs and Superbowl LV, the NBA regular season, the
NHL regular season, the NASCAR Cup Series, various NCAA football bowl games and
the NCAA college basketball season and tournament. 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. 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. Additionally, while retail casinos where we have branded
Sportsbooks have reopened, they continue to operate with reduced capacity.
Our revenues vary based on sports seasons and sporting events amongst other
things, and cancellations, suspensions or alterations resulting from COVID-19
have the potential to adversely affect our revenue, possibly materially.
However, our product offerings that do not rely on sports seasons and sporting
events, such as iGaming, may partially offset this adverse impact on revenue.
DraftKings is also innovating to develop more products that do not rely on
traditional sports seasons and sporting events, for example, products that
permit wagering and contests on events such as eSports, simulated NASCAR and
League of Legends .
A significant or prolonged decrease in consumer spending on entertainment or
leisure activities would likely have an adverse effect on demand for our product
offerings, reducing cash flows and revenues, and thereby materially harming our
business, financial condition and results of operations. In addition, a
recurrence of COVID-19 cases or an emergence of additional variants or strains
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 have necessitated a shift away from a traditional office environment
for many employees, we have business continuity programs in place to ensure that
employees are safe and that the business continues to function with minimal
disruptions to normal work operations while employees work remotely. We will
continue to monitor developments relating to disruptions and uncertainties
caused by COVID-19.
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Financial Highlights and Trends
The following table sets forth a summary of our financial results for the
periods indicated:
Three months ended March 31,
2021 2020
(amounts in thousands)
Revenue (1) $ 312,276 $ 88,542
Pro Forma Revenue (2) 312,276 113,445
Net Loss (1) (346,344) (68,680)
Pro Forma Net Loss (2) (346,344) (82,081)
Adjusted EBITDA (3) (139,262) (49,460)
Pro Forma Adjusted EBITDA (3) (139,262) (51,600)
Due to the timing of the Business Combination (as defined below), the
(1) three month period ended
three month period ending
(2) Assumes that the Business Combination was consummated on
"-Comparability of Financial Information" below.
Adjusted EBITDA and Pro Forma Adjusted EBITDA are non-GAAP financial (3) measures. See "-Non-GAAP Information" below for additional information about
these measures and a reconciliation of these measures.
Revenue grew in the quarter endedMarch 31, 2021 compared to the quarter endedMarch 31, 2020 by$223.7 million primarily due to the strong performance of our B2C product offerings as a result of robust customer acquisition and retention, successful launches of our Sportsbook and iGaming product offerings in a number of states since the first quarter of 2020 and the acquisition ofSBTech . In addition, revenue growth in the first quarter of 2021 when compared to the same period in 2020 was positively impacted by the suspension and cancellation of major sporting events beginning in early March of 2020 as a result of COVID-19, and resulted in a reduction in customers' use of, and spending on, our Sportsbook and DFS product offerings.
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
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We recorded a loss on remeasurement warrant liabilities of$27.0 million in the three months endedMarch 31, 2021 due to fair value changes in the warrant liability. We did not have similar instruments in the three months endedMarch 31, 2020 and therefore no loss on remeasurement was recorded in the prior period. The following discussion of our results of operations for the three months endedMarch 31, 2021 includes the financial results ofSBTech . Accordingly, our consolidated results of operations for the three months endedMarch 31, 2021 are not comparable to our consolidated results of operations for prior periods. Our B2C segment results, presented and discussed below, are comparable toDraftKings' legacy operations and our reported consolidated results for prior periods. To facilitate comparability between periods, we have included in this Report a supplemental discussion of our results of operations for the three months endedMarch 31, 2021 compared with our unaudited pro forma results of operations for the three months endedMarch 31, 2020 . The pro forma results for the three months endedMarch 31, 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 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.
