RUSH STREET INTERACTIVE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections of this Annual Report captioned "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors." This Management's Discussion and Analysis of Financial Condition and Results of Operations (this "MD&A") contains certain financial measures, in particular the presentation of Adjusted EBITDA, which are not presented in accordance with generally accepted accounting principles ofthe United States ("GAAP"). These non-GAAP financial measures are being presented because they provide us and readers of this MD&A with additional insight into our operational performance relative to earlier periods and relative to our competitors. These non-GAAP financial measures are not a substitute for any GAAP financial information. Readers of this MD&A should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. Reconciliations of Adjusted EBITDA to Net Loss, the most comparable GAAP measure, are provided in this MD&A.
Unless the context requires otherwise, all references in this MD&A to the
"Company," "we," "us," or "our" refer to the business of
Our Business
We are a leading online gaming and entertainment company that focuses primarily on online casino and online sports betting in theU.S. and Latin American markets. Our mission is to provide our customers with the most user-friendly online casino and online sports betting experience in the industry. In furtherance of this mission, we strive to create an online community for our customers where we are transparent and honest, treat our customers fairly, show them that we value their time and loyalty, and listen to feedback. We also endeavor to implement industry leading responsible gaming practices and provide our customers with a cutting-edge online gaming platform and exciting, personalized offerings that will enhance their user experience. We provide our customers an array of leading gaming offerings such as real-money online casino, online sports betting, and retail sports betting, as well as social gaming, which involves free-to-play games that use virtual credits that users can earn or purchase. We launched our first social gaming website in 2015 and began accepting real-money bets inthe United States in 2016. Currently, we offer real-money online casino, online sports betting and/or retail sports betting in thirteenU.S. states as outlined in the table below. 56
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Online Sports Retail Sports
U.S. State Online Casino Betting Betting
Arizona ü
Colorado ü
Connecticut ü ü
Illinois ü ü
Indiana ü ü
Iowa ü
Louisiana ü
Michigan ü ü ü
New Jersey ü ü
New York ü ü
Pennsylvania ü ü ü
Virginia ü
West Virginia ü
In 2018, we also became the first U.S. -based online gaming operator to launch in
Colombia , which was an early adopting Latin American country to legalize and
regulate online casino and sports betting nationally. In addition, we launched
our social gaming offering in Canada during October 2021 and anticipate
launching real-money online casino and sports betting there in 2022. We also
expect to launch online casino and sports betting in Mexico in the second
quarter of 2022.
Our real-money online casino and online sports betting offerings are currently
provided under our BetRivers.com and PlaySugarHouse.com brands in the United
States and under our RushBet.co brand in Colombia . We operate and/or support
retail sports betting for our bricks-and-mortar partners primarily under their
respective brands. Many of our social gaming offerings are marketed under our
partners' brands, although we also offer social gaming under our own brands as
well. Our decision about what brand or brands to use is market- and
partner-specific, and is based on brand awareness, market research, marketing
efficiency and applicable gaming rules and regulations.
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. Starting in 2020 and continuing through the date hereof, the COVID-19 pandemic continued to adversely impact 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. The COVID-19 pandemic has significantly impacted our business. The direct impact on our business, beyond disruptions in normal business operations, is primarily through the change in consumer habits as a result of people being ordered or requested to stay home and restrict their traveling or otherwise voluntarily choosing to stay at home or restrict travel. During the periods affected by government-imposed stay-at-home orders, our business volume significantly increased and has since continued to remain strong as many of these orders were lifted. COVID-19 has also directly impacted sports betting due to the rescheduling, reconfiguring, suspension, postponement and cancellation of major sports seasons and sporting events or exclusion of certain players or teams from sporting events. Beginning in early 2020 and continuing into the third quarter of 2020, many sports seasons and sporting events, including the NBA regular season and playoffs, theNCAA college basketball tournament, the MLB regular season, the Masters golf tournament, the NHL regular season and playoffs and domestic soccer leagues and European cup competitions, were suspended, postponed, modified or cancelled. While most major professional sports leagues have since resumed their activities primarily starting in the second half of 2020, the third quarter of 2021 was still impacted by the COVID-19 pandemic. For example, the number of games in the NBA's 2020-2021 and NHL's 2021 season were reduced and nearly every major professional sports league has experienced postponed, rescheduled or canceled games, or players or teams being excluded from certain games or events due to COVID-19, COVID-19 protocols or local COVID-19 vaccine requirements. 57
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The return of major sports and sporting events during the second half of 2020, as well as the unique and concentrated sports calendar, generated significant customer interest and activity in our sports betting offerings. However, sports seasons and calendars could be further suspended, cancelled or rescheduled due to additional COVID-19 outbreaks. The alteration of sports seasons and sporting events, including the postponement or cancellation of events, throughout fiscal year 2021 reduced our customers' use of, and spending on, our sports betting offerings and from time to time caused us to issue refunds for canceled events. Additionally, ongoing or future closures of bricks-and-mortar casinos and certain ongoing limitations on visitations to such casinos due to COVID-19 may provide additional opportunities for us to market online casino and sports betting to traditional bricks-and-mortar casino patrons. Our revenue varies based on sports seasons and sporting events, among other factors, and cancellations, suspensions or alterations resulting from COVID-19 have the potential to adversely affect our revenue, possibly materially. However, our online casino offerings do not rely on sports seasons and sporting events, thus, they may partially offset this adverse impact on revenue. The ultimate impact of COVID-19 and the related restrictions on consumer behavior is currently unknown. A significant or prolonged decrease in consumer spending on entertainment or leisure activities would likely have an adverse effect on demand for our offerings, reducing cash flows and revenues, thus materially harming our business, financial condition and results of operations. In addition, a significant uptick in COVID-19 cases or an emergence of additional variants or strains could cause other widespread or more severe impacts depending on where infection rates are highest. As steps taken to mitigate the spread of COVID-19 have necessitated a shift away from a traditional office environment for many employees, we implemented business continuity programs to help ensure that our personnel were safe and our business continued to function with minimal disruptions to normal work operations while personnel worked remotely. We will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19.
