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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-04 · 91 added, 197 removed, 118 unchanged (71% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 (this “Report”) and the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 18, 2022.

On May 5, 2022 (the “GNOG Closing Date”), DraftKings Inc.

consummated its acquisition of Golden Nugget Online Gaming, Inc.

(together with its subsidiaries unless the context requires otherwise, “GNOG”), pursuant to a definitive agreement and plan of merger, dated August 9, 2021 (the “Merger Agreement”), in an all-stock transaction (the “GNOG Transaction”).

DraftKings’ unaudited condensed consolidated financial statements exclude GNOG’s operations prior to the GNOG Closing Date, unless indicated otherwise.

(together with its subsidiaries unless the context requires otherwise, “GNOG”), pursuant to a definitive agreement and plan of merger, dated August 9, 2021 (the “GNOG Merger Agreement”), in an all-stock transaction (the “GNOG Transaction”).

DraftKings’ consolidated financial statements exclude GNOG’s operations prior to the GNOG Closing Date, unless indicated otherwise.

In connection with the GNOG Transaction, DraftKings Inc.

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(or, in respect of periods prior to the GNOG Closing Date, Old DraftKings), together with its consolidated subsidiaries.

Forward-Looking Statements

Cautionary Statement Regarding 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.

The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “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.

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• 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, including inflation, unemployment and our liquidity, operations and personnel;

• intense competition and competitive pressures from other companies worldwide in the industries in which we operate;

• market and global conditions and economic factors beyond our control, including the potential adverse effects of the global coronavirus (“COVID-19”) pandemic (or the emergence of additional variants or strains thereof), as well as the potential impact of general economic conditions, including inflation, rising interest rates and instability in the banking system, on our liquidity, operations and personnel;

• significant competition and competitive pressures from other companies worldwide in the industries in which we operate;

• our ability to raise financing in the future;

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• 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 ended December 31, 2021, as filed with the SEC on February 18, 2022.

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, except as

required by applicable law.

These risks and other factors include those set forth under the caption “Risk Factors” in our 2022 Annual Report.

Due to the uncertain nature of these factors, management cannot assess the impact of each factor on our 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.

New factors may emerge, and it is not possible to predict all factors that may affect our business and prospects.

We are a digital sports entertainment and gaming company.

We provide users with sports betting (“Sportsbook”), online casino (“iGaming”) and daily fantasy sports (“DFS”) products, as well as media and other online consumer products.

We are also involved in the design and development of sports betting and casino gaming software for online and retail Sportsbooks and casino gaming products, as well as other online consumer products.

On May 5, 2022, we acquired GNOG in an all-stock transaction to enable us to leverage Golden Nugget’s established brand to broaden our reach into new customer segments and enhance the combined company’s iGaming product offerings through our vertically-integrated technology stack and GNOG’s unique capabilities, including live dealer.

We are a digital sports entertainment and gaming company that provides users with online sports betting (“Sportsbook”), online casino (“iGaming”) and daily fantasy sports (“DFS”) product offerings, as well as DraftKings Marketplace ("Marketplace"), retail sportsbook, media and other consumer product offerings.

We are also involved in the design and development of sports betting and casino gaming software for online and retail sportsbooks and iGaming operators.

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 Sportsbook, iGaming and DFS, as well as media and other online consumer products.

We accomplish this by creating an environment where our users can find enjoyment and fulfillment through Sportsbook, iGaming and DFS, 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 continuously launch new product innovations, improve marketing, merchandising, and operational efficiency through data science, and deliver a great user experience.

We continue to make deliberate and substantial investments in support of our mission and long-term growth.

For example, we have invested in our product offerings and technology in order to continuously 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 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 products in new geographies, (c) create replicable and predictable state-level unit economics in sports betting and iGaming and (d) expand our other online consumer products.

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 products.

Our current technology is highly scalable with relatively minimal incremental spend required to launch our products 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.

Our priorities are to (a) continue to invest in our product offerings, (b) launch our product offerings in new jurisdictions, (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 our Sportsbook and iGaming product offerings in a new jurisdiction, we invest heavily 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 also expect to improve our profitability over time as our revenue and gross profit expand as states mature, and our variable marketing expenses and fixed costs stabilize or grow at a slower rate.