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The chart below presents our MUPs for the three months ended
[[Image Removed: Graphic]]
Average Revenue per MUP ("ARPMUP"). ARPMUP is the average B2C segment revenue
per MUP, and this key metric represents our ability to drive usage and
monetization of our B2C product offerings. The chart below presents our ARPMUP
for the three months ended March 31, 2021 and 2020 respectively:
[[Image Removed: Graphic]]
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 months ended March 31, 2021 ,
compared to the same period in 2020, reflects growth in DFS, the expansion of
our Sportsbook and iGaming product offerings into new states and increased
response rates to our advertising spending. Year-over-year growth in MUPs in the
first quarter of 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 months ended March 31, 2021 , compared to
the same period in 2020, due to our continued focus on driving engagement across
our B2C product offerings, specifically with our Sportsbook and iGaming products
being offered in additional jurisdictions but also as we cross sell our
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users into more products. As a result, we experienced a favorable change in revenue mix as a higher percentage of our total customers engaged with our Sportsbook and iGaming product offerings. There was also some favorability from the normalized sports schedule as our users in Sportsbook and DFS were able to engage with our products for the entire quarter, including theNCAA basketball tournament and the regular seasons of the NBA and NHL.
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, 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), non-cash expenditures (for example, in the case of depreciation, amortization, and stock-based compensation), or are not related to our underlying business performance (for example, in the case of interest income and expense and litigation settlement and related costs). Pro Forma Adjusted EBITDA excludes the same categories of expenses and is prepared to give effect to the Business Combination as if it occurred onJanuary 1, 2019 .
Adjusted EBITDA
The table below presents our Adjusted EBITDA reconciled to our net loss, the
closest
Three months ended March 31,
2021 2020
(amounts in thousands)
Net loss $ (346,344) $ (68,680)
Adjusted for:
Depreciation and amortization (excluding acquired intangibles) 9,062 4,704
Amortization of acquired intangibles 19,131 -
Interest (income) expense, net (985) 2,351
Income tax (benefit) provision (4,595) 9
Stock-based compensation (1) 151,843 4,842
Transaction-related costs (2) 3,023 5,652
Litigation, settlement, and related costs (3) 622 1,330
Loss on remeasurement of warrant liabilities 26,980 -
Other non-recurring costs and special project costs (4) 1,848 129
Other non-operating costs (5) 153 203
Adjusted EBITDA $ (139,262) $ (49,460)
Adjusted EBITDA by segment:
B2B $ 2,093 $ -
B2C $ (141,355) $ (49,460)
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The amounts for the three months ended March 31, 2021 primarily reflect
stock-based compensation expenses resulting from the issuance of awards under
(1) long-term incentive plans and, for the three months ended
primarily reflects stock-based compensation expenses resulting from the
issuance of awards under time-based, performance-based and long-term
incentive plans.
Includes capital markets advisory, consulting, accounting and legal expenses (2) related to evaluation, negotiation and integration costs incurred in
connection with transactions and offerings, including those relating to the
Business Combination for the three months ended
(3) Includes primarily external legal costs related to litigation and litigation
settlement costs deemed unrelated to our core business operations.
(4) Includes primarily consulting, advisory and other costs relating to
non-recurring items and special projects.
(5) Includes our equity method share of the investee's losses.
Pro Forma Adjusted EBITDA
The table below presents our Actual Non-GAAP Adjusted EBITDA reconciled to net loss for the three-month period endingMarch 31, 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: Three months ended March 31, 2021 2020 (amounts in thousands) Actual Pro Forma Net loss$ (346,344) $ (82,081) Adjusted for: Depreciation and amortization (excluding acquired intangibles) 9,062 5,552 Amortization of acquired intangibles 19,131 17,699 Interest (income) expense, net (985) 2,798 Income tax (benefit) provision (4,595) (2,088) Stock-based compensation (1) 151,843 4,858 Transaction-related costs (2) 3,023 - Litigation, settlement, and related costs (3) 622 1,330 Loss on remeasurement of warrant liabilities 26,980 - Other non-recurring costs and special project costs (4) 1,848 129 Other non-operating costs (5) 153 203 Pro forma Adjusted EBITDA $
(139,262)
The amounts for the three months ended
stock-based compensation expenses resulting from the issuance of awards under
(1) long-term incentive plans and, for the three months ended
primarily reflects stock-based compensation expenses resulting from the
issuance of awards under time-based, performance-based and long-term
incentive plans.
