Rush Street Interactive, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Rush Street Interactive, Inc. is an online gaming company offering online casino, online sports betting, retail sports betting and social gaming in the United States and Latin America. The filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The company operated real-money offerings in 12 U.S. states and Colombia and expanded into Michigan, West Virginia, Virginia and Iowa after September 30, 2020. The December 2020 business combination created an UP-C structure, with the company owning approximately 27.02% of RSILP at September 30, 2021 and non-controlling interest holders owning approximately 72.98%.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Revenue | $122.9 million | $78.2 million | +57% |
| Costs of revenue | $81.2 million | $47.1 million | +72% |
| Advertising and promotions | $46.1 million | $17.5 million | +163% |
| Loss from operations | $(17.7) million | $(26.5) million | Loss narrowed |
| Net loss | $(18.9) million | $(26.5) million | Loss narrowed 29% |
| Adjusted EBITDA | $(12.2) million | $1.0 million | Declined |
Q3 revenue was composed primarily of online casino and online sports betting revenue of $121.4 million, retail sports betting revenue of $0.5 million and social gaming revenue of $1.0 million. United States revenue was $114.0 million and Colombia revenue was $9.0 million.
Q3 gross profit, calculated as revenue less costs of revenue, was approximately $41.7 million, representing a gross margin of approximately 34%, compared with approximately 40% in the prior-year quarter. Operating margin was approximately negative 14%, and net margin was approximately negative 15%. Advertising and promotions represented approximately 37% of revenue versus 22% in Q3 2020.
For the nine months ended September 30, 2021, revenue was $357.5 million versus $178.5 million, up 100%. Net loss improved to $(33.0) million from $(90.0) million, while Adjusted EBITDA declined to $(33.9) million from $5.7 million. Nine-month costs of revenue were $245.7 million, advertising and promotions were $125.8 million and operating loss was $(57.2) million.
Balance sheet, liquidity, debt and cash flow
- Cash and cash equivalents were $346.6 million at September 30, 2021, excluding segregated customer cash; cash, cash equivalents and restricted cash totaled $360.3 million.
- Total assets were $421.0 million and total liabilities were $80.8 million.
- The company reported no debt outstanding and had a $0.45 million letter of credit related to Colombia, with no draws reported.
- Nine-month operating cash flow was $(16.7) million, compared with $2.6 million provided in the prior-year period.
- Nine-month investing cash flow was $(10.9) million, including $3.5 million for gaming licenses, $3.0 million for internally developed software, $2.0 million for property and equipment and a $1.5 million equity investment.
- Nine-month financing cash flow was $126.9 million, primarily reflecting $131.6 million of proceeds from public warrant exercises, partly offset by $3.5 million of share repurchases.
- Contractual obligations totaled approximately $64.5 million, including marketing commitments of $36.1 million, license and market-access commitments of $26.3 million, and lease obligations of $2.0 million.
Management stated that existing cash, warrant proceeds and expected operating cash flows should fund operating and capital requirements for at least the next 12 months and thereafter for the foreseeable future. Management also expects capital, marketing, market-access and personnel spending to increase as the company expands.
Material changes versus the prior comparable period
- Revenue growth reflected market expansion and continued growth in existing markets, but variable costs and marketing grew faster than revenue in Q3.
- Advertising and promotions increased by $28.6 million in Q3 and $92.4 million for the nine-month period, reflecting customer acquisition and sponsorship activity.
- Costs of revenue increased faster than revenue, reducing the Q3 cost-based gross margin from approximately 40% to 34%.
- General administration and other expense declined substantially, primarily because prior-year share-based compensation was significantly higher.
- The nine-month results included a $41.8 million gain from changes in warrant liability fair value and a $13.7 million expense from changes in the earnout interests liability. These items were related to the business combination and warrant settlement activity and were not present in the 2020 comparable period.
- All public warrants and private warrants were exercised or settled by September 30, 2021. Public warrant exercises generated approximately $131.6 million of cash proceeds and resulted in the issuance of 11.4 million Class A shares.
- The company repurchased 218,589 Class A shares for $3.5 million during the nine-month period.
- The company’s previously reported material weakness relating to accounting for complex securities transactions was reported as fully remediated as of September 30, 2021.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal revenue, EBITDA or profitability guidance. Management expects continued expansion of online gaming markets and increased investment in technology, personnel, marketing, market access and licenses. Management also expects the company to remain dependent on operating cash flows and available cash rather than third-party debt.
- COVID-19 continued to affect sports schedules, casino visitation and customer behavior. Cancellations or postponements may reduce sports betting revenue, while online casino revenue may partly offset those effects.
- Competition is intense, and customer acquisition costs may remain elevated as operators compete for market share.
- The business depends on obtaining and maintaining gaming licenses and complying with evolving U.S., Colombian and other regulatory requirements.
- Technology outages, cybersecurity incidents, payment-processing disruptions and reliance on third-party identity, geolocation and platform providers could adversely affect operations.
- Revenue and margins are sensitive to sports seasonality, betting outcomes, promotional activity, jackpot payouts and customer engagement.
- The company has an unrecognized Tax Receivable Agreement liability of approximately $42.5 million at September 30, 2021. No payments had been made, and management did not expect material near-term payments because related tax benefits were not considered more-likely-than-not to be realized.
- A lawsuit alleging entitlement to a 1% RSILP equity interest remained active after certain claims were dismissed. The company recorded no accrual because the potential result could not be estimated.
- Related-party arrangements include services from Rush Street Gaming and royalty arrangements with affiliated land-based casinos. Related-party casino royalties were $9.0 million in Q3 and $36.3 million for the nine months.
Important facts for investors to verify
- Whether revenue growth in new markets can offset rising market-access, gaming-tax, payment-processing and customer-acquisition costs.
- The sustainability of customer metrics, including MAUs and ARPMAU; the filing text provided does not include the chart values for these metrics.
- The pace of operating cash consumption and the timing of any movement toward positive Adjusted EBITDA and operating cash flow.
- The effect of sports seasonality, COVID-19 disruptions, promotional intensity and competitive pricing on future margins.
- Potential future payments under the Tax Receivable Agreement and the company’s $64.5 million of contractual commitments.
- The outcome and potential financial exposure from the Anderson litigation.
- The company’s ability to maintain licenses, regulatory compliance, cybersecurity controls and effective internal controls as it scales.