Our Business Model
We enter new markets by leveraging our proprietary online gaming platform and our ability to provide either a full-suite service model or a customized solution to fit a specific situation. Our business model is designed to be nimble, innovative and customer-centric. By leveraging our dynamic proprietary online gaming platform, we aspire to be "first to market" where real-money online gaming has been newly legalized and where our management determines that it is desirable to enter such market. Our principal offerings are our real-money online casino and online sports betting products. These products can be launched under one of our existing brands or customized to be incorporated into a local or third-party brand. We also provide a variety of retail sports betting solutions to service land-based casino and other partners and leverage our social gaming offerings to increase customer engagement and build online databases in key markets both before and after legalization and regulation. We currently generate revenue through two operating models: (i) B2C and (ii) B2B. Through our B2C operations, we offer online casino, online sports betting, retail sports betting and social gaming directly to the end customer through our websites, apps or physical retail locations. B2C is our primary operating model, contributing more than 99% of our total revenue for the years endedDecember 31, 2021 and 2020, and we expect that it will continue to be our primary operating model into the future. We believe this is a flexible operating model that permits us to customize our operating structure based on applicable gaming regulations, market demands and, as applicable, our land-based partner's operations. Through our B2B operations, we offer retail sports betting services to land-based businesses, such as bricks-and-mortar casinos, in exchange for a monthly commission. Often in advance of markets legalizing online gaming, we build relationships with local bricks-and-mortar casino operators and other potential land-based partners who are looking for online gaming and sports betting partners. In mostU.S. jurisdictions, the applicable gaming regulations require online gaming operators that offer real-money offerings to operate under the gaming license of, or partner with, a land-based operator such as a bricks-and-mortar casino or other type of local partner such as a professional sports team. Consequently, we leverage our relationships with bricks-and-mortar casinos and vendors in the gaming industry to find high-quality and reliable partners for online gaming collaboration. Upon securing a partner for access to a specific market (if required or desirable) and before we launch operations in that market, we customize our online gaming platform to the laws and regulations of the jurisdiction. Then, upon entering a new market, we employ a number of marketing strategies to obtain new customers as well as leverage our partner's database when applicable. We continuously refine our offerings and marketing strategies based on data collected from each market. To attract, engage, retain and/or reactivate customers, we offer a loyalty program that rewards customers in exciting, fair 58
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and transparent ways. We recognize and reward customer loyalty by, among other things, ensuring there are exciting benefits at each of the customer loyalty levels we currently offer. The Business Combination OnDecember 29, 2020 , we completed the Business Combination. As a result of the Business Combination, we are organized in an Up-C structure, in which substantially all the assets of the combined company are held by RSILP and its subsidiaries, and the Company's only assets are its equity interests in RSILP (which are held indirectly through wholly owned subsidiaries of the Company - theSpecial Limited Partner and RSI GP, LLC ("RSI GP")). As of the Closing, the Company owned, indirectly through the Special Limited Partner, approximately 21.9% of the RSILP Units (which includes 100% of the earnout interests that were earned inJanuary 2021 ) and controls RSILP through RSI GP, and the Sellers owned approximately 78.1% of the RSILP Units (which includes 100% of the earnout interests that were earned inJanuary 2021 ) and control the Company through the ownership of the Class V Voting Stock. The Company has also entered into certain customary agreements in connection with the Business Combination, including the Tax Receivable Agreement, which provides for the sharing of certain tax benefits as realized by the Company. See "Business - Business Combination" for a more comprehensive description of the Business Combination and the agreements entered into in connection therewith. Trends in Key Metrics Monthly Active Users MAUs is the number of unique users per month who have placed at least one real-money bet across one or more of our online casino or online sports betting offerings. For periods longer than one month, we average the MAUs for the months in the relevant period. We exclude users who have made a deposit but have not yet placed a real-money bet on at least one of our online offerings. We also exclude users who have placed a real-money bet but only with promotional incentives. The numbers of unique users included in calculating MAUs includeU.S. -based users only. MAUs is a key indicator of the scale of our user base and awareness of our brands. We believe that year-over-year MAUs is also generally indicative of the long-term revenue growth potential of our business, although MAUs in individual periods may be less indicative of our longer-term expectations. We expect the number of MAUs to grow as we attract, retain and re-engage users in new and existing jurisdictions and expand our offerings to appeal to a wider audience. 59
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The chart below presents our average MAUs for the years ended 2021 and 2020:
[[Image Removed: rsi-20211231_g8.jpg]]
The year-over-year increase in MAUs was mainly due to our continued growth and
strong customer retention rates in existing markets such as Pennsylvania , New
Jersey , Illinois , Indiana , Colorado and Colombia , as well as our expansion into
new markets such as Arizona , Connecticut , Michigan , Virginia and West Virginia .
Additionally, we continue to achieve a positive response from our strategic
advertising and marketing efforts.
Average Revenue Per Monthly Active User
ARPMAU for an applicable period is average revenue divided by average MAUs. This
key metric represents our ability to drive usage and monetization of our online
offerings.
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The chart below presents our ARPMAU for the years ended 2021 and 2020:
[[Image Removed: rsi-20211231_g9.jpg]]
The year-over-year increase in ARPMAU was mainly due to a favorable mix of
online casino MAUs, as casino customers generally generate more revenue per user
than sports betting customers. Additionally, as our product offerings continue
to be available in more mature markets, customer bonusing volumes have
decreased, thus resulting in higher ARPMAUs. This year-over-year increase in
ARPMAUs was partially offset by increased promotional spend related to new
market launches in jurisdictions such as Michigan , Virginia , West Virginia ,
Arizona and Connecticut .
Non-GAAP Information
This MD&A includes Adjusted EBITDA, which is a non-GAAP performance measure that we use to supplement our results presented in accordance withU.S. GAAP. We believe Adjusted EBITDA provides useful information to investors regarding our results of operations and operating performance, as it is similar to measures reported by our public competitors and is regularly used by security analysts, institutional investors and other interested parties in analyzing operating performance and prospects. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for any GAAP financial measures and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry. We define Adjusted EBITDA as net income (loss) before interest expense, income taxes, depreciation and amortization, share-based compensation, adjustments for certain one-time or non-recurring items and other adjustments. Adjusted EBITDA excludes certain expenses that are required in accordance withU.S. GAAP because certain expenses are either non-cash (for example, depreciation and amortization, and share-based compensation) or are not related to our underlying business performance (for example, interest income or expense). We include Adjusted EBITDA because management uses it to evaluate our core operating performance and trends and to make strategic decisions regarding the distribution of capital and new investments. Management believes that Adjusted EBITDA provides investors with useful information on our past financial and operating performance, enable comparison of financial results from period-to-period where certain items may vary independent of business performance, and allow for greater transparency with respect to metrics used by our management in operating our business. Management also believes this non-GAAP financial measure is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance. 61
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The table below presents our Adjusted EBITDA reconciled from our Net loss, the
closest
Years Ended December 31,
($ in thousands) 2021 2020
Net loss $ (71,092) $ (131,645)
Depreciation and amortization 4,245 2,082
Interest expense, net 187 135
Income tax expense 4,688 2,919
One-time payment from Affiliated casino - (9,000)
Change in fair value of earnout interests liability 13,740
2,338
Change in fair value of warrant liabilities (41,802) (7,166) Share-based compensation 24,912 144,733 Adjusted EBITDA$ (65,122) $ 4,396
Key Factors Affecting Our Results
Our financial position and results of operations depend to a significant extent on the following factors:
Industry Opportunity and Competitive Landscape
We operate within the global gaming and entertainment industry, which is comprised of diverse products and offerings that compete for consumers' time and disposable income. As we prepare to enter new jurisdictions, we expect to face significant competition from other established industry players, some of which may have more experience in online casino, and online and/or retail sports betting, and have access to more resources. We believe that our proprietary online gaming platform, our experience operating in domestic and foreign jurisdictions, our brand and marketing strategies, which appeal to both male and female customers, and our many unique product offerings and bonusing features will enable us to compete with such established industry players.
Our performance may vary from one jurisdiction to the next as a result of the level of competition in each jurisdiction.