Our path to profitability is based on the acceleration of positive contribution profit growth driven by increased revenue and gross profit generation from ongoing efficient customer acquisition enabled by the transition from local to regional to national advertising, strong customer retention, improved monetization from increased frequency of customer play and higher hold percentage, as well as scale benefits from investments in our product offerings 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 products and the other factors summarized in the section entitled “Forward-Looking Statements”.

Basis of Presentation

We operate two complementary business segments:

business-to-consumer (“B2C”) and business-to-business (“B2B”).

Our B2C business is comprised of the legacy business of DK Crown Holdings Inc.

(formerly DraftKings Inc.), a Delaware corporation (“DK DE”), which includes our DraftKings-branded Sportsbook, iGaming and DFS products, as well as our other online consumer products, and our GNOG-branded Sportsbooks and iGaming products.

Across our DraftKings-branded products, 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 in the United States.

Our B2B business is primarily comprised of the operations of SBTech, which we acquired on April 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 in Europe and the United States.

Impact of COVID-19

Beginning in 2020 and continuing into 2022, the novel coronavirus (“COVID-19”) pandemic adversely impacted global commercial activity, disrupted supply chains and contributed to significant volatility in financial markets.

The primary impacts of the COVID-19 pandemic on us were the suspension, cancellation, rescheduling and shortening of sports seasons and sporting events, particularly between March 2020 and July 2020, when 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 products.

Beginning in July 2020, major professional sports leagues gradually resumed regular activities with shortened seasons in many instances.

In the nine months ended September 30, 2022, sports seasons continued, and sporting events were held as planned, including the NFL regular season, the NFL Playoffs and Superbowl LVI, the NBA regular season and playoffs, the NHL regular season and playoffs, the NASCAR Cup Series, various NCAA football bowl games, the NCAA college basketball regular season and tournament, the MLB regular season and several golf tournaments.

The continued return of major sports and sporting events generated significant user interest and activity in our Sportsbook and DFS products.

However, the possibility remains that sports seasons and sporting events may be suspended, cancelled, rescheduled or shortened 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 products 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 products, 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.

Since the second quarter of 2022, our primary offices, including our corporate headquarters in Boston, Massachusetts, have been re-opened with many of our employees returning to work onsite in various capacities.

We will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19.

adult population that has access to our product offerings and the other factors summarized in the section entitled “Cautionary Statement Regarding Forward-Looking Statements”.

Financial Highlights and Trends

The following table sets forth a summary of our financial results for the periods indicated:

Three months ended September 30, Nine months ended September 30,

Three months ended March 31,

(amounts in thousands)

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(397,148) (467,693)

(450,494) (545,028) (1,135,290) (1,196,898)

Adjusted EBITDA (1)

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See “Non-GAAP Information” below for additional information about this measure and a reconciliation of this measure to the most directly comparable financial measure calculated in accordance with U.S.

Revenue increased by $289.1 million in the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

This improvement is primarily due to the strong performance of our B2C segment in the three months ended September 30, 2022 resulting from robust customer acquisition and retention, the successful launches of our Sportsbook and iGaming products in additional jurisdictions since the third quarter of 2021, and atypically strong hold rates (primarily in NFL wagering) and reduced promotional intensity in the three months ended September 30, 2022.

Revenue increased by $562.6 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily due to the strong performance of our B2C segment as a result of robust customer acquisition and retention, the successful launches of our Sportsbook and iGaming products in additional jurisdictions since the third quarter of 2021 and reduced promotional intensity.

Key Performance Indicators – B2C Operations

Revenue increased by $352.4 million in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 primarily due to the strong performance of our Sportsbook and iGaming product offerings as a result of robust customer acquisition and retention, the successful launches of those product offerings in additional jurisdictions and reduced promotional intensity.

Key Performance Indicators

Monthly Unique Payers (“MUPs”) .

MUPs is the average number of unique paid users (“unique payers”) that use our B2C products 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 growth in 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 products 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 products such as a DFS contest, sports bet or casino game) across one or more of our products via our technology.

We define MUPs as the number of unique paid users per month who had one or more real-money, paid engagements across one or more of our Sportsbook, iGaming, DFS, or Marketplace 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 products 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 only promotional incentives, which are fungible with other funds deposited into their wallets on our technology;

however, the number of such users has not been material to date.

The charts below present our MUPs for the three and nine months ended September 30, 2021 and 2022:

Although the number of unique paid users includes those users that have participated in a real-money, paid engagement using only promotional incentives (which has not been a material number of users to date), which are fungible with other funds deposited into their wallets on our technology, it does not include users who have made a deposit but have not yet had a real-money, paid engagement.