Includes capital markets advisory, consulting, accounting and legal expenses
related to evaluation, negotiation and integration costs incurred in
connection with transactions and offerings. The transaction costs related to (2) the Business Combination described in footnote 1 to the preceding table have
been eliminated in calculating our pro forma net income for the three months
ended
S-X.
(3) Includes primarily external legal costs related to litigation and litigation
settlement costs deemed unrelated to our core business operations.
(4) Includes primarily consulting, advisory and other costs relating to
non-recurring items and special projects.
(5) Includes our equity method share of the investee's losses.
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Results of Operations
Three Months Ended
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 March 31,
2021 2020 $ Change % Change
(amounts in thousands, except percentages)
Revenue $ 312,276 $ 88,542 $ 223,734 252.7 %
Cost of revenue 183,225 43,416 (139,809) (322.0) %
Sales and marketing 228,686 53,706 (174,980) (325.8) %
Product and technology 56,159 18,041 (38,118) (211.3) %
General and administrative 168,997 39,496 (129,501) (327.9) %
Loss from operations (324,791) (66,117) (258,674) (391.2) %
Interest income (expense), net 985 (2,351) 3,336 141.9 %
Loss on remeasurement of warrant liabilities (26,980) - (26,980) n.m.
Loss before income tax (benefit) provision and
loss from equity method investment (350,786) (68,468) (282,318) (412.3) %
Income tax (benefit) provision (4,595) 9 4,604 n.m.
Loss from equity method investment 153 203 50 24.6 %
Net loss $ (346,344) $ (68,680) $ (277,664) (404.3) %
n.m. = not meaningful
Revenue. Revenue increased$223.8 million , or 252.7%, to$312.3 million in the three months endedMarch 31, 2021 from$88.5 million in the three months endedMarch 31, 2020 . The increase was partially attributable to$31.4 million in revenue fromSBTech , which we acquired onApril 23, 2020 . Excluding the impact of the SBTech Acquisition, revenue would have increased by$192.4 million in the three months endedMarch 31, 2021 , reflecting strong customer acquisition and retention as well as successful launches of Sportsbook and iGaming in additional states since the first quarter of 2020, as well as a more favorable sport schedule especially as it relates to the COVID-19 impact on the 2020 period. Quarter-on-quarter, MUPs for our B2C segment increased by 114.1%, while ARPMUP for our B2C segment increased by 48.1%.
Cost of Revenue. Cost of revenue increased
Excluding the impact of the SBTech Acquisition, the cost of revenue increase would have been$108.1 million in the three months endedMarch 31, 2021 . This increase is largely due to variable costs that relate to the expanded product and geographic footprint of our B2C segment. These variable costs primarily include an increase in product taxes and revenue share agreements with the expansion into new states, as well as the variable impact of continued growth in existing states. In addition, we have certain technology and merchant processing partners with variable costs that increased as well from additional customer engagement. B2C segment cost of revenue as a percentage of B2C revenue increased by 4.9 percentage points to 53.9% in the three months endedMarch 31, 2021 from 49.0% in the three months endedMarch 31, 2020 , reflecting our changed revenue mix from our more mature DFS product to our iGaming and Sportsbook product offerings as well as higher promotional investment in new geographies. In general, our iGaming and Sportsbook product offerings produce revenue at a higher cost per revenue dollar relative to our more mature DFS offering. Sales and Marketing. Sales and marketing expense increased$175.0 million , or 325.8%, to$228.7 million in the three months endedMarch 31, 2021 from$53.7 million in the three months endedMarch 31, 2020 , of which$2.5 million was attributable toSBTech . Excluding the impact of the SBTech Acquisition, the increase was$172.5 million and was primarily due to higher advertising and 28
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marketing spending to increase awareness and user acquisition for our Sportsbook and iGaming offerings, particularly in newly launched states, and an increase in stock-based compensation expense. Product and Technology. Product and technology expense increased$38.1 million , or 211.3%, to$56.2 million in the three months endedMarch 31, 2021 from$18.0 million in the three months endedMarch 31, 2020 , of which$20.3 million was attributable toSBTech . Excluding the impact of the acquisition ofSBTech , the increase would have been$17.9 million and primarily reflects an increase in stock-based compensation expense from the issuance of awards under our long-term incentive plans, as well as additions to our product operations and engineering headcount in our B2C segment. General and Administrative. General and administrative expense increased$129.5 million , or 327.9%, to$169.0 million in the three months endedMarch 31, 2021 from$39.5 million in the three months endedMarch 31, 2020 . Of this increase,$7.6 million was attributable toSBTech . Excluding the impact of the acquisition ofSBTech , the increase would have been$121.9 million , primarily due to an increase in stock-based compensation expense from the issuance of awards granted under our long-term incentive plans as well as an increase in personnel costs, reflecting headcount growth, including new hires to support our operations as a public company.
