Rush Street Interactive, Inc. — Q1 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 services and social gaming in the United States and Latin America. The filing covers the three months ended March 31, 2021, with comparisons to the three months ended March 31, 2020. The December 29, 2020 business combination with dMY Technology Group was accounted for as a reverse recapitalization; therefore, historical results primarily reflect RSILP, while the post-combination structure includes significant non-controlling interests.
The Company offered real-money gaming in ten U.S. states and operated in Colombia. Its principal brands included BetRivers, PlaySugarHouse and RushBet.co.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $111.8 million | $35.2 million | Up 218% |
| Costs of revenue | $79.7 million | $22.4 million | Up 256% |
| Advertising and promotions | $42.2 million | $8.5 million | Up 398% |
| Loss from operations | $27.3 million | $12.9 million | Loss increased $14.4 million |
| Net loss | $0.1 million | $12.9 million | Improved $12.9 million |
| Net loss attributable to RSI | $0.02 million | $12.9 million | Improved |
| Adjusted EBITDA | $(15.1) million | $1.1 million | Declined $16.1 million |
| Net cash used in operating activities | $11.2 million | $3.0 million | Use increased $8.2 million |
Revenue consisted of $110.0 million from online casino and online sports betting, $0.6 million from retail sports betting and $1.2 million from social gaming. U.S. revenue was $105.3 million and Colombian revenue was $6.5 million.
Costs of revenue represented approximately 71% of revenue, compared with 64% in the prior-year quarter. Advertising and promotions represented approximately 38% of revenue, compared with 24%. The resulting gross margin before advertising and other operating expenses was approximately 29%, compared with 36% in Q1 2020. Operating margin was approximately negative 24%.
Net income before taxes was $0.7 million, benefiting from a $41.8 million gain from the change in fair value of warrant liabilities, partly offset by a $13.7 million loss from the change in fair value of the earnout interests liability. These noncash items significantly affected reported net loss and adjusted EBITDA.
Cash and cash equivalents were $363.6 million at March 31, 2021; cash, cash equivalents and restricted cash totaled $375.1 million. Total assets were $428.8 million and total liabilities were $64.0 million. The Company reported no debt outstanding and had a $0.3 million undrawn letter of credit related to Colombia.
Material changes versus the prior comparable period
- Revenue increased $76.6 million, primarily from expansion into new markets, including Illinois, Michigan, Colorado, Iowa and Virginia, and growth in Pennsylvania, New Jersey and Colombia.
- Online casino and sports betting revenue increased $75.5 million year over year; social gaming revenue increased $0.7 million and retail sports betting revenue increased $0.4 million.
- Costs of revenue rose $57.3 million, including higher gaming taxes, market access costs and operating expenses.
- Marketing expense increased $33.7 million as the Company pursued customer acquisition and brand-building initiatives.
- Operating losses increased despite substantial revenue growth, and adjusted EBITDA declined from positive $1.1 million to negative $15.1 million.
- Financing cash flow increased to $128.0 million, primarily from $131.4 million of proceeds from Public Warrant exercises, partly offset by $3.5 million of share repurchases.
- Public and private warrants were fully exercised or otherwise settled during the quarter. The Company issued 14.0 million Class A shares in connection with warrant exercises and recorded no warrant liabilities at March 31, 2021.
- The earnout interests became fully earned in January 2021, resulting in a $13.7 million fair-value expense and a $364.8 million noncash settlement into equity.
Cash flow, commitments and outlook
Operating cash use was $11.2 million and investing cash use was $3.1 million, including $1.5 million for gaming licenses and $0.9 million for internally developed software. Management expects existing cash, warrant proceeds and operating cash flows to fund operations and capital expenditures for at least the next 12 months, while noting that expansion, marketing, regulatory developments, acquisitions or competitive pressures could require additional financing.
The Company had future minimum contractual commitments of approximately $54.9 million, including $17.3 million of marketing contracts, $36.2 million of license and market-access commitments and $1.3 million of operating lease obligations.
No formal revenue or profitability guidance was provided in the filing. Management expects capital expenditures, working capital needs and marketing spending to increase as the Company expands in the United States and internationally. Management also stated that it intends to finance operations without third-party debt for the foreseeable future.
Risks, contingencies and unusual items
- COVID-19 may continue to affect sports schedules, casino visitation, consumer spending and betting activity. Online casino revenue may partially offset sports-betting volatility.
- The business operates in highly competitive and evolving online gaming markets and depends on obtaining and maintaining licenses and complying with gaming regulations.
- Technology failures, cybersecurity incidents, payment-processing disruptions, geolocation or identity-verification failures and reliance on third-party platforms could adversely affect operations.
- Sports betting revenue is seasonal and subject to volatility from sporting-event outcomes, cancellations, postponements and jackpot payouts.
- The Company had a material weakness in internal control over financial reporting related to accounting for complex securities transactions. Management stated that remediation efforts are underway, but disclosure controls were not effective as of March 31, 2021.
- A lawsuit alleges that Todd Anderson was promised a 1% equity interest in RSILP. The Company believes the claims are without merit, has not accrued a loss and cannot estimate the potential outcome.
- The Tax Receivable Agreement could require payment of 85% of certain realized or deemed realized tax benefits. No payments were expected in the near term, and an unrecognized liability of $51.6 million was disclosed.
- Related-party arrangements include services from Rush Street Gaming and royalty payments to affiliated land-based casinos. Affiliated-casino royalties were $12.5 million in Q1 2021.
Most important facts for investors to verify
- Whether rapid revenue growth can translate into improving margins and positive adjusted EBITDA as marketing and market-access costs remain elevated.
- The sustainability and quality of customer growth, including the reported MAU and ARPMAU trends; the filing text supplied here does not provide clear numerical values for those metrics.
- The cash-burn rate excluding the one-time warrant proceeds and the adequacy of liquidity as expansion and contractual commitments increase.
- The effectiveness and timing of remediation of the material weakness in internal controls.
- The regulatory status and economics of licenses, market-access agreements and related-party arrangements.
- The potential financial impact of the Tax Receivable Agreement, litigation and other contractual commitments.
- The effect of COVID-19, sports-event schedules, consumer spending and competitive promotional intensity on future revenue and profitability.