MUPs is a key indicator of the scale of our online gaming user base and awareness of our brand.

We believe that year-over-year growth in MUPs is also generally indicative of the long-term revenue growth potential of our online gaming product offerings, 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.

The chart below presents our average MUPs for the three months ended March 31, 2022 and 2023:

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 products.

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 charts below present our ARPMUP for the three and nine months ended September 30, 2021 and 2022:

MUPs increased for the three and nine months ended September 30, 2022, compared to the same periods in 2021, primarily due to strong unique payer retention and acquisition across our Sportsbook and iGaming products as well as the expansion of our Sportsbook and iGaming products into new jurisdictions, partially offset by a decline in Daily Fantasy Sports MUPs.

ARPMUP increased in the three months ended September 30, 2022, compared to the same period in 2021, primarily due to a continued mix shift into our Sportsbook and iGaming products, atypically strong Sportsbook hold rates (primarily in NFL wagering) and reduced promotional intensity.

ARPMUP increased in the nine months ended September 30, 2022, compared to the same period in 2021, primarily due to a continued mix shift into our Sportsbook and iGaming products and reduced promotional intensity.

We define and calculate ARPMUP as the average monthly revenue, excluding revenue from gaming software services, for a reporting period, divided by the average number of MUPs for the same period.

ARPMUP is a key indicator of our ability to drive usage and monetization of our product offerings.

The chart below presents our ARPMUP for the three months ended March 31, 2022 and 2023:

The increase in MUPs for the three months ended March 31, 2023, compared to the same period in 2022, primarily reflects strong unique payer retention and acquisition across our Sportsbook and iGaming products as well as the expansion of our Sportsbook and iGaming products into new states, partially offset by a decline in DFS MUPs.

ARPMUP increased in the three months ended March 31, 2023, compared to the same period in 2022, primarily due to structural improvement in our Sportsbook hold rates and reduced promotional intensity.

Non-GAAP Information

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We define and calculate Adjusted EBITDA as net loss before the impact of interest income or expense (net), income tax provision or benefit, and depreciation and amortization, and further adjusted for the following items:

stock-based compensation, transaction-related costs, litigation, settlement and related costs, advocacy and other related legal expenses, gain or loss on remeasurement of warrant liabilities and other non-recurring and non-operating costs or income, as described in the reconciliation below.

We include 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.

stock-based compensation;

transaction-related costs;

litigation, settlement and related costs;

advocacy and other related legal expenses;

gain or loss on remeasurement of warrant liabilities;

and other non-recurring and non-operating costs or income, as described in the reconciliation below.

We include non-GAAP financial measures because they are used by management to evaluate our core operating performance and trends and to make decisions regarding the allocation of capital and new investments.

Adjusted EBITDA excludes certain expenses that are required in accordance with U.S.

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GAAP, for the periods indicated:

Three months ended September 30, Nine months ended September 30,

Three months ended March 31,

(amounts in thousands) 2023 2022

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48,213 32,225

Interest (income) expense, net (6,301) 1,556 (8,378) (1,071)

Income tax provision (benefit) 3,177 3,845 (77,580) 1,654

Interest income, net (11,140) (148)

Income tax provision 1,368 469

Stock-based compensation (2)

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Transaction-related costs (3)

751 4,348 15,030 15,261

Litigation, settlement, and related costs (4)

1,390 4,712 5,786 8,933

Advocacy and other related legal expenses (5)

16,558 16,667 16,558 27,702

Loss (gain) on remeasurement of warrant liabilities 17,035 (12,681)

Other non-recurring and non-operating costs (income) (6)

(8,216) 1,368 (37,046) 5,501

Other non-recurring costs and non-operating (income) costs (6)

Adjusted EBITDA $ (221,611) $ (289,509)

Adjusted EBITDA by segment:

B2B $ (16,689) $ (5,903) $ (56,257) $ (6,854)

B2C $ (247,522) $ (307,700) $ (615,597) $ (541,313)

(1) The amounts include the amortization of acquired intangible assets of $29.8 million and $20.2 million for the three months ended September 30, 2022 and 2021, respectively, and $76.1 million and $59.9 million for the nine months ended September 30, 2022 and 2021, respectively.