Legalization, Regulation and Taxation
Our financial growth prospects depend on legalization of online casino and sports betting across more regulated jurisdictions, with particular emphasis onthe United States , a trend that we believe is still in its early stage. Online casino may expand further due to many factors, including that manyU.S. states are seeking ways to increase revenues. Online sports betting's prospects were made possible after theU.S. Supreme Court struck down PASPA inMay 2018 . Our strategy is to enter new jurisdictions that we believe are financially prudent for us to enter as they are legalized. Online casino is currently authorized only in seven states:Connecticut ,Delaware ,Michigan ,New Jersey ,Pennsylvania ,West Virginia andNevada (although regulators have not authorized online casino outside of physical casinos inNevada ). As of the date hereof, 32 states and theDistrict of Columbia have authorized sports betting. Of those 33 jurisdictions, 22 states have authorized statewide online sports betting while 11 remain authorized for retail-only at casinos or retail locations. The process of securing the necessary licenses or partnerships to operate in a given jurisdiction may take longer than we anticipate. In addition, legislative or regulatory restrictions and gaming taxes may make it less attractive or more difficult for us to do business in a particular jurisdiction. Further, certain jurisdictions require us to have a relationship with a bricks-and-mortar casino or other land-based partner for online sports betting access, which tends to increase our costs of revenue. Jurisdictions that have established state or government-run monopolies may limit opportunities for private operators such as us. States and some local governments impose tax rates on online casino and sports betting, which may vary substantially between states. We are also subject to a federal excise tax of 0.25% on the amount of each sports bet placed. We believe the jurisdictions that will create the most compelling levels of profitability for us are jurisdictions with both online casino and sports betting at favorable tax rates. 62
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Ability to Acquire, Retain and Monetize Customers
Our ability to effectively market is critical to operational success. Using experience, dynamic learnings and analytics, we leverage marketing to acquire, convert, retain and/or re-engage customers. We use a variety of earned media and paid marketing channels, in combination with compelling offers and unique game and site features, to attract and engage customers. Furthermore, we continuously optimize our marketing spend using data collected from our operations. Our marketing spend is based on a return-on-investment model that considers a variety of factors, including the products offered in the jurisdiction, the performance of different marketing channels, predicted lifetime value, marginal costs and expenses and behavior of customers across various product offerings. With respect to paid marketing, we use a broad array of advertising channels, including television, radio, social media platforms, sponsorships, affiliates and paid search, and other digital channels. We also use other forms of marketing and outreach, such as our social media channels, first-party websites, media interviews and other media spots and organic searches. These efforts are concentrated within the specific jurisdictions where we operate or intend to operate. We believe there is significant benefit to having a flexible approach to advertising spending as we can quickly redirect our advertising spending based on dynamic testing of which advertising methods and channels are working and which ones are not. These investments and personalized promotions are intended to increase consumer awareness and drive engagement. While we have some data points, particularly inNew Jersey , of the effectiveness of our marketing and promotion activities, our limited operating history and the relative novelty of theU.S. online casino and sports betting industries make it difficult for us to predict when we will achieve our longer-term profitability objectives.
Managing Wagering Risk
The online casino and retail and online sports betting businesses are characterized by an element of chance. Accordingly, we employ theoretical win rates to estimate what a certain type of online casino wager or retail or online sports bet, on average, will win or lose in the long run. Revenue is impacted by variations in the hold percentage (the ratio of winnings to total amount bet) with respect to the online casino and retail and online sports betting we offer to our customers. We use the hold percentage as an indicator of an online casino game or retail or online sports bet's performance against its expected outcome. Although each online casino wager or retail or online sports bet generally performs within a defined statistical range of outcomes in the long run, actual outcomes may vary for any given period, particularly in the short term. In the short term, for online casino and retail and online sports betting, the element of chance may affect win rates (hold percentages); these win rates, particularly for retail and online sports betting, may also be affected in the short term by factors that are largely beyond our control, such as unanticipated event outcomes, a customer's skill, experience and behavior, the mix of games played or bets placed, the financial resources of customers, the volume of bets placed and the amount of time spent betting. For online casino games, it is possible a random number generator outcome or game will malfunction and award errant prizes. For retail and online sports betting, it is possible that our platform erroneously posts odds or is otherwise misprogrammed to pay out odds that are highly favorable to bettors, and bettors place bets before the odds are corrected. Additionally, odds compilers and risk managers are capable of human error, so even if our betting products are subject to a capped payout, significant volatility can occur. As a result of the variability in these factors, the actual win rates on our online casino games and retail and online sports bets may differ from the theoretical win rates we have estimated and could result in the winnings of our online casino or sports betting customers exceeding those anticipated. The variability of win rates (hold rates) also has the potential to adversely affect our business, financial condition, results of operations, prospects and cash flows.
Mix of Revenue Based on Time Period in Markets
Our profitability generally depends on how long we have been operating in each jurisdiction. Generally, but not always, our profitability levels will increase in a jurisdiction as we have operated there for longer.
Mix of Revenue From Our Different Operating Models
Because we operate using two different operating models, each of which has its
own unique range of profitability, the relative proportion of revenue that is
derived from each operating model in a given time period could impact our
overall level of profitability.
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Key Components of Revenue and Expenses
Revenue
We offer real-money online casino, online sports betting and/or retail sports
betting in thirteen
Our revenue is predominantly generated from ourU.S. operations, with the remaining revenue being generated from our Colombian operations. See Note 4 to our consolidated financial statements, included elsewhere in this Annual Report. We generate revenue primarily through the following offerings.
Online casino offerings typically include the full suite of games available in bricks-and-mortar casinos, such as table games (i.e., blackjack and roulette) and slot machines. For these offerings, we function similarly to bricks-and-mortar casinos, generating revenue through hold, or gross winnings, as customers play against the house. Like bricks-and-mortar casinos, there is volatility with online casino, but as the number of bets placed increases, the revenue retained from bets placed becomes easier to predict. Our experience has been that online casino revenue is less volatile than sports betting revenue. Our online casino offering consists of a combination of licensed content from leading suppliers in the industry, customized third-party games and a small number of proprietary games that we developed in-house. Third-party content is usually subject to standard revenue-sharing agreements specific to each supplier, where the supplier generally receives a percentage of the net gaming revenue generated from its casino games played on our platform. In exchange, we receive a limited license to offer the games on our platform to customers in jurisdictions where use is approved by the regulatory authorities. We pay much lower fees on revenue generated through our in-house developed casino games such as our multi-bet blackjack (with side bets: 21+3,Lucky Ladies ,Lucky Lucky ), and single-deck blackjack, which primarily relate to hosting/remote gaming server fees and certain intellectual property license fees. Online casino revenue is generated based on total customer bets less amounts paid to customers for winning bets, less incentives awarded to customers, plus or minus the change in the progressive jackpot reserve.
Online Sports Betting
Online sports betting involves a user placing a bet on the outcome of a sporting event, or a series of sporting events, with the chance to win a pre-determined amount, often referred to as fixed odds. Online sports betting revenue is generated by setting odds such that there is a built-in theoretical margin in each sports bet offered to customers. While sporting event outcomes may result in revenue volatility, we believe that we can achieve a long-term betting win margin. Integrated into our online sports betting platform is a third-party risk and trading platform currently provided by certain subsidiaries of Kambi Group plc. In addition to traditional fixed-odds betting, we also offer other sports betting products including in-game betting and multi-sport and same-game parlay betting. We have also incorporated live streaming of certain sporting events into our online sports betting offering. Online sports revenue is generated based on total customer bets less amounts paid to customers for winning bets, less incentives awarded to customers, plus or minus the change in unsettled sports bets.
Retail Sports Betting
We provide retail sports services to certain land-based partners in exchange for
a monthly commission that is calculated based on the land-based retail
sportsbook revenue. Services generally include ongoing management and oversight
of the retail sportsbook (i.e., within a bricks-and-mortar location), technical
support for the partner's customers, risk management, advertising and promotion,
and support for third-party sports betting equipment.
In addition, certain relationships with business partners provide us the ability
to operate the retail sportsbook at the land-based partner's facility. In this
scenario, revenue is generated based on total customer bets less amounts paid to
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customers for winning bets, less other incentives awarded to customers, plus or minus the change in unsettled retail sports bets.
Social Gaming
We provide social gaming (where permitted) where users are given virtual credits to enjoy free-to-play games. Users who exhaust their credits can either purchase additional virtual credits from the virtual cashier or wait until their virtual credits are replenished for free. Virtual credits have no monetary value and can only be used within our social gaming platform. Our social gaming business has three main goals: building online databases in key markets ahead of and post-legalization and regulation; generating revenues; and increasing engagement and visitation to our bricks-and-mortar casino partner properties. Our social gaming products are a marketing tool that keeps the applicable brands present in the minds of our users and engages with users through another channel while providing the entertainment value that users seek. We also leverage our social gaming products to cross-sell to our real-money offerings in jurisdictions where real-money gaming is authorized. We recognize deferred revenue when users purchase virtual credits and revenue when the virtual credits are redeemed. We pay a percentage of the social gaming revenue derived from the sale and redemption of the virtual credits to content suppliers as well as to our land-based partners.
