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 Annual Report on Form 10-K for the year endedDecember 31, 2020 , as amended, and our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this "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 Report captioned "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors." For a discussion of limitations in measuring certain of our key metrics, see the section of this Report captioned "Limitations of Key Metrics and Other Data." This Management's Discussion and Analysis of Financial Condition and Results of Operations 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"). We present these non-GAAP financial measures because they provide us and readers of this Report 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 Report 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 Report. Unless the context requires otherwise, all references in this Report to the "Company," "we," "us," or "our" refer to: (i) the business ofRush Street Interactive, LP and its subsidiaries prior to the consummation of the previously disclosed business combination between dMYTechnology Group, Inc. andRush Street Interactive, LP onDecember 29, 2020 (the "Business Combination"); and (ii)Rush Street Interactive, Inc. and its subsidiaries after the consummation of the Business Combination. 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 player-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 (i.e., sports betting services provided at bricks-and-mortar casinos), as well as social gaming, which involves free-to-play games that use virtual credits that customers 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 twelveU.S. states as outlined in the table below. 19
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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
Michigan ü ü ü
Pennsylvania ü ü ü
New Jersey ü ü
New York 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 .
Our real-money online casino and online sports betting offerings are 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. In 2020 and continuing into 2021, 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. While most major professional sports leagues 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.
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 continue to remain uncertain and 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, during the third quarter of 2021 reduced our
customers' use of, and spending on, our sports betting offerings and from time
to time
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caused us to issue refunds for canceled events. Additionally, while many
bricks-and-mortar casinos where we operate retail sports betting have reopened,
visitation at these casinos is still generally below their pre-COVID-19 levels.
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 revenues vary based on sports seasons and sporting events, among other
things, 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, an 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 have business continuity programs in place to ensure that
employees are safe and that the business continues to function with minimal
disruptions to normal work operations while employees work remotely. We will
continue to monitor developments relating to disruptions and uncertainties
caused by COVID-19.
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 include
U.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.
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The chart below presents our average MAUs for the nine months ended September
30, 2021 and 2020:
[[Image Removed: rsi-20210930_g1.jpg]]
The increase in MAUs was mainly due to our continued growth in existing markets
such as Pennsylvania , New Jersey , Illinois , Indiana , Colorado and Colombia , as
well as our expansion into new markets such as Michigan , West Virginia , Virginia
and Iowa , that had not launched until after September 30, 2020 . 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 nine months ended September 30, 2021
and 2020:
[[Image Removed: rsi-20210930_g2.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, player bonusing volumes have decreased,
thus resulting in higher ARPMAUs.
Non-GAAP Information
This Report includes Adjusted EBITDA, which is a non-GAAP performance measure
that we use to supplement our results presented in accordance with 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 securities 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, 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 with 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
allocation 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.
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The table below presents our Adjusted EBITDA reconciled from our Net loss, the
closest GAAP measure, for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands) 2021 2020 2021 2020
Net loss $ (18,939) $ (26,494) $ (32,969) $ (90,027)
Interest expense, net 11 16 41 101
Income tax expense 1,225 - 3,781 -
One-time payment from Affiliated casino - (9,000) - (9,000)
Depreciation and amortization 1,007 452 2,595 1,368
Change in fair value of warrant liability - - (41,802) -
Change in fair value of earnout interests
liability - - 13,740 -
Share-based compensation expense 4,468 36,023 20,705 103,282
Adjusted EBITDA $ (12,228) $ 997 $ (33,909) $ 5,724
Key Components of Revenue and Expenses
Revenue
We offer real-money online casino, online sports betting and/or retail sports
betting in twelve U.S. states and Colombia . We also provide social gaming (where
permitted, including Ontario, Canada ), where players are given virtual credits
to enjoy free-to-play games.
Our revenue is predominantly generated from our U.S. operations, with the
remaining revenue being generated from our Colombian operations. We generate
revenue primarily through the following offerings:
Online Casino
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
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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
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 players are given virtual
credits to enjoy free-to-play games. Players 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 partner
properties. Our social gaming products are a marketing tool that keeps the
applicable brands present in the minds of our players and engages with players
through another channel while providing the entertainment value that players
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 players 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, benefits and
share-based compensation for dedicated personnel. These costs are 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 player 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, 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.
