Rush Street Interactive, Inc. — Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020; separate fourth-quarter results are not clearly provided. RSI operates online casino, online sports betting, retail sports betting and social gaming businesses in nine U.S. states and Colombia, primarily through the BetRivers, PlaySugarHouse and RushBet brands.
On December 29, 2020, RSI completed its business combination with dMY Technology Group and became a public company using an Up-C structure. The transaction was accounted for as a reverse recapitalization, with historical results primarily reflecting Rush Street Interactive, LP.
Financial performance and key metrics
| ($ in millions, except percentages) | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $278.5 | $63.7 | +337% |
| Costs of revenue | $190.9 | $32.9 | +480% |
| Advertising and promotions | $56.5 | $28.3 | +100% |
| General administration and other | $162.4 | $23.6 | +587% |
| Loss from operations | $(133.4) | $(22.3) | Loss increased |
| Net loss | $(138.8) | $(22.5) | Loss increased 518% |
| Adjusted EBITDA | $4.4 | $(7.8) | Improved |
Revenue consisted of $273.8 million from online casino and online sports betting, $1.2 million from retail sports betting and $3.5 million from social gaming. U.S. revenue was $263.2 million and Colombian revenue was $15.3 million.
Costs of revenue were approximately 69% of revenue versus 52% in 2019, implying a gross margin of approximately 31% versus 48%. The operating margin was approximately negative 48% and the net margin approximately negative 50% in 2020. Advertising and promotions declined to approximately 20% of revenue from 44% in 2019.
Adjusted EBITDA benefited from excluding $144.7 million of share-based compensation, including approximately $143.0 million related to Common B-1 profit interests, as well as other adjustments. Accordingly, Adjusted EBITDA is not comparable to GAAP operating profit or net income without considering these exclusions.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $255.6 million at December 31, 2020; total cash, cash equivalents and restricted cash were $262.1 million.
- Operating cash flow was $16.2 million, compared with $(2.5) million in 2019, primarily because non-cash share-based compensation more than offset the net loss.
- Investing cash flow was $(6.2) million, including $4.4 million of gaming-license acquisitions and $1.9 million of capital expenditures.
- Financing cash flow was $241.1 million, including $239.8 million of net proceeds from the business combination and PIPE financing.
- The company reported no debt outstanding at year-end and no off-balance-sheet arrangements.
- Contractual obligations totaled approximately $60.0 million, including $58.6 million of vendor, licensing, marketing and other commitments and $1.4 million of operating lease obligations.
- Working capital was negative $106.5 million, principally because of a $351.0 million earnout interests liability. The liability was non-cash and was reclassified to equity after the earnout interests vested in January 2021.
Material changes versus the prior comparable period
- Revenue increased substantially as RSI entered or expanded in Illinois, Colorado and Iowa, grew in Pennsylvania and benefited from increased online casino adoption during COVID-19.
- Online sports betting was negatively affected by suspended and canceled sporting events during the first half of 2020, then benefited from the return and concentration of major sports seasons during the second half.
- Market-access costs increased by $129.4 million, and total costs of revenue rose faster than revenue, reducing gross margin.
- General and administrative expense increased primarily because of $131.3 million of additional non-cash share-based compensation associated with pre-business-combination partnership and profit interests.
- Operating cash flow turned positive, while liquidity increased materially from the business combination and PIPE financing.
- Revenue was more than 99% B2C in both 2020 and 2019; B2B remained immaterial to consolidated revenue.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide clear formal revenue, EBITDA or profitability guidance. Management expects existing cash, business-combination proceeds, warrant proceeds and operating cash flow to fund operating and capital requirements for at least the next 12 months, but notes that additional funding could be required because of regulatory changes, acquisitions, competitive pressures or increased expansion and marketing spending.
Management’s strategy is to enter newly legalized jurisdictions, expand online casino and sports betting, increase marketing where customer economics support it, continue investing in the proprietary platform and personnel, and pursue targeted acquisitions. Potential market access was identified in New York, Ohio, Maryland, Missouri and, subject to conditions, Texas, but approvals and legalization remained uncertain.
- COVID-19 increased online gaming activity but disrupted sports betting and reduced retail casino activity; the longer-term effect of reopening land-based casinos remained uncertain.
- The business is highly dependent on gaming licenses, evolving regulation, land-based casino partners, gaming taxes and market-access arrangements.
- Competition is intense and may require greater marketing expenditure or lower margins to acquire and retain customers.
- Sports betting results are subject to volatility from sporting outcomes, hold rates, errors in posted odds and seasonality. Progressive-jackpot payouts may also reduce cash flow.
- RSI relies on third-party providers for cloud infrastructure, identity and geolocation verification, payments, sports data, risk management and gaming content.
- The company identified cybersecurity, privacy, fraud, platform availability and third-party system risks as potentially material.
- RSI is a controlled company, with significant voting control held by Neil Bluhm, Gregory Carlin and related entities, and intends to rely on certain NYSE governance exemptions.
- The Tax Receivable Agreement requires payment of 85% of certain realized or deemed realized tax benefits to the sellers. The unrecognized TRA liability was $51.6 million at December 31, 2020, and future payments could be substantial.
- The Anderson litigation alleges that a 1% equity interest promised in 2012 was not issued. RSI disputes the claim; the potential loss was not estimable and no accrual was recorded.
- The company’s disclosure controls were effective, but management did not provide an internal-control effectiveness assessment because of the recent business combination. A historical RSILP material weakness was reported as remediated during the fourth quarter of 2020.
Most important facts for investors to verify
- Reconcile the annual results with any separately reported fourth-quarter metrics, because this filing does not clearly present standalone Q4 revenue, loss or cash flow.
- Assess the sustainability of positive operating cash flow excluding the unusually large non-cash share-based compensation benefit.
- Review the growth and profitability impact of market-access fees, gaming taxes, promotions and related-party casino arrangements.
- Verify post-year-end warrant-redemption proceeds and the resulting share-count dilution.
- Evaluate the amount and timing of Tax Receivable Agreement payments and the effect of future RSILP-unit exchanges on cash and ownership.
- Monitor licensing, legalization, tax and responsible-gaming developments in current and prospective jurisdictions.
- Review the concentration of voting power, related-party services and affiliated casino relationships.
- Confirm the remediation and ongoing effectiveness of financial reporting controls after the business combination.