Interest Income (Expense). Interest income was
Loss on Remeasurement of Warrant Liabilities. We recorded a loss on remeasurement of warrant liabilities of$27.0 million in the three months endedMarch 31, 2021 due to fair value changes in the warrant liability. We did not have similar instruments in the three months endedMarch 31, 2020 and therefore no loss on remeasurement was recorded in the prior period.
Net Loss. Net loss increased by
Results of Operations for the Three Months Ended
Set forth below are our results of operations for the three months endedMarch 31, 2021 compared with the pro forma results of operations for the three months endedMarch 31, 2020 . These pro forma results assume that the Business Combination, including our acquisition ofSBTech , which comprises the entirety of our new B2B segment, occurred onJanuary 1, 2019 and are based on estimates and assumptions which we believe are reasonable. They are not the results that would have been realized had the Business Combination actually occurred onJanuary 1, 2019 and are not indicative of our consolidated results of operations for future periods. Three months endedMarch 31, 2021 2020
$ Change % Change (amounts in thousands, except percentages) Actual Pro Forma Revenue
$ 312,276 $ 113,445 $ 198,831 175.3 % Cost of revenue 183,225 68,458 (114,767) (167.6) % Sales and marketing 228,686 57,273 (171,413) (299.3) % Product and technology 56,159 29,742 (26,417) (88.8) % General and administrative 168,997 39,140 (129,857) (331.8) % Loss from operations (324,791) (81,168) (243,623) (300.1) % Interest income (expense), net 985 (2,798) 3,783 135.2 % Loss on remeasurement of warrant liabilities (26,980) - (26,980) n.m. Loss before income tax benefit and loss from equity method investment (350,786) (83,966) (266,820) (317.8) % Income tax benefit (4,595) (2,088) 2,507 120.1 % Loss from equity method investment 153 203
50 24.6 %
Net loss $ (346,344) $ (82,081) $ (264,263) (322.0) %
Revenue. Revenue increased$198.8 million , or 175.3%, to$312.3 million in the three months endedMarch 31, 2021 from pro forma revenue of$113.4 million in the three months endedMarch 31, 2020 . Of this increase,$192.4 million was attributable to the performance of our B2C segment, as discussed above. 29
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Cost of Revenue. Cost of revenue increased$114.8 million , or 167.6%, to$183.2 million in the three months endedMarch 31, 2021 from pro forma cost of revenue of$68.5 million in the three months endedMarch 31, 2020 . Of this increase,$108.1 million was attributable to the performance of our B2C segment, as discussed above. The remaining increase was attributable to the performance of our B2B segment asSBTech experienced improved results in the first quarter of 2021, compared to the first quarter of 2020, which was negatively impacted in by COVID-19. Sales and Marketing. Sales and marketing expense increased$171.4 million , or 299.3%, to$228.7 million in the three months endedMarch 31, 2021 from pro forma sales and marketing expense of$57.3 million in the three months endedMarch 31, 2020 . Substantially all of the increase was attributable to the performance of our B2C segment, as discussed above. Our B2B segment sales and marketing costs remained relatively steady between periods, reflecting a modest headcount increase that was offset by a decrease in conferences and other marketing spending in the first quarter of 2021 as a result of COVID-19. Product and Technology. Product and technology expense increased by$26.4 million , or 88.8%, to$56.2 million in the three months endedMarch 31, 2021 from pro forma product and technology expense of$29.7 million in the three months endedMarch 31, 2020 . Of this increase,$17.9 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. General and Administrative. General and administrative expense increased$129.9 million , or 331.8%, to$169.0 million in the three months endedMarch 31, 2021 from pro forma general and administrative expense of$39.1 million in the three months endedMarch 31, 2020 . Of this increase,$121.9 million was