Costs and Expenses
Costs of Revenue. Costs of revenue consist primarily of (i) revenue share and market access fees, (ii) platform and content fees, (iii) gaming taxes, (iv) payment processing fees and chargebacks and (v) salaries, bonuses, benefits and share-based compensation for dedicated personnel. These costs are primarily variable in nature and should, in large part, correlate with the change in revenue. Revenue share and market access fees consist primarily of amounts paid to local land-based partners that hold the applicable gaming license, providing us the ability to offer our real-money online offerings in the respective jurisdictions. Our platform and content fees are primarily driven by costs associated with third-party casino content, sports betting trading services and certain elements of our platform technology, such as geolocation and know-your-customer. Gaming taxes primarily relate to state taxes and are determined on a jurisdiction-by-jurisdiction basis. We incur payment processing costs on customer deposits and occasionally chargebacks (i.e., when a payment processor contractually disallows customer deposits in the normal course of business). Advertising and Promotions Costs. Advertising and promotion costs consist primarily of costs associated with marketing our offerings via different channels, promotional activities and the related costs incurred to acquire new customers. These costs also include salaries, bonuses, benefits and share-based compensation for dedicated personnel and are expensed as incurred. Our ability to effectively market is critical to operational success. Using experience, dynamic learnings and analytics, we leverage marketing to acquire, convert, retain and re-engage customers. We use a variety of earned media and paid marketing channels, in combination with compelling offers and unique game and site features, to attract and engage customers. Furthermore, we continuously optimize our marketing spend using data collected from our operations. Our marketing spend is based on a return-on-investment model that considers a variety of factors, including the products and services offered in the jurisdiction, the performance of different marketing channels, predicted lifetime value, marginal costs and expenses and behavior of customers across various product offerings. With respect to paid marketing, we use a broad array of advertising channels, including television, radio, social media platforms, sponsorships, affiliates and paid search, and other digital channels. We also use other forms of marketing and outreach, such as our social media channels, first-party websites, media interviews and other media spots and organic searches. These efforts are primarily concentrated within the specific jurisdictions where we operate or intend to operate. We believe there is significant benefit to having a flexible approach to advertising spending as we can quickly redirect our advertising spending based on dynamic testing of our advertising methods and channels.General Administration and Other. General administration and other expenses consist primarily of administrative personnel costs, including salaries, bonuses and benefits, share-based compensation expense, professional fees related to legal, compliance, audit and consulting services, rent and insurance costs. 65
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Depreciation and Amortization. Depreciation and amortization expense consists of depreciation on our property and equipment and amortization of market access licenses, gaming jurisdictional licenses, internally developed software and finance lease right of use assets over their useful lives. See Notes 2, 5 and 6 to our consolidated financial statements, included elsewhere in this Annual Report.
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the years indicated, and the changes between periods. We have derived this data from our consolidated financial statements included elsewhere in this Annual Report. This information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report. The results of historical periods are not necessarily indicative of the results of operations for any future period.
Comparison of the Years Ended
Years Ended December 31, Change
($ in thousands) 2021 2020 $ %
Revenue $ 488,105 $ 278,500 $ 209,605 75 %
Costs of revenue 332,145 190,873 141,272 74 %
Advertising and promotions 190,476 56,517 133,959 237 %
General administration and other 55,518 162,447 (106,929) (66) %
Depreciation and amortization 4,245 2,082 2,163 104 %
Loss from operations (94,279) (133,419) 39,140 (29) %
Interest expense, net (187) (135) (52) 39 %
Change in fair value of earnout interests
liability (13,740) (2,338) (11,402) 488 %
Change in fair value of warrant
liabilities 41,802 7,166 34,636 483 %
Loss before income taxes (66,404) (128,726) 62,322 (48) %
Income tax expense 4,688 2,919 1,769 61 %
Net loss $ (71,092) $ (131,645) $ 60,553 (46) %
Revenue. Revenue increased by $209.6 million , or 75%, to $488.1 million in 2021
as compared to $278.5 million in 2020. The increase was mainly due to and
directly correlated with our continued growth in the majority of our existing
markets, as well as our expansion into new markets such as Michigan , West
Virginia , and Connecticut . The increase reflects higher period-over-period
online casino and sports betting revenue of $206.3 million , retail sports
betting revenue of $2.6 million , and social gaming revenue of $0.7 million .
Costs of Revenue. Costs of revenue increased by $141.3 million , or 74%, to
$332.2 million in 2021 as compared to $190.9 million in 2020. The increase was
mainly due to and directly correlated with, our expansion and continued growth
in existing and new markets. Market access costs, operating expenses, gaming
taxes and payment processing costs contributed $21.8 million , $26.5 million ,
$70.2 million , and $18.5 million , respectively, to the year-over-year increase
in costs of revenue, with personnel costs contributing to the remaining $4.3
million of the year-over-year increase. Costs of revenue as a percentage of
revenue decreased to 68% in 2021 as compared to 69% in 2020.
Advertising and Promotions. Advertising and promotions expense increased by
$134.0 million , or 237%, to $190.5 million in 2021 as compared to $56.5 million
in 2020. The increase was mainly due to new and increased marketing efforts and
strategies in newly entered and existing markets to increase customer awareness
and acquisition of our offerings, such as executing strategic marketing or
sponsorship arrangements with the three-time NBA champion Detroit Pistons , hall
of famer Jerome Bettis , legendary NBA coach George Karl , nine-time First
Division/Premier League champions, Everton Football Club , the Chicago Bears ,
Mike Ditka , Field of 68 Media Network, Field of 12 Media Network, Mark Schlereth
and podcast organizations. Advertising and promotions expense as a percentage of
revenue increased to 39% in 2021 as compared to 20% in 2020.
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administrative expense of
Depreciation and Amortization. Depreciation and amortization expense increased by$2.2 million , or 104%, to$4.3 million in 2021 as compared to$2.1 million in 2020. The increase was mainly due to purchases of property and equipment and the related depreciation expense, and additional acquisition of gaming licenses, amounts paid for internally developed software, and capitalization of certain leases and the related amortization expense. Depreciation and amortization expense as a percentage of revenue remained flat at 1% in 2021 and 2020. Interest expense, net. Interest expense, net increased by$0.1 million , or 39%, to$0.2 million in 2021 as compared to$0.1 million in 2020. The increase was mainly attributable to the recognition of additional imputed interest associated with the recognition of deferred royalties and the commencement of additional leases as we continue to expand into new jurisdictions. Change in fair value of earnout interests liability. Change in fair value of earnout interests liability was$13.7 million in 2021 and$2.3 million in 2020. Gains and losses are attributable to the remeasurement of the liability at fair value and were primarily a result of changes in the underlying share price of our Class A Common Stock. The liability was fully settled during the year endedDecember 31, 2021 . Change in fair value of warrant liabilities. Change in fair value of warrant liability was$41.8 million in 2021 and$7.2 million in 2020. Gains and losses are attributable to the remeasurement of the liability at fair value and were primarily a result of changes in the underlying share price of our Class A Common Stock. The liability was fully settled during the year endedDecember 31, 2021 . Income tax expense. Income tax expense increased by$1.8 million , or 61%, to$4.7 million in 2021 as compared to$2.9 million in 2020. The increase in income tax expense is attributable to the profitability of certain of our subsidiaries. Income tax as a percentage of revenue remained flat at 1% in 2021 and 2020.