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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.
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 asset amortization over their useful lives.
Results of Operations
The following tables set forth a summary of our consolidated results of
operations for the interim periods indicated and the changes between periods. We
have derived these data from our unaudited condensed consolidated financial
statements included elsewhere in this Report. The results of historical periods
are not necessarily indicative of the results of operations for any future
period.
Comparison of the Three Months Ended September 30, 2021 and 2020
Three Months Ended
September 30, Change
($ in thousands) 2021 2020 $ %
Revenue $ 122,920 $ 78,237 $ 44,683 57 %
Costs of revenue 81,221 47,107 34,114 72 %
Advertising and promotions 46,077 17,506 28,571 163 %
General administration and other 12,318 39,650 (27,332) (69) %
Depreciation and amortization 1,007 452 555 123 %
Loss from operations (17,703) (26,478) 8,775 (33) %
Interest expense, net (11) (16) 5 (31) %
Loss before income taxes (17,714) (26,494) 8,780 (33) %
Income tax expense 1,225 - 1,225 100 %
Net loss $ (18,939) $ (26,494) $ 7,555 (29) %
Revenue. Revenue increased by $44.7 million , or 57%, to $122.9 million for the
three months ended September 30, 2021 as compared to $78.2 million for the same
period in 2020. The increase was mainly due to and directly correlated with our
continued growth in our existing markets such as Pennsylvania , Illinois , New
Jersey , Indiana , Colorado , New York , and Colombia , as well as our expansion into
new markets such as Michigan , West Virginia , Virginia and Iowa , that had not
launched until after September 30, 2020 . The increase reflects higher
period-over-period online casino and sports betting revenue of $44.4 million and
retail sports betting revenue of $0.3 million .
Costs of Revenue. Costs of revenue increased by $34.1 million , or 72%, to $81.2
million for the three months ended September 30, 2021 as compared to $47.1
million for the same period 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 $13.1 million , $5.8 million , $11.9 million and $3.1 million ,
respectively, to the period-over-period increase in costs of revenue, with
personnel costs and other costs of revenue contributing to the remainder of the
period-over-period increase. Costs of revenue as a percentage of revenue
increased to 66% for the three months ended September 30, 2021 as compared to
60% for the same period in 2020.
Advertising and Promotions. Advertising and promotions expense increased by
$28.6 million , or 163%, to $46.1 million for the three months ended
September 30, 2021 as compared to $17.5 million for the same period in 2020. The
increase was mainly due to new and increased marketing efforts and strategies in
newly entered and existing markets to
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increase customer awareness and use of our offerings, such as executing
strategic marketing or sponsorship arrangements with the Chicago Bears , Mike
Ditka , Field of 68, Field of 12, James Blake , Mark Schlereth , and podcast
organizations. Advertising and promotions expense as a percentage of revenue
increased to 37% for the three months ended September 30, 2021 as compared to
22% for the same period in 2020.
General Administration and Other. General administration and other expense
decreased by $27.3 million , or 69%, to $12.3 million for the three months ended
September 30, 2021 as compared to $39.6 million for the same period in 2020. The
decrease was due to a reduction in share-based compensation expense of $31.6 ,
which was partially offset by an increase in other general and administration
expenses of $4.2 million . General administration and other expense as a
percentage of revenue decreased to 10% for the three months ended September 30,
2021 as compared to 51% for the same period in 2020.
Depreciation and Amortization. Depreciation and amortization expense increased
by $0.6 million , or 123%, to $1.0 million for the three months ended
September 30, 2021 as compared to $0.4 million for the same period in 2020. The
increase was mainly due to additional purchases of property and equipment and
related depreciation expense, and additional acquisition of gaming licenses,
amounts paid for internally developed software, and capitalization of certain
leases and related amortization expense. Depreciation and amortization expense
as a percentage of revenue was 1% for the three months ended September 30, 2021
and 2020.
Interest expense, net. Interest expense, net was less than $0.1 million for each
of the three months ended September 30, 2021 and 2020.
Income tax expense. Income tax expense was $1.2 million for the three months
ended September 30, 2021 and nil for the same period in 2020. Income tax expense
for the three months ended September 30, 2021 related to foreign operations for
which both current and deferred taxes are recorded. The Company did not record a
tax provision for the three months ended September 30, 2020 primarily due to
RSILP's status as a pass-through entity for U.S. federal income tax purposes.