(1) The amounts include the amortization of acquired intangible assets of $29.8 million and $19.2 million for the three months ended March 31, 2023 and 2022, respectively.

(2) Reflects stock-based compensation expenses resulting from the issuance of awards under incentive plans.

(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.

(4) Primarily includes 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 the three and nine months ended September 30, 2022, those costs primarily related to our activities in California.

For the three and nine months ended September 30, 2021, those costs primarily related to our activities in California and Florida.

The amounts presented exclude other costs relating to advocacy efforts and other legal expenses incurred in jurisdictions where related legislation has been passed and we currently operate.

(5) Reflects non-recurring and non-ordinary course costs relating to advocacy efforts and other legal expenses in jurisdictions where we do not operate certain product offerings and are actively seeking licensure, or similar approval, for those product offerings.

For the three months ended March 31, 2023 and 2022, we did not incur any such costs.

This adjustment excludes (i) costs relating to advocacy efforts and other legal expenses in jurisdictions where we do not operate that are incurred in the ordinary course of business and (ii) costs relating to advocacy efforts and other legal expenses incurred in jurisdictions where related legislation has been passed and we currently operate.

(6) Primarily includes the change in fair value of certain financial assets, as well as our equity method share of the investee’s losses and other costs relating to non-recurring and non-operating items.

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Results of Operations

Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

The following table sets forth a summary of our consolidated results of operations for the interim periods indicated, and the changes between periods:

Due to the timing of the consummation of the GNOG Transaction, the below periods, to the extent applicable, exclude GNOG’s operations prior to the GNOG Closing Date of May 5, 2022.

Three months ended September 30,

Three months ended March 31,

(amounts in thousands, except percentages) 2023 2022 $ Change % Change

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Loss from operations (389,785) (515,584) 125,799 24.4 %

Interest income (expense), net 6,301 (1,556) 7,857 504.9 %

Interest income, net 11,140 148 10,992 7,427.0 %

(Loss) gain on remeasurement of warrant liabilities (17,035) 12,681 (29,716) 234.3 %

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Net loss $ (397,148) $ (467,693) $ 70,545 15.1 %

Revenue increased $289.1 million, or 135.9%, to $501.9 million in the three months ended September 30, 2022, from $212.8 million in the three months ended September 30, 2021.

The increase was attributable to $303.8 million in incremental B2C segment revenue, partially offset by a decrease in B2B segment revenue of $14.6 million.

The $303.8 million increase in our B2C segment revenue was primarily attributable to our online gaming revenues which increased $292.2 million, or 165.8%, to $468.5 million in the three months ended September 30, 2022, from $176.3 million in the three months ended September 30, 2021.

The remaining increase in our B2C segment revenue was attributable to “Other” revenue, which primarily includes media, marketplace and retail Sportsbooks.

Online gaming revenue grew in the three months ended September 30, 2022 primarily due to MUPs increasing by 22.3% and ARPMUP increasing by 114.0% as compared to the three months ended September 30, 2021.

These key performance indicators increased primarily due to strong unique payer retention and acquisition across our Sportsbook and iGaming products as well as the expansion of our Sportsbook and iGaming products into new jurisdictions, atypically strong hold rates (primarily in NFL wagering), a continued mix shift into our Sportsbook and iGaming products and reduced promotional intensity.

Revenue increased $352.4 million, or 84.5%, to $769.7 million in the three months ended March 31, 2023, from $417.2 million in the three months ended March 31, 2022.

The increase was primarily attributable to our online gaming revenues, which increased $348.5 million, or 90.1%, to $735.2 million in the three months ended March 31, 2023, from $386.7 million in the three months ended March 31, 2022, primarily due to MUPs increasing by 39.2% and ARPMUP increasing by 35.4%, in each case, as compared to the three months ended March 31, 2022.

MUPs and ARPMUP increased primarily due to strong player retention and acquisition across our Sportsbook and iGaming product offerings, as well as the expansion of our Sportsbook and iGaming product offerings into new jurisdictions, structural improvement in our Sportsbook hold rate and reduced promotional intensity.

Cost of Revenue .

Cost of revenue increased $201.9 million, or 118.3%, to $372.7 million in the three months ended September 30, 2022, from $170.7 million in the three months ended September 30, 2021.