Comparison of the Years Ended
Years Ended December 31, Change
($ in thousands) 2020 2019 $ %
Revenue $ 278,500 $ 63,667 $ 214,833 337 %
Costs of revenue 190,873 32,893 157,980 480 %
Advertising and promotions 56,517 28,313 28,204 100 %
General administration and other 162,447 23,649 138,798 587 %
Depreciation and amortization 2,082 1,139 943 83 %
Loss from operations (133,419) (22,327) (111,092) 498 %
Interest expense, net (135) (123) (12) 10 %
Change in fair value of earnout interests
liability (2,338) - (2,338) 100 %
Change in fair value of warrant
liabilities 7,166 - 7,166 100 %
Loss before income taxes (128,726) (22,450) (106,276) 473 %
Income tax expense 2,919 - 2,919 100 %
Net loss $ (131,645) $ (22,450) $ (109,195) 486 %
Revenue. Revenue increased by $214.8 million , or 337%, to $278.5 million in 2020
as compared to $63.7 million in 2019. The increase was mainly due to, and
directly correlated with, our expansion into new markets (specifically Illinois ,
Colorado and Iowa ), our continued growth in markets that we entered in 2019 such
as Pennsylvania and our accelerated adoption of online casino during the
COVID-19 pandemic and to a lesser extent, online sports betting once sports
seasons and events resumed toward the end of the third quarter of 2020. The
increase reflects higher period-over-period online casino and sports betting
revenue of $212.5 million , social gaming revenue of $2.2 million and retail
sports betting revenue of $0.1 million .
Costs of Revenue. Costs of revenue increased by $158.0 million , or 480%, to
$190.9 million in 2020 as compared to $32.9 million in 2019. The increase was
mainly due to and directly correlated with, our expansion and continued growth
in
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existing and new markets (specificallyIllinois ,Colorado andIowa ). Market access costs, operating expenses and gaming taxes contributed$129.4 million ,$18.1 million and$5.0 million , respectively, to the year-over-year increase in costs of revenue, with payments processing costs, personnel costs and other costs of revenue contributing to the remaining$5.5 million of the year-over-year increase. Costs of revenue as a percentage of revenue increased to 69% in 2020 as compared to 52% in 2019. Advertising and Promotions. Advertising and promotions expense increased by$28.2 million , or 100%, to$56.5 million in 2020 as compared to$28.3 million in 2019. The increase was mainly due to new and increased marketing efforts and strategies in newly entered and existing markets to increase customer awareness and acquisition for our offerings, such as executing strategic marketing or sponsorship arrangements with the three-time NBA championDetroit Pistons , hall of famerJerome Bettis , legendary NBA coachGeorge Karl and nine-timeFirst Division/Premier League champions,Everton Football Club . Advertising and promotions expense as a percentage of revenue decreased to 20% in 2020 as compared to 44% in 2019.General Administration and Other. General administration and other expense increased by$138.8 million , or 587%, to$162.4 million in 2020 as compared to$23.6 million in 2019. The year-over-year increase was mainly due to$131.3 million of additional non-cash share-based compensation expense in 2020, related to partnership interests and profits interests in RSILP that were issued before the Business Combination. The remainder of the increase was due to increased personnel costs resulting from headcount growth betweenDecember 31, 2019 and 2020 as well as customary merit increases. General administration and other expense as a percentage of revenue increased to 58% for 2020 as compared to 37% in 2019. Depreciation and Amortization. Depreciation and amortization expense increased by$1.0 million , or 83%, to$2.1 million in 2020 as compared to$1.1 million in 2019. The increase was mainly due to purchases and subsequent amortization of license fees as we continue to expand into new states, such asIllinois andColorado . Depreciation and amortization expense as a percentage of revenue decreased to 1% in 2020 as compared to 2% in 2019.
Interest expense, net. Interest expense, net was
Change in fair value of earnout interests liability. Change in fair value of earnout interests liability was$2.3 million in 2020 and zero in 2019. The change in fair value was primarily a result of changes in the underlying share price of our Class A Common Stock. Change in fair value of warrant liabilities. We classify the Warrants issued in connection with ourFebruary 2020 IPO and the closing of the Business Combination as derivative liabilities with subsequent changes in their respective fair values recognized in our consolidated statement of operations and comprehensive income (loss). Change in fair value of warrant liabilities was$7.2 million in 2020 and zero in 2019. The change in fair value of warrant liabilities was due to the increase in the estimated fair value of the Warrants, which was primarily a result of changes in the underlying share price of our Class A Common Stock, offset by warrant issuance costs. Subsequent to the Business Combination, we had 11,500,000 Public Warrants, 6,600,000 Private Placement Warrants and 75,000 Working Capital Warrants outstanding as ofDecember 31, 2020 .
Income tax expense. Income tax expense was
Seasonality and Other Trends Impacting Our Business
Our results of operations can and generally do fluctuate due to seasonal trends
and other factors such as level of customer engagement, online casino and sports
betting results and other factors that are outside of our control or that we
cannot reasonably predict. Our quarterly financial performance depends on our
ability to attract and retain customers. Customer engagement in our online
offerings may vary due to, among other things, customer satisfaction with our
platform, the number and timing of sporting events, the length of professional
sports seasons, our offerings and those of our competitors, our marketing
efforts, climate and weather conditions, public sentiment or an economic
downturn. As customer engagement varies, so may our quarterly financial
performance.
Our quarterly financial results may also be impacted by the number and amount of
betting losses and jackpot payouts we experience. Although our losses are
limited per stake to a maximum payout in our online casino offering, when
looking at bets across a period of time, these losses can be significant. As
part of our online casino offering, we offer progressive jackpot games. Each
time a customer plays a progressive jackpot game, we contribute a portion of the
amount bet to the
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jackpot for that game or group of games. When a progressive jackpot is won, the jackpot is paid out and is reset to a predetermined base amount. As winning the jackpot is determined by a random mechanism, we cannot foresee when a jackpot will be won and we do not insure against jackpot payouts. Paying the progressive jackpot decreases our cash position and depending upon the size of the jackpot it may have a significant negative affect on our cash flow and financial condition. Our online sports betting and retail sports betting operations experience seasonality based on the relative popularity and frequency of certain sporting events. Although sporting events occur throughout the year, our online sports betting customers are most active during the American football season as well as during the NBA andNCAA basketball seasons. In addition, the suspension, postponement or cancellation of major sports seasons and sporting events, due to COVID-19, may adversely impact our quarterly results. See "- Impact of COVID-19." From a legislative perspective, we are continuing to see strong momentum to legalize and regulate online sports betting in newU.S. jurisdictions. As expected, in many cases these newU.S. jurisdictions are first trying to legalize and regulate online sports betting before considering whether to legalize and regulate online casino. However, given the tax generation success of online casino in markets where it has been legalized, we are also continuing to see strong momentum for online casino in severalU.S. jurisdictions that are looking for additional revenue sources to fund expanding budgets. We operate within the global gaming and entertainment industry, which is comprised of diverse products and offerings that compete for consumers' time and disposable income. We face and expect to continue to face significant competition from other industry players both within existing and new markets including from competitors with access to more resources or experience. Customer demands for new and innovative offerings and features require us to continue to invest in new technologies and content to improve the customer experience. Many jurisdictions in which we operate or intend to operate in the future have unique regulatory and/or technological requirements, which require us to have robust, scalable networks and infrastructure, and agile engineering and software development capabilities. The global gaming and entertainment industry has seen significant consolidation, regulatory change and technological development over the last few years, and we expect this trend to continue into the foreseeable future, which may create opportunities for us but may also create competitive and margin pressures.