Income tax expense as a percentage of revenue increased to 1% for the three
months ended September 30, 2021 as compared to nil for the same period in 2020.
Comparison of the Nine Months Ended September 30, 2021 and 2020
Nine Months Ended
September 30, Change
($ in thousands) 2021 2020 $ %
Revenue $ 357,540 $ 178,452 $ 179,088 100 %
Costs of revenue 245,668 118,774 126,894 107 %
Advertising and promotions 125,836 33,421 92,415 277 %
General administration and other 40,650 114,815 (74,165) (65) %
Depreciation and amortization 2,595 1,368 1,227 90 %
Loss from operations (57,209) (89,926) 32,717 (36) %
Interest expense, net (41) (101) 60 (59) %
Change in fair value of warrant liability 41,802 - 41,802 100 %
Change in fair value of earnout interests
liability (13,740) - (13,740) 100 %
Loss before income taxes (29,188) (90,027) 60,839 (68) %
Income tax expense 3,781 - 3,781 100 %
Net loss $ (32,969) $ (90,027) $ 57,058 (63) %
Revenue. Revenue increased by $179.1 million , or 100%, to $357.5 million for the
nine months ended September 30, 2021 as compared to $178.4 million for the same
period 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 and West Virginia , that had not
launched until after September 30, 2020 . The increase reflects higher
period-over-period online casino and sports betting revenue of $177.1 million ,
retail sports betting revenue of $1.3 million and, social gaming revenue of $0.7
million .
Costs of Revenue. Costs of revenue increased by $126.9 million , or 107%, to
$245.7 million for the nine months ended September 30, 2021 as compared to
$118.8 million for the same period 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
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expenses, gaming taxes and payment processing costs contributed $28.5 million ,
$20.9 million , $61.0 million and $14.2 million , respectively, to the
period-over-period increase in costs of revenue, with personnel costs and other
costs of revenue contributing to the remainder of the period-over-period
increase. Costs of revenue as a percentage of revenue increased to 69% for the
nine months ended September 30, 2021 as compared to 67% for the same period in
2020.
Advertising and Promotions. Advertising and promotions expense increased by
$92.4 million , or 277%, to $125.8 million for the nine months ended
September 30, 2021 as compared to $33.4 million for the same period 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 for 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, Field of 12, Mark Schlereth , and podcast organizations.
Advertising and promotions expense as a percentage of revenue increased to 35%
for the nine months ended September 30, 2021 as compared to 19% for the same
period in 2020.
General Administration and Other. General administration and other expense
decreased by $74.2 million , or 65%, to $40.7 million for the nine months ended
September 30, 2021 as compared to $114.8 million for the same period in 2020.
The decrease was due to a reduction in share-based compensation expense of
$82.6 , which was partially offset by an increase in other general and
administration expenses of $8.4 million . General administration and other
expense as a percentage of revenue decreased to 11% for the nine months ended
September 30, 2021 as compared to 64% for the same period in 2020.
Depreciation and Amortization. Depreciation and amortization expense increased
by $1.2 million , or 90%, to $2.6 million for the nine months ended September 30,
2021 as compared to $1.4 million for the same period in 2020. The increase was
mainly due to additional purchases of property and equipment and related
depreciation expense, and additional acquisition of gaming licenses, amounts
paid for internally developed software, and capitalization of certain leases and
related amortization expense. Depreciation and amortization expense as a
percentage of revenue was 1% for the nine months ended September 30, 2021 and
2020.
Interest expense, net. Interest expense, net was less than $0.1 million for the
nine months ended September 30, 2021 as compared to $0.1 million for the same
period in 2020.
Change in fair value of warrant liabilities. Change in fair value of warrant
liabilities was $41.8 million for the nine months ended September 30, 2021 due
to fair value changes in the warrant liabilities. We did not have similar
instruments in the nine months ended September 30, 2020 and therefore no gain or
loss on remeasurement was recorded in the prior period.
Change in fair value of earnout interests liability. Change in fair value of
earnout interests liability was $13.7 million for the nine months ended
September 30, 2021 due to fair value changes in the earnout interests liability.
