Business Context and Reporting Period
Rush Street Interactive, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2022. The company operates online casino, online sports betting, retail sports betting and social gaming businesses in the United States, Colombia and, beginning in April 2022, Ontario, Canada. It operated real-money offerings in 13 U.S. states at quarter-end and expected to launch in Mexico during the second quarter of 2022.
The company uses an UP-C structure and consolidates Rush Street Interactive, LP. Non-controlling interests owned 70.92% of RSILP units at March 31, 2022, compared with 72.20% at December 31, 2021.
Financial Performance and Key Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $134.9 million | $111.8 million | Up 21% |
| Costs of revenue | $99.9 million | $79.7 million | Up 25% |
| Advertising and promotions | $66.8 million | $42.2 million | Up 58% |
| Loss from operations | $(50.0) million | $(27.3) million | Loss increased |
| Net loss | $(52.3) million | $(0.1) million | Loss increased |
| Adjusted EBITDA | $(43.4) million | $(15.1) million | Loss increased |
| Net loss attributable to RSI | $(14.7) million | $(0.02) million | Loss increased |
| Basic loss per Class A share | $(0.24) | $0.00 | Unfavorable change |
Revenue consisted of $131.7 million from online casino and online sports betting, $2.3 million from retail sports betting and $1.0 million from social gaming. U.S. revenue was $122.5 million and Colombian revenue was $12.4 million.
Gross margin, calculated as revenue less costs of revenue divided by revenue, was approximately 26% in Q1 2022 versus 29% in Q1 2021. Advertising and promotions represented approximately 50% of revenue versus 38% in the prior-year period. Operating loss margin was approximately 37% versus 24%.
Management attributed revenue growth primarily to continued expansion in existing markets and launches including Connecticut and West Virginia. The company stated that its average monthly active users increased year over year, although the filing text provided does not show the chart values. Average revenue per monthly active user declined, primarily because new sports-betting-only markets and increased promotional activity added customers who generally generate less revenue than online casino-only customers.
Cash Flow, Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $232.2 million at March 31, 2022, excluding segregated customer deposits. Cash, cash equivalents and restricted cash totaled $261.0 million.
- Net cash used in operating activities was $37.0 million, compared with $11.2 million used in Q1 2021.
- Net cash used in investing activities was $3.4 million, including $1.0 million of property and equipment purchases, $0.9 million for gaming licenses and $1.4 million for internally developed software.
- Net cash used in financing activities was $0.4 million. Q1 2021 included $131.4 million of proceeds from warrant exercises.
- Total assets were $376.7 million and total liabilities were $115.8 million at March 31, 2022.
- The company reported no debt outstanding and no off-balance-sheet arrangements. It had a $1.0 million letter of credit related to Colombia, with no amounts drawn.
- Contractual obligations totaled $64.4 million, including $28.5 million of marketing commitments and $33.7 million of license and market-access commitments.
Management expected existing cash, operating cash flows and prior warrant proceeds to fund operating and capital requirements for at least the next 12 months and thereafter for the foreseeable future. Management also cautioned that additional financing could be required if business conditions, regulatory developments, acquisitions or competitive pressures changed.
Material Changes Versus the Prior Comparable Period
- Revenue increased $23.1 million, or 21%, driven by market expansion and growth in online casino and sports betting revenue.
- Costs of revenue increased faster than revenue, rising 25%, and increased from approximately 71% to 74% of revenue.
- Advertising and promotions increased $24.6 million, or 58%, reflecting new-market customer acquisition and sponsorship and marketing arrangements.
- Depreciation and amortization increased to $2.7 million from $0.7 million, primarily due to additional property, equipment and definite-lived intangible assets.
- Q1 2021 benefited from a $41.8 million gain from warrant-liability remeasurement and a $13.7 million loss from earnout-interest liability remeasurement. Both liabilities had been settled by March 31, 2021 and had no Q1 2022 impact.
- Operating cash use increased by $25.8 million, while Q1 2021 financing cash flow benefited from warrant-exercise proceeds.
- Class A shares outstanding increased to 63.9 million from 61.1 million at December 31, 2021 due to RSILP unit exchanges. Non-controlling ownership declined to 70.92%.
Guidance, Outlook, Risks and Unusual Items
The filing did not provide quantitative revenue, earnings or Adjusted EBITDA guidance. Management expected continued investment in market expansion, technology, personnel, marketing, licenses and market-access arrangements, with capital expenditures and working-capital requirements expected to increase in the near term.
- Key risks include intense competition, customer acquisition and retention costs, regulatory uncertainty, licensing requirements, cybersecurity and dependence on third-party technology and payment providers.
- COVID-19 remained a source of uncertainty, particularly regarding sports schedules, consumer spending, casino visitation and operating disruptions.
- Results are subject to seasonality, sports outcomes, betting losses, jackpot payouts, customer engagement and changes in promotional intensity.
- The Tax Receivable Agreement generally requires payment of 85% of certain realized or deemed realized tax benefits. The unrecognized TRA liability was $52.6 million at March 31, 2022; management did not expect material payments in the near term because the related tax benefits were not considered more likely than not to be realized.
- A lawsuit alleges that the plaintiff was promised a 1% equity interest in RSILP. Certain claims were dismissed, remaining claims continued, and the potential loss could not be estimated; no accrual was recorded.
- The company reported no material changes to the risk factors in its 2021 Form 10-K. Management concluded that disclosure controls and procedures were effective as of March 31, 2022.
Important Facts for Investors to Verify
- Verify the sustainability of revenue growth relative to the substantially higher costs of revenue and customer-acquisition spending.
- Verify monthly active user and average revenue per monthly active user figures, which are presented in filing charts but are not legible in the supplied text.
- Assess cash-burn trends, the company’s ability to fund contractual commitments and the potential need for future equity or debt financing.
- Review the timing and potential amount of future Tax Receivable Agreement payments.
- Evaluate regulatory approval and launch execution in Ontario, Mexico and other prospective markets.
- Monitor the Anderson litigation and other ordinary-course claims for changes in potential exposure.
- Consider the impact of sports seasonality, COVID-19 disruptions, promotional spending, gaming taxes and competitive conditions on future margins.