Liquidity and Capital Resources
We measure liquidity in terms of our ability to fund the cash requirements of our business operations, including working capital and capital expenditure needs, contractual obligations and other commitments, with cash flows from operations. Our current working capital needs relate mainly to supporting our existing businesses, the growth of these businesses in their existing markets and their expansion into other geographic regions, as well as our employees' compensation and benefits. We had$281.0 million in cash and cash equivalents as ofDecember 31, 2021 (excluding customer cash deposits, which we segregate from our operating cash balances on behalf of our real-money customers for all jurisdictions and products). OnFebruary 22, 2021 , we announced the redemption (the "Redemption") of all the Company's warrants to purchase Class A common stock that were issued to third parties in connection with dMYTechnology Group, Inc.'s initial public offering (the "Public Warrants"), which were exercisable for an aggregate of approximately 11.5 million shares of Class A Common Stock at a price of$11.50 per share. During the year endedDecember 31, 2021 , 11,442,389 Public Warrants were exercised at a price of$11.50 per share, resulting in cash proceeds of approximately$131.6 million . We intend for the foreseeable future to continue to finance our operations without third-party debt and entirely from operating cash flows and proceeds from the Redemption. In connection with the Business Combination, we executed the TRA, by and among the Special Limited Partner, RSILP, the Sellers and the Sellers' representative, which generally provides for the payment by the Special Limited Partner of 85% of certain net tax benefits, if any, that RSI and its consolidated subsidiaries, including the Special Limited Partner, realizes (or in certain cases is deemed to realize) as a result of the increases in tax basis and tax benefits related to the transactions contemplated under the Business Combination Agreement and the exchange of Retained RSILP Units for Class A Common Stock (or cash) and tax benefits related to entering into the TRA, including tax benefits attributable to payments under the TRA. Although the actual timing and amount of any payments made under the TRA will vary, such payments may be significant. Any payments made under the TRA will generally reduce the amount of overall cash flow that might have otherwise been available to us and, to the extent that payments required under the TRA are unable to be made for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid. To date, no material payments under the TRA have been made, and no payments or accrued payments thereunder are expected in the near future 69
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as payments under the TRA are not owed until the tax benefits generated thereunder are more-likely-than-not to be realized.
We expect our existing cash and cash equivalents, proceeds from the Redemption and cash flows from operations to be sufficient to fund our operating activities and capital expenditure requirements for at least the next 12 months and thereafter for the foreseeable future. We may, however, need additional cash resources due to changed business conditions or other developments, including unanticipated regulatory developments, significant acquisitions and competitive pressures. We expect our capital expenditures and working capital requirements to continue to increase in the immediate future to support our growth as we seek to expand our offerings across more ofthe United States and worldwide, which will require significant investment in our online gaming platform and our personnel, in particular in product development, engineering and operations roles. See Note 16 of our consolidated financial statements, included elsewhere in this Annual Report for a summary of our commitments as ofDecember 31, 2021 . We also expect to increase our marketing, advertising and promotional spend in existing and new markets, as well as market access fees and license costs as we continuing to enter into new market access arrangements with local partners in new jurisdictions. In particular, we are party to several non-cancelable contracts with vendors and licensors for marketing and other strategic partnerships where we are obligated to make future minimum payments under the non-cancelable terms of these contracts. To the extent that our current resources are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. If the needed financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to decrease our level of investment in new product or service launches and related marketing initiatives or to scale back our existing operations, which could have an adverse impact on our business and financial prospects. See Note 1 to our consolidated financial statements, included elsewhere in this Annual Report. We expect our material cash requirements during the upcoming 12-month period to include$0.8 million of lease payments,$10.0 million of license and market access fees, and$18.4 million of non-cancellable purchase obligations with marketing vendors. In addition, we will continue to pursue expansion into new markets, which is expected to require significant capital investments. We have$56.5 million of additional non-cancellable purchase obligations subsequent to the upcoming 12-month period. Management believes our current cash holdings and various avenues available to pursue funding in capital market will suffice to fund these obligations.
As of
Debt
As of
Cash Flows
The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
Years Ended December 31,
($ in thousands) 2021 2020 2019
Net cash provided by (used in) operating activities
(37,002) (6,243) (5,770)
Net cash provided by financing activities 125,584 241,071 15,545
Effect of exchange rate changes on cash, cash
equivalents and restricted cash (2,132) 515 (6)
Net change in cash, cash equivalents and restricted cash
$ 38,264 $
251,522
Operating activities. Net cash used in operating activities was$48.2 million for the year endedDecember 31, 2021 as compared to$16.2 million provided by operating activities for the year endedDecember 31, 2020 . The increased use of cash reflects a lower period-over-period net loss totaling$60.6 million , which was more than offset by lower non-cash expenses totaling$140.7 million and a decline in working capital changes of$15.8 million . The increase in non-cash expenses totaling$140.7 million was driven primarily by an decrease in share-based compensation expense of$119.8 million and the change in fair value of warrant liabilities of$34.6 million , partially offset by the change in fair value of earnout interests liability of$11.4 million . 70
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Net cash provided by operating activities was$16.2 million for the year endedDecember 31, 2020 as compared to$2.5 million used in operating activities for the year endedDecember 31, 2019 . The increase reflects a higher period-over-period net loss totaling$109.2 million , which was more than offset by higher non-cash expenses totaling$127.6 million and improvement in working capital of$0.2 million . The increase in non-cash expenses totaling$127.6 million was driven primarily by an increase in share-based compensation expense of$131.3 million and the change in fair value of earnout interests liability of$2.3 million , partially offset by the change in fair value of warrant liabilities of$7.2 million . Investing activities. Net cash used in investing activities during 2021 increased by$30.8 million to$37.0 million , as compared to$6.2 million during 2020. The increase reflects higher period-over-period costs including increased gaming license acquisition purchases of$19.2 million , cash paid for internally developed software costs of$4.1 million , acquisition of developed technology intangible assets of$3.3 million , property and equipment costs of$2.0 million , investment in equity of$1.5 million , and investments in long-term time deposits of$0.7 million . Net cash used in investing activities during 2020 increased by$0.4 million to$6.2 million , as compared to$5.8 million during 2019. The increase reflects higher period-over-period purchases of property and equipment of$1.4 million , partially offset by lower period-over-period acquisitions of gaming licenses of$1.0 million such asIllinois andColorado . Financing activities. Net cash provided by financing activities during 2021 decreased by$115.5 million to$125.6 million , as compared to$241.1 million during 2020. The decrease primarily reflects the net proceeds from the exercise of warrants of$131.6 million , which was more than offset by the Business Combination and PIPE financing of$239.8 million received during 2020, increased costs to repurchase common stock of$3.5 million , and increased principal payments of finance lease liabilities of$2.1 million .
Net cash provided by financing activities during 2020 increased by
Critical Accounting Policies
We have prepared our consolidated financial statements in accordance with GAAP. In doing so, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses during the reporting period. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results may differ from these estimates. A discussion of our more significant estimates follows. Management has discussed the development, selection and disclosure of these estimates and assumptions with the Audit Committee of the Board. See Note 2 to our consolidated financial statements, included elsewhere in this Annual Report for further information on our critical and other significant accounting policies.
Share-based Compensation (subsequent to the Business Combination)
We have issued stock-based awards with service-based conditions or market-based conditions. Our historical and outstanding share-based compensation awards are described in Note 11 to our consolidated financial statements, included elsewhere in this Annual Report. Share-based compensation expense is measured based on the grant-date fair value of the stock-based awards and is recognized over the requisite service period of the awards. Following the Business Combination, the fair value of our Class A Common Stock is now determined based on the quoted market price. To estimate the fair value of stock option awards, we used the Black-Scholes model, and we used a Monte Carlo simulation to determine the fair value of grants with market-based conditions. Both the Black-Scholes model and the Monte Carlo simulation require management to make a number of key assumptions, including expected volatility, expected term, risk-free interest rate and expected dividends. The risk-free interest rate is estimated using the rate of return onU.S. treasury notes with a life that approximates the expected term. The expected term assumption used in the Black-Scholes model represents the period of time that the options are expected to be outstanding and is estimated using the midpoint between the requisite service period and the contractual term of the option.
The assumptions underlying these valuations represent management's best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and our management uses significantly different assumptions or estimates, our share-based compensation expense for future
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periods could be materially different, including as a result of adjustments to share-based compensation expense recorded for prior periods.