We did not have similar instruments in the nine months ended September 30, 2020
and therefore no gain or loss on remeasurement was recorded in the prior period.
Income tax expense. Income tax expense was $3.8 million for the nine months
ended September 30, 2021 and nil for the same period in 2020. Income tax expense
for the nine months ended September 30, 2021 related to foreign operations for
which both current and deferred taxes are recorded. The Company did not record a
tax provision for the nine months ended September 30, 2020 primarily due to
RSILP's status as a pass-through entity for U.S. federal income tax purposes.
Income tax expense as a percentage of revenue increased to 1% for the nine
months ended September 30, 2021 as compared to nil for the same period in 2020.
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
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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 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 and NCAA 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 new U.S. jurisdictions. As
expected, in many cases these new U.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 several U.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 $346.6 million in cash and cash equivalents as of September 30, 2021
(excluding customer cash deposits, which we segregate from our operating cash
balances on behalf of our real-money customers for all jurisdiction and
products). On February 22, 2021 , we announced the redemption (the "Redemption")
of all the Company's warrants to purchase Class A common stock ("Class A Common
Stock") that were issued to third parties in connection with dMY Technology
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 nine-months ended
September 30, 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 a Tax Receivable
Agreement, dated as of December 29, 2020 (the "TRA"), by and among RSI ASLP,
Inc. (the "Special Limited Partner"), Rush Street Interactive, LP ("RSILP"), the
sellers in the Business Combination (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 the Company 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 agreement
governing the Business Combination and the exchange of certain common units in
RSILP retained by the Sellers 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
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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 payments under the TRA have
been made, and no material payments or accrued payments thereunder are expected
in the near future 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 of the United States and worldwide, which
will require significant investment in our online gaming platform and personnel,
in particular in product development, engineering and operations roles. 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 continue
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.
Debt
As of September 30, 2021 , we had no debt outstanding. We have an outstanding
letter of credit for $0.45 million in connection with our operations in
Colombia , for which no amounts have been drawn as of September 30, 2021 .
Cash Flows
The following table shows our cash flows from operating activities, investing
activities and financing activities for the nine months ended September 30, 2021
and 2020:
Nine Months Ended
September 30,
($ in thousands) 2021 2020
Net cash (used in) provided by operating activities $ (16,677) $ 2,559
Net cash used in investing activities (10,943) (4,696)
Net cash provided by financing activities 126,916 7,150
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(1,075) (441)
Net change in cash, cash equivalents and restricted cash
Operating activities. Net cash used in operating activities for the nine months endedSeptember 30, 2021 was$16.7 million , as compared to$2.6 million provided by operating activities for the same period in 2020. The difference of$19.3 million reflects a lower period-over-period net loss totaling$57.1 million and improvement in working capital totaling$34.6 million , which was more than offset by a decrease in non-cash expenses totaling$109.6 million . The decrease in non-cash expenses of$109.6 million was driven primarily by a decrease in share-based compensation expense totaling$82.6 million and a change in fair value of warrant liabilities totaling$41.8 , which was partially offset by a change in fair value of earnout interests liability totaling$13.7 million and an increase in other non-cash expenses totaling$1.1 million . Investing activities. Net cash used in investing activities for the nine months endedSeptember 30, 2021 increased by$6.2 million to$10.9 million , as compared to$4.7 million during the same period in 2020. The increase reflects higher period-over-period cash paid for internally developed software costs totaling$2.9 million , an increase in property and equipment purchases totaling$1.0 million , a$1.5 million investment in equity, an increase in short-term advances totaling$0.8 million and additional investments in long-term time deposits totaling$0.3 million , which was partially offset by lower period-over-period cash paid to acquire gaming licenses totaling$0.3 million . 