attributable to the performance of our B2C segment, as discussed above. B2B segment pro forma general and administrative expense primarily increased due to an increase in stock-based compensation awards and increased headcount. Interest Income (Expense). Interest income was$1.0 million in the three months endedMarch 31, 2021 compared to pro forma interest expense of$2.8 million in the three months endedMarch 31, 2020 . Loss on Remeasurement of Warrant Liabilities. We recorded a loss on remeasurement of warrant liabilities of$27.0 million in the three months endedMarch 31, 2021 due to fair value changes in the warrant liability. We did not have similar instruments in the three months endedMarch 31, 2020 and therefore no loss on remeasurement was recorded in the prior period.
Net Loss. Net loss increased by
Liquidity and Capital Resources
We had$2.8 billion in cash and cash equivalents as ofMarch 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 from the date of this filing, irrespective of the continuing impact of COVID-19.
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 during the quarter endedMarch 31, 2021 .
We also have a revolving credit facility with
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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:
Three months ended March 31,
2021 2020
(amounts in thousands)
Net cash used in operating activities $ (77,751) $ (50,762)
Net cash used in investing activities (51,921) (6,329)
Net cash provided by financing activities 1,128,768 77,657
Effect of foreign exchange rates on cash and cash equivalents 1,774 -
Net increase in cash and cash equivalents 1,000,870 20,566
Cash and cash equivalents at beginning of period 1,817,258 76,533
Cash and cash equivalents at end of period $ 2,818,128 $ 97,099
Operating Activities. Our cash used in operating activities includes the impact
of changes in cash reserved for users, user cash receivables and liabilities to
users. Cash reserved for users is comprised of deposits by our users. We treat
this cash as the property of our users and segregate it from our operating cash
balances. When we receive a user deposit, we record it as cash reserved for
users on our balance sheet. In certain cases, a payment processor may delay the
remittance of deposits to us for risk management or other reasons, in which case
we grant our users access to those funds and record the deposits as a receivable
reserved for users. The sum of the changes in cash reserved for users, and
changes in receivables reserved for users, are approximately equal to the change
in liabilities owed to users for any given period. While on deposit with us,
cash reserved for users earns interest, which is recorded as interest income on
our statement of operations and is included in our operating cash flows. This
interest income has not been material to date.
Net cash used in operating activities in the three months ended March 31, 2021
was $77.8 million , compared to $50.8 million in the three months ended March 31,
2020 , mainly reflecting our $277.7 million higher net loss, for the reasons
discussed above, net of non-cash cost items, and changes in operating working
capital. Non-cash cost items increased $186.8 million period-over-period, driven
primarily by an increase in stock-based compensation expense.
Investing Activities. Net cash used in investing activities during the
three months ended March 31, 2021 increased by $45.6 million to $51.9 million
from $6.3 million during the same period in 2020, mainly reflecting the cash
portion of consideration paid to VSiN shareholders, net of cash acquired.
Financing Activities. Net cash provided by financing activities during the
three months ended
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 of
Critical Accounting Policies
Our financial statements have been prepared in accordance with 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.
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During the three months endedMarch 31, 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.
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