Share-based Compensation (prior to the Business Combination)
Our historical share-based compensation awards, including the issuances of equity awards and liability awards, are described in Note 11 to our consolidated financial statements, included elsewhere in this Annual Report. Share-based compensation expense recognized for the years endedDecember 31, 2020 and 2019 relates entirely to partnership interests in RSILP that were issued before the Business Combination. Share-based awards expected to be satisfied in cash are treated as liability awards and remeasured at fair value at the end of each reporting period, recognizing a proportionate amount of the expense for each period over the vesting period of the award. Share-based awards expected to be satisfied in Company common stock are treated as equity awards and recorded based on an estimated grant date fair value and on a straight-line basis over the vesting period of the award. We account for forfeitures as they occur. Determination of the fair value of the awards requires judgments and estimates regarding, among other things, the appropriate methodologies to follow in valuing the awards and the related inputs required by those valuation methodologies. Prior to the Business Combination, we obtained a third-party valuation at the grant date for equity awards and at each remeasurement date for liability awards based upon assumptions regarding risk-free rates of return, expected volatilities, the expected term of the award and dividend yield, as applicable. The risk-free rate was based on an extrapolated 5-yearU.S. Treasury bond rate in effect at the time of grant given the expected time to liquidity. The expected term represented the period that our awards were expected to be outstanding and was calculated using a permitted simplified method, which was based on the vesting period and contractual term for each tranche of awards. The expected volatility was based on the historical share volatility of several comparable publicly traded companies over a period of time equal to the expected term of the awards, as we did not have any trading history of RSILP common units prior to the Business Combination. The comparable companies were chosen based on their size, stage in life cycle and area of specialty. The dividend yield used was zero because we have not paid dividends on RSILP common units nor did we expect to pay dividends in the foreseeable future. Prior to the Business Combination, we determined the estimated fair value of the RSILP common units (which include preferred units, Common A-1 units, Common A-2 units and Common B-1 units) based on third party valuation reports that were prepared in accordance with the guidance outlined in theAmerican Institute of Certified Public Accountants Technical Practice Aid , Valuation of Privately-Held-Company Equity Securities Issued as Compensation. For the year endedDecember 31, 2019 , we determined the estimated fair value of the RSILP common units using the Option Pricing Model ("OPM"), an allocation method that considers the current value of equity and then allocates that equity value to each equity class based on its corresponding rights and preferences. The OPM treated the common units and preferred units as call options on our total equity value, with exercise prices based on the liquidation preferences of the preferred units. The OPM utilized the Black-Scholes model to price the call options and considered the various terms of the unitholder agreements that would affect the distributions to each class of equity upon a liquidity event, including the level of seniority among the classes of equity, dividend policy, conversion ratios and cash allocations. We applied a Market Approach (using the Market Value ofInvested Capital ) to determine our total equity value. The Market Value ofInvested Capital was determined based on the performance of a set of guideline comparable companies, known as the Guideline Publicly-Traded Companies Method, or GPTCM, and a set of guideline comparable recent market transactions, known as the Guideline Company Transactions Method, or GTM. Under the GPTCM and GTM, valuation multiples were calculated from the market data and operating metrics of the guideline companies/transactions. The selected multiples were evaluated and adjusted based on our strengths and weaknesses relative to the companies/transactions being analyzed. The selected multiples were ultimately applied to our operating metrics to calculate indications of value. A discount for lack of marketability was also then applied. Beginning inJune 2020 , we determined the estimated fair value of the RSILP common units using the Hybrid Method, which incorporated the OPM and the Probability Weighted Expected Return Method (PWERM) Scenario-Based Method, estimating the probability-weighted value across multiple scenarios by using the OPM to estimate the allocation of value within one or more of those scenarios. The Hybrid Method was utilized given there was transparency into one or more near-term potential exits but there existed uncertainty regarding what would occur if the near-term exit plans did not materialize. Under the PWERM, the values of the various equity interests were estimated based upon an analysis of future values for RSILP, assuming various potential future outcomes. Share value was based upon the probability-weighted 72
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present value of expected future investment returns, considering each of the possible future outcomes available to us, as well as the rights of each share class. The future outcomes modeled included (1) an acquisition and (2) continued operations as a private company until a later exit date. To estimate the total equity value for the acquisition model, we utilized a Post-Money Value derived from the Business Combination Agreement, and to estimate the total equity value for the continued operations as a private company model, we utilized an average of the values from the GPTCM and GTM analyses. After deriving the indicated values of equity under each scenario, the common unit per share equity allocations were calculated based on a cash exit distribution allocation method for the acquisition model and an OPM for the continued operations as a private company model. After calculating the per share values in each model, we applied discounts for the time until exit and lack of marketability, and then applied a probability estimate to each scenario (acquisition versus continued operations as a private company), representing the likelihood of each scenario occurring. The fair value of common units was ultimately determined by calculating the probability weighted average of both scenarios. For the period endedDecember 29, 2020 , we continued to determine the estimated fair value of the RSILP common units using the OPM and PWERM Scenario-Based Method. However, because the analysis was performed onDecember 29, 2020 (i.e., the effective date of the Business Combination), we only considered the acquisition model and not the continued operations as a private company model. We utilized a Post-Money Value derived from the Business Combination Agreement to estimate the total equity value and calculated the common unit per share equity allocations based on a cash exit distribution allocation method. We did not apply any discount for time until exit, lack of marketability or probability of executing the merger. Our management and Board considered various objective and subjective factors to determine the fair value of RSILP's equity price per unit of each grant date, including the value determined by a third-party valuation firm. The factors considered by the third-party valuation firm and our Board included the following:
•our financial performance, capital structure and stage of development;
•our management team and business strategy;
•external market conditions affecting our industry, including competition and regulatory landscape;
•our financial position and forecasted operating results;
•the lack of an active public or private market for our equity units;
•the likelihood of achieving a liquidity event, such as a sale of
•market performance analyses, including with respect to unit price valuation, of similar companies in our industry.
Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between the assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of these common units.
In contemplation of the Business Combination, the RSILP common units that
existed prior to the Business Combination, including the profits interests
described above, were converted into Class A Common Units of RSILP on
Fair value measurements
Fair value measurements are based on the premise that fair value is an exit
price representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use
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in pricing an asset or liability. As a basis for considering such assumptions, the following three-tier fair value hierarchy has been used in determining the inputs used in measuring fair value:
•Level 1 - Quoted prices in active markets for identical assets or liabilities on the reporting date.
•Level 2 - Pricing inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. •Level 3 - Pricing inputs are generally unobservable and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require management's judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using factors that involve considerable judgment and interpretations, including but not limited to private and public comparables, third-party appraisals, discounted cash flow models, and fund manager estimates. Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Management's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The use of different assumptions and/or estimation methodologies may have a material effect on estimated fair values. Accordingly, the fair value estimates disclosed or initial amounts recorded may not be indicative of the amount that the Company or holders of the instruments could realize in a current market exchange. Financial liabilities subject to fair value measurements on a recurring basis include the Earnout Interests Liability and Warrant Liabilities.