Our B2C segment accounted for substantially all of this increase, reflecting growth in revenue from our expanded product and geographic footprint, including the launch of our Sportsbook product in Connecticut, Louisiana, Kansas, New York and Ontario, Canada and the launch of our iGaming product in Connecticut and Ontario, Canada since the three months ended September 30, 2021.

The cost of revenue increase was primarily attributable to an increase in our variable expenses such as product taxes and payment processing fees, which increased by $107.3 million and $24.8 million, respectively, relative to the expenses incurred during the three months ended September 30, 2021.

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 2.8 percentage points to 69.7% in the three months ended September 30, 2022, as compared to 72.5% in the three months ended September 30, 2021, primarily reflecting atypically strong hold rates (primarily in NFL wagering) and reduced promotional intensity, which positively impacted cost of revenue as a percentage of B2C revenue in the three months ended September 30, 2022 compared to the same period in 2021.

Cost of revenue increased $208.4 million, or 66.5%, to $521.7 million in the three months ended March 31, 2023, from $313.4 million in the three months ended March 31, 2022.

Our online gaming product offerings accounted for substantially all of this increase, reflecting growth in revenue from our expanded product and jurisdictional footprint, including the launch of our Sportsbook product offering in Kansas, Maryland, Massachusetts, Ohio and Ontario, Canada and the launch of our iGaming product offering in Ontario, Canada since March 31, 2022.

In particular, the cost of revenue increase was primarily attributable to an increase in our variable expenses, such as product taxes and payment processing fees which increased $123.9 million and $22.2 million, respectively.

The remaining increase was primarily attributable to an increase in our variable platform costs and revenue share arrangements resulting from additional customer activity.

Cost of revenue as a percentage of revenue decreased by 7.3 percentage points to 67.8% in the three months ended March 31, 2023, as compared to 75.1% in the three months ended March 31, 2022, reflecting, in part, structural improvement in our Sportsbook hold rate and reduced promotional intensity, partially offset by a change in revenue mix from our more mature DFS product offering to our Sportsbook and iGaming product offerings, which in general, produce revenue at a higher cost per revenue dollar relative to our more mature DFS product offering.

Sales and Marketing.

Sales and marketing expense increased $18.1 million, or 5.9%, to $321.7 million in the three months ended September 30, 2022, from $303.7 million in the three months ended September 30, 2021.

Our B2C segment accounted for substantially all of this increase.

Of the $18.1 million increase, $20.3 million resulted from activities to acquire and retain

players in new states that we operate in, such as marketing costs including advertising and the development of marketing campaigns, as well as headcount and technology associated with analyzing, developing and deploying those campaigns.

This increase was partially offset by a decrease in stock-based compensation expense.

Sales and marketing expense increased $67.7 million, or 21.1%, to $389.1 million in the three months ended March 31, 2023, from $321.5 million in the three months ended March 31, 2022.

The increase was primarily attributable to an increase of $42.2 million from activities to acquire and retain players in new jurisdictions that we operate in, such as marketing costs, including advertising and the development of marketing campaigns.

Product and Technology.

Product and technology expense increased $11.1 million, or 17.0%, to $76.3 million in the three months ended September 30, 2022, from $65.2 million in the three months ended September 30, 2021, of which $0.6 million was attributable to our B2B segment.

The remaining increase of $10.5 million primarily reflects additions to our product operations and engineering headcount in our B2C segment.

Product and technology expense increased $6.7 million, or 8.3%, to $88.1 million in the three months ended March 31, 2023, from $81.4 million in the three months ended March 31, 2022.

The increase primarily reflects additions to our product operations and engineering headcount.

General and Administrative.

General and administrative expense decreased $33.4 million, or 15.2%, to $186.3 million in the three months ended September 30, 2022, from $219.7 million in the three months ended September 30, 2021.

Our B2C segment accounted for substantially all of this decrease, primarily driven by a decrease in stock-based compensation expense of $40.7 million, which was partially offset by an increase of $15.3 million in compensation costs due to an increase in headcount.

General and administrative expense decreased $56.1 million, or 25.9%, to $160.5 million in the three months ended March 31, 2023, from $216.6 million in the three months ended March 31, 2022.

This decrease was primarily driven by a reduction in stock-based compensation expense of $66.3 million, partially offset by an increase in cash-based compensation expense due to an increase in headcount.

(Loss) Gain on Remeasurement of Warrant Liabilities.