30 -------------------------------------------------------------------------------- Table of Contents Financing activities. Net cash provided by financing activities for the nine months endedSeptember 30, 2021 increased by$119.7 million to$126.9 million , as compared to$7.2 million for the same period in 2020. The increase reflects the proceeds from the exercise of Public Warrants totaling$131.6 million , partially offset by repurchases of Class A Common Stock totaling$3.5 million , principal payments of finance lease liabilities totaling$0.9 million , and distributions paid to non-controlling interest holders totaling$0.3 million . Cash provided by financing activities for the nine months endedSeptember 30, 2021 includes member contributions totaling$6.5 million and proceeds from a related-party loan totaling$0.7 million . Contractual Obligations Refer to Note 13 of our unaudited condensed consolidated financial statements included elsewhere in this Report for a summary of our commitments as ofSeptember 30, 2021 . Critical Accounting Policies and Estimates We have prepared our unaudited condensed 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. Other than as indicated below, there were no changes during the nine months endedSeptember 30, 2021 , to the critical accounting policies discussed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , as filed with theSEC onMarch 25, 2021 and as amended by Amendment No. 1 on Form 10-K/A and Amendment No. 2 on Form 10-K/A, as filed with theSEC onApril 30, 2021 andMay 7, 2021 , respectively (collectively, our "Amended Annual Report"). For a complete discussion of our critical accounting policies, refer to our Amended Annual Report. Share-based Compensation 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 9 to our unaudited condensed consolidated financial statements, included elsewhere in this 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 periods could be materially different, including as a result of adjustments to share-based compensation expense recorded for prior periods. 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. We are an "emerging growth company" as defined in Section 2(a) of the Securities Act of 1933, as amended, and have elected to take advantage of the benefits of this extended transition period. We remain an emerging growth company and are expected to continue to take advantage of the benefits of the extended transition period. This may make it difficult or impossible to compare our financial results with the financial results of another public company that is either not an 31 -------------------------------------------------------------------------------- Table of Contents 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk We operate primarily inthe United States andLatin America . As such, we have been exposed in the past and may in the future be exposed to certain market risks, including interest rate, foreign currency exchange and financial instrument risks, in the ordinary course of our business. Currently, these risks are not material to our financial condition or results of operations, but they may be in the future. Interest Rate Risk As ofSeptember 30, 2021 , we had cash, cash equivalents and restricted cash of$360.3 million , which consisted primarily of bank deposits and money market funds. Such interest-earning instruments carry a degree of interest rate risk; however, due to the relatively short-term nature of these instruments, historical fluctuations of interest income have not been significant. The primary objective of our investment activities are to preserve principal and provide liquidity without significantly increasing risk. A 10% increase or decrease in the interest rates of these interest-earning instruments would not have a material effect on our unaudited condensed consolidated financial statements for the nine months endedSeptember 30, 2021 . Foreign Currency Exchange Rate Risk We have been exposed to foreign currency exchange risk related to our transactions in currencies other than theU.S. Dollar, which is our reporting currency. We seek to naturally hedge our foreign exchange transaction exposure by matching the transaction currencies for our cash inflows and outflows. Currently, we do not otherwise hedge our foreign exchange exposure but may consider doing so in the future. Our foreign currency exposure is primarily with respect to the Colombian Peso.Colombia accounted for less than 8% of our revenue for the three and nine months endedSeptember 30, 2021 and 2020. A 10% increase or decrease in the value of these currencies compared to theU.S. Dollar would not have a material effect on our unaudited condensed consolidated financial statements for the three and nine months endedSeptember 30, 2021 . Item 4. Controls and Procedures. Management's Evaluation of Disclosure Controls and Procedures As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Report. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in reports that are filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by theSEC . Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as ofSeptember 30, 2021 . Changes in Internal Control Over Financial Reporting As previously reported, the Company identified a material weakness in our internal control over financial reporting related to the accounting for a significant and unusual transaction related to the warrants we issued in connection with our initial public offering inFebruary 2020 and the closing of the Business Combination inDecember 2020 . A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, our management concluded that our internal control over financial reporting was not effective as ofMarch 31, 2021 . To remediate this material weakness, we expanded and improved our review process for complex securities and related accounting standards. We also further improved this process by enhancing access to accounting literature, identifying third- 32 -------------------------------------------------------------------------------- Table of Contents party professionals with whom to consult regarding complex accounting applications and hiring additional staff with the requisite experience and training to supplement existing accounting professionals. The Company has concluded, through testing, that its internal controls are designed and operating effectively and that the previously identified material weakness has been fully remediated as ofSeptember 30, 2021 . Other than the item noted above, there has been no change in the Company's internal control over financial reporting as ofSeptember 30, 2021 , that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Limitations on Effectiveness of Controls and Procedures Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, as specified above. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. 33
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