Earnout Interests Liabilities
The earnout interests, as described in Note 9 to our consolidated financial statements, included elsewhere in this Annual Report, are subject to certain restrictions on transfer and voting and potential forfeiture pending the achievement (if any) of certain earnout targets. The earnout targets include (a) a change of control within three years of the Closing, (b) achieving certain revenue targets for the year endedDecember 31, 2021 , and (c) achieving certain volume weighted average share prices ("VWAPs") within three years of the Closing. With respect to the revenue targets for the 2021 year, the percentage of Earnout Interests no longer subject to the restrictions, starting at 25% and ending at 100%, is dependent on achieving revenue equal to$270 million up to$300 million , respectively. With respect to the earnout targets related to VWAPs, the share price must be equal to or exceed the target price for 10 trading days of any 20 consecutive trading day period. Pursuant to the Business Combination Agreement, a VWAP of$12.00 and$14.00 would result in 50% and 100%, respectively, of the Earnout Interests being no longer subject to the restrictions. Certain of those earnout targets were achieved inJanuary 2021 and, as a result, 100% of the shares and units subject to these restrictions were deemed earned and thus were no longer subject to the restrictions. We obtained a third-party valuation atDecember 29, 2020 (i.e., the Business Combination date) and atDecember 31, 2020 based upon assumptions regarding share price, maturity, volatility and risk-free rate. The share price represents the trading price as of the valuation date. The maturity assumption represents the time to maturity or expiration of the earnout interest, which was three years. The volatility in the analysis was determined using the Guideline Public Companies' daily trading activity. Daily volatilities were calculated based on the daily trading activity using a historical lookback period commensurate with the maturity. The selected volatility was the average of the Guideline Public Companies' volatility for the period, which was calculated to be 54.58%. The risk-free rate utilizes the three-yearU.S. Treasury bond rate in effect at the time of the grant. The fair value was determined using a Monte Carlo simulation of 500,000 trials to value the earnout interests as of the valuation date. Within each trial, the Geometric Brownian Motion formula is used to simulate the underlying security price through the life of the earnout interests. In each trial, the 10th largest simulated trading price within any 20-day trading period was observed to determine if and when the earnout interests met either of the threshold values ($12.00 and$14.00 ) defined in the Trigger Events. Each future value is discounted to the appropriate valuation date at the risk-free rate to determine the value conclusion within each trial. The average of all 500,000 trials yields the overall valuation conclusion.
As of
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Warrant Liabilities
As described in Note 8 to our consolidated financial statements, included elsewhere in this Annual Report, we evaluated the Public Warrants, Private Placement Warrants and Working Capital Warrants under ASC 815-40, and concluded that they do not meet the criteria to be classified in stockholders' equity. Specifically, the exercise of these warrants may be settled in cash upon the occurrence of a tender offer or exchange that involves 50% or more of our stockholders holding Class A Common Stock. Because not all of the stockholders need to participate in such tender offer or exchange to trigger the potential cash settlement and we do not control the occurrence of such an event, we concluded that the Public Warrants, Private Placement Warrants and Working Capital Warrants do not meet the conditions to be classified in equity. Because the Public Warrants, Private Placement Warrants and Working Capital Warrants meet the definition of a derivative under ASC 815-40, we recorded these warrants as liabilities on our consolidated balance sheet at fair value as of each reporting date, with subsequent changes in their respective fair values recognized in our consolidated statement of operations and comprehensive income (loss). We determined the fair value of our Public Warrants based on the publicly listed trading price of such warrants on the valuation date. We determined the fair value of the Private Placement Warrants and Working Capital Warrants using Level 3 inputs within a Black-Scholes model. The Private Placement Warrants and Working Capital Warrants were valued as ofDecember 29, 2020 (i.e., the Business Combination closing date) andDecember 31, 2020 . The significant inputs and assumptions in this method are the stock price, exercise price, volatility, risk-free rate, and term or maturity. The underlying stock price input is the closing stock price as of each valuation date and the exercise price is the price as stated in the warrant agreement. The volatility input was determined using the historical volatility of comparable publicly traded companies which operate in a similar industry or are our direct competitors. Volatility for each comparable is calculated as the annualized standard deviation of daily continuously compounded returns. The Black-Scholes analysis is performed in a risk-neutral framework, which requires a risk-free rate assumption based upon constant-maturity treasury yields, which are interpolated based on the remaining term of the Private Placement Warrants and Working Capital Warrants as of each valuation date. The term/maturity is the duration between each valuation date and the maturity date, which is five years following the date the Business Combination closed, orDecember 29, 2025 .
As of
Income Taxes
We account for income taxes using the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are calculated by
applying existing tax laws and the rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in the year of the enacted rate change.
We regularly review our deferred tax assets, including net operating loss
carryovers, for recoverability, and a valuation allowance is provided when it is
more likely than not that some portion or all of a deferred tax asset may not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which the temporary
differences are deductible. In assessing the need for a valuation allowance, we
make estimates and assumptions regarding projected future taxable income, our
ability to carry back operating losses to prior periods, the reversal of
deferred tax liabilities and the implementation of tax planning strategies.
Based on our cumulative earnings history and forecasted future sources of
taxable income, we have determined we are not more-likely-than-not to realize
existing deferred tax assets and thus have recorded a valuation allowance. As we
reassesses these assumptions in the future, changes in forecasted taxable income
may alter this expectation and may result in an increase to the valuation
allowance and an increase in the effective tax rate.
We account for uncertainty in income taxes using a recognition and measurement
threshold for tax positions taken or expected to be taken in a tax return, which
are subject to examination by federal and state taxing authorities. The tax
benefit from an uncertain tax position is recognized when it is more likely than
not that the position will be sustained upon examination by taxing authorities
based on technical merits of the position. The amount of the tax benefit
recognized is the largest amount of the benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement. The effective tax rate
and the tax basis of assets and liabilities reflect management's estimates of
the ultimate outcome of various tax uncertainties. We recognize penalties and
interest related to uncertain tax positions within the provision (benefit) for
income taxes line in the accompanying consolidated statements of operations.
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Tax Receivable Agreement
Pursuant to the Tax Receivable Agreement, the Special Limited Partner is required to pay to the Sellers and/or the exchanging holders of RSILP Units, as applicable, 85% of the net income tax savings that we and our consolidated subsidiaries (including the Special Limited Partner) realize as a result of increases in tax basis in RSILP's assets related to the transactions contemplated under the Business Combination Agreement and the future exchange of the Retained RSILP Units (for shares of Class A Common Stock (or cash) pursuant to the RSILP A&R LPA and tax benefits related to entering into the Tax Receivable Agreement, including tax benefits attributable to payments under the Tax Receivable Agreement, and those payments may be substantial. We evaluate the realizability of the deferred tax assets resulting from the exchange of RSILP Units for Class A Common Stock. If the deferred tax assets are determined to be realizable, we then assess whether payment of amounts under the TRA have become probable. If so, we record a TRA liability equal to 85% of such deferred tax assets. In subsequent periods, we assess the realizability of all our deferred tax assets subject to the TRA. Should it be determined that a deferred tax asset with a valuation allowance is realizable in a subsequent period, the related valuation allowance will be released and consideration of a corresponding TRA liability will be assessed. The realizability of deferred tax assets, including those subject to the TRA, is dependent upon the generation of future taxable income during the periods in which those deferred tax assets become deductible and consideration of prudent and feasible tax-planning strategies.
The measurement of the TRA liability is accounted for as a contingent liability. Therefore, once we determine that a payment becomes probable and can be estimated, the estimate of the payment will be accrued.
Recently Adopted and Issued Accounting Pronouncements
Recently issued and adopted accounting pronouncements are described in Note 2 to our consolidated financial statements included elsewhere in this Annual Report.
Emerging Growth Company Accounting Election
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 ("JOBS
Act") exempts emerging growth companies from being required to comply with new
or revised financial accounting standards until private companies are required
to comply with the new or revised financial accounting standards. The JOBS Act
provides that a company can choose not to take advantage of the extended
transition period and comply with the requirements that apply to non-emerging
growth companies, and any such election to not take advantage of the extended
transition period is irrevocable. RSI is an "emerging growth company" as defined
in Section 2(a) of the Securities Act of 1933, as amended, and has elected to
take advantage of the benefits of this extended transition period. The Company
remains an emerging growth company and is expected to continue to take advantage
of the benefits of the extended transition period. This may make it difficult or
impossible to compare the Company financial results with the financial results
of another public company that is either not an emerging growth company or is an
emerging growth company that has chosen not to take advantage of the extended
transition period exemptions for emerging growth companies because of the
potential differences in accounting standards used.
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