We recorded a loss on remeasurement of warrant liabilities of $6.8 million in the three months ended September 30, 2022, compared to a gain of $7.1 million in the three months ended September 30, 2021 primarily due to changes in the underlying share price of DraftKings Inc.’s Class A common stock.

Other Income .

Other income, net was $8.3 million in the three months ended September 30, 2022, as compared to no other income, net in the three months ended September 30, 2021.

This increase was primarily attributable to the recovery of a tax liability indemnity.

Income Tax Provision .

We recorded an income tax provision of $3.2 million in the three months ended September 30, 2022, as compared to an income tax provision of $3.8 million in the three months ended September 30, 2021.

Net loss decreased by $94.5 million to $450.5 million in the three months ended September 30, 2022, as compared to a net loss of $545.0 million in the three months ended September 30, 2021, for the reasons discussed above.

Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

The following table sets forth a summary of our consolidated results of operations for the interim periods indicated, and the changes between periods.

Due to the timing of the consummation of the GNOG Transaction, the below periods, to the extent applicable, exclude GNOG’s operations prior to the GNOG Closing Date of May 5, 2022.

Nine months ended September 30,

(amounts in thousands, except percentages) 2022 2021 $ Change % Change

Revenue $ 1,385,328 $ 822,700 $ 562,628 68.4 %

Cost of revenue 998,838 540,980 (457,858) (84.6) %

Sales and marketing 840,695 703,056 (137,639) (19.6) %

Product and technology 234,853 184,016 (50,837) (27.6) %

General and administrative 590,476 587,509 (2,967) (0.5) %

Loss from operations (1,279,534) (1,192,861) (86,673) (7.3) %

Interest income, net 8,378 1,071 7,307 682.3 %

Gain (loss) on remeasurement of warrant liabilities 20,199 (2,905) 23,104 795.3 %

We recorded a loss on remeasurement of warrant liabilities of $17.0 million in the three months ended March 31, 2023, compared to a gain of $12.7 million in the three months ended March 31, 2022 primarily due to changes in the underlying share price of our Class A common stock.

Other Income, Net .

Loss before income tax (benefit) provision and loss from equity method investment (1,210,391) (1,194,695) (15,696) (1.3) %

Income tax (benefit) provision (77,580) 1,654 79,234 4,790.4 %

Loss from equity method investment 2,479 549 (1,930) (351.5) %

Net loss $ (1,135,290) $ (1,196,898) $ 61,608 5.1 %

Revenue increased $562.6 million, or 68.4%, to $1,385.3 million in the nine months ended September 30, 2022, from $822.7 million in the nine months ended September 30, 2021.

The increase was attributable to $611.2 million in incremental B2C segment revenue, partially offset by a decrease in B2B segment revenue of $48.5 million.

The $611.2 million increase in our B2C segment revenue was primarily attributable to our online gaming revenues which increased $582.1 million, or 82.3%, to $1,289.3 million in the nine months ended September 30, 2022, from $707.1 million in

the nine months ended September 30, 2021.

The remaining increase in our B2C segment revenue was attributable to “Other” revenue, which primarily includes media, marketplace and retail Sportsbooks.

Online gaming revenue grew in the nine months ended September 30, 2022 primarily due to MUPs increasing by 27.0% and ARPMUP increasing by 43.5% as compared to the nine months ended September 30, 2021.

These key performance indicators increased primarily due to strong player retention and acquisition across our Sportsbook and iGaming products as well as the expansion of our Sportsbook and iGaming products into new jurisdictions, a continued mix shift into our Sportsbook and iGaming products and reduced promotional intensity.

Cost of Revenue .

Cost of revenue increased $457.9 million, or 84.6%, to $998.8 million in the nine months ended September 30, 2022, from $541.0 million in the nine months ended September 30, 2021.

Our B2C segment accounted for substantially all of this increase, reflecting growth in revenue from our expanded product and geographic footprint, including the launch of our Sportsbook product in Connecticut, Louisiana, Kansas, New York and Ontario, Canada and the launch of our iGaming product in Connecticut and in Ontario, Canada since the nine months ended September 30, 2021.

The cost of revenue increase was primarily attributable to an increase in our variable expenses such as product taxes and payment processing fees, which increased by $253.5 million and $63.0 million, respectively, relative to the expenses incurred during the nine months ended September 30, 2021.

The remaining increase was primarily attributable to variable platform costs and revenue share arrangements resulting from additional customer activity.

B2C segment cost of revenue as a percentage of B2C revenue increased by 7.5 percentage points to 67.2% in the nine months ended September 30, 2022, as compared to 59.7% in the nine months ended September 30, 2021, reflecting our changed revenue mix from our more mature DFS product to our iGaming and Sportsbook products.

In addition, as a result of customer activity due to the launches of our products in new states, we incurred variable expenses that are not based on net revenue, including payment processing fees, and revenue share arrangements.

In general, our iGaming and Sportsbook products produce revenue at a higher cost per revenue dollar relative to our more mature DFS product.

Sales and Marketing.

Sales and marketing expense increased $137.6 million, or 19.6%, to $840.7 million in the nine months ended September 30, 2022, from $703.1 million in the nine months ended September 30, 2021.

Our B2C segment accounted for substantially all of this increase with $114.4 million of the increase resulting from activities to acquire and retain players in new states that we operate in, such as marketing costs including advertising and the development of marketing campaigns, as well as headcount and technology associated with analyzing, developing and deploying those campaigns.

Product and Technology.

Product and technology expense increased $50.8 million, or 27.6%, to $234.9 million in the nine months ended September 30, 2022, from $184.0 million in the nine months ended September 30, 2021, of which $7.2 million was attributable to our B2B segment.

The remaining increase of $43.6 million primarily reflects additions to our product operations and engineering headcount in our B2C segment.

General and Administrative.

General and administrative expense increased $3.0 million, or 0.5%, to $590.5 million in the nine months ended September 30, 2022, from $587.5 million in the nine months ended September 30, 2021.

Our B2C segment accounted for substantially all of this increase, primarily driven by an increase of $45.0 million in compensation costs due to an increase in headcount, as well as an increase in software and facility fees of $11.5 million, which were partially offset by a decrease in stock-based compensation expense of $50.9 million.

Gain (Loss) on Remeasurement of Warrant Liabilities.

We recorded a gain on remeasurement of warrant liabilities of $20.2 million in the nine months ended September 30, 2022, compared to a loss of $2.9 million in the nine months ended September 30, 2021 primarily due to changes in the underlying share price of DraftKings Inc.’s Class A common stock.

Other Income .

Other income, net was $40.6 million in the nine months ended September 30, 2022, as compared to no other income, net in the nine months ended September 30, 2021.

This increase was primarily attributable to a change in the fair value of certain financial assets.

Income Tax (Benefit) Provision .

We recorded an income tax benefit of $77.6 million in the nine months ended September 30, 2022, as compared to an income tax provision of $1.7 million in the nine months ended September 30, 2021.

This increase was primarily due to a discrete income tax benefit of $76.8 million recorded during the second quarter of 2022, which was attributable to non-recurring partial releases of the Company’s U.S.

valuation allowance as a result of the preliminary purchase accounting for GNOG.

Net loss decreased by $61.6 million to $1,135.3 million in the nine months ended September 30, 2022, as compared to a net loss of $1,196.9 million in the nine months ended September 30, 2021, for the reasons discussed above.

We had de minimis other income in the three months ended March 31, 2023, as compared to $37.9 million in the three months ended March 31, 2022.

This decrease was primarily attributable to a change in the fair value of certain financial assets.

Net loss decreased by $70.5 million to $397.1 million in the three months ended March 31, 2023, as compared to a net loss of $467.7 million in the three months ended March 31, 2022, for the reasons discussed above.

Liquidity and Capital Resources

We had $1.4 billion in cash and cash equivalents as of September 30, 2022 (excluding player cash, which we segregate from our operating cash balances on behalf of our paid users for all jurisdictions and products).

We had $1.1 billion in cash and cash equivalents as of March 31, 2023 (excluding player cash, which we segregate from our operating cash balances on behalf of our paid users for all jurisdictions and product offerings).

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.

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.

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 our business long-term.

In March 2021, we issued zero-coupon convertible senior notes in an aggregate principal amount of $1,265.0 million (the “Convertible Notes”).

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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.

As of September 30, 2022, the Convertible Notes, net of issuance costs, balance was $1,250.4 million.

As of March 31, 2023, the Convertible Notes, net of issuance costs, balance was $1,251.8 million .

We have lease arrangements for certain corporate office facilities, data centers, and motor vehicles.

As of September 30, 2022, the Company had lease obligations of $81.7 million, with $5.6 million payable within 12 months.

As of March 31, 2023, the Company had lease obli gations of $70.4 million, with $4.0 million payabl e within 12 months.

Other Purchase Obligations .

We have certain non-cancelable contracts with vendors, licensors and others requiring us to make future cash payments.

As of September 30, 2022, these purchase obligations were $1,831.6 million, with $164.2 million payable in the remainder of 2022.

The table below summarizes our cash flows for the periods indicated.

Due to the timing of the consummation of the GNOG Transaction, the below periods, to the extent applicable, exclude GNOG’s operations prior to the GNOG Closing Date of May 5, 2022.

Nine months ended September 30,

As of March 31, 2023, these purchase obligations were $1,616.5 million, with $326.8 million payable in the remainder of 2023.

The following table summarizes our cash flows for the periods indicated:

Three months ended March 31,

(amounts in thousands) 2023 2022

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Net cash used in investing activities (27,564) (23,065)

Net cash (used in) provided by financing activities (16,843) 1,134,129

Effect of foreign exchange rates on cash and cash equivalents and restricted cash — 1,884

Net (decrease) increase in cash and cash equivalents and restricted cash (665,836) 770,057

Net cash used in financing activities (25,166) (12,313)

Net decrease in cash and cash equivalents and restricted cash (254,222) (392,096)

Cash and cash equivalents and restricted cash at beginning of period 1,778,825 2,629,842

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Operating Activities .

Net cash used in operating activities in the nine months ended September 30, 2022 was $477.1 million, compared to $247.3 million in the nine months ended September 30, 2021, mainly reflecting a decrease in operating working capital of $147.3 million primarily due to an increase in cash used in accounts payable, accrued expenses, liabilities to users and receivables reserved for users.

In addition, we incurred a $61.6 million lower net loss, for the reasons discussed above, net of non-cash cost items.

Non-cash cost items decreased $144.1 million period-over-period, primarily driven by deferred income taxes, a gain on various financial assets and a gain on remeasurement of warrants liabilities.

Net cash used in operating activities in the three months ended March 31, 2023 decreased $155.2 million to $201.5 million, compared to $356.7 million in the three months ended March 31, 2022, mainly reflecting an improved net loss, net of non-cash items, of $81.5 million, as well as a cash in-flow from changes in operating assets and liabilities of $13.1 million compared to an outflow of $60.7 million in the three months ended March 31, 2022, primarily due to improved collection of accounts receivable and timing of payments.

Investing Activities.

Net cash used in investing activities during the nine months ended September 30, 2022 increased by $53.2 million to $171.9 million from $118.7 million during the same period in 2021, mainly reflecting an increase in cash paid for acquisitions during the nine months ended September 30, 2022 when compared to the nine months ended September 30, 2021.

Net cash used in investing activities during the three months ended March 31, 2023 increased by $4.5 million to $27.6 million from $23.1 million during the same period in 2022, mainly reflecting an increase in cash paid for internally developed software costs.

Financing Activities.

Net cash provided by (used in) financing activities during the nine months ended September 30, 2022 decreased by $1,151.0 million to $(16.8) million from $1,134.1 million during the same period in 2021, mainly reflecting the completion of our issuance of Convertible Notes during the three months ended March 31, 2021.

Net cash used in financing activities during the three months ended March 31, 2023 increased by $12.9 million to $25.2 million from $12.3 million during the same period in 2022, primarily reflecting purchases of treasury stock related to the satisfaction of withholding taxes due upon the vesting of restricted stock units.

Commitments and Contingencies

Refer to Note 13 of our unaudited condensed consolidated financial statements included elsewhere in this Report for a summary of our commitments as of September 30, 2022.

Refer to Note 12 of our unaudited condensed consolidated financial statements included elsewhere in this Report for a summary of our commitments as of March 31, 2023.

Critical Accounting Estimates

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Actual results could differ materially from these estimates.

During the nine months ended September 30, 2022, there were no changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on February 18, 2022.

During the three months ended March 31, 2023, there were no changes to the critical accounting estimates discussed in the 2022 Annual Report.

Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in our exposure to market risk during the nine months ended September 30, 2022.

There have been no significant changes in our exposure to market risk during the three months ended March 31, 2023.

Refer to Item 7A.

Quantitative and Qualitative Disclosures about Market Risk in our 2021 Annual Report.

Quantitative and Qualitative Disclosures about Market Risk in the 2022 Annual Report.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis