Rush Street Interactive, Inc. — Q2 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 Colombia. The company operated in ten U.S. states plus Colombia as of June 30, 2021. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The December 2020 business combination was accounted for as a reverse recapitalization; therefore, historical comparisons primarily reflect RSILP’s prior operations.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $122.8 million | $65.0 million | $234.6 million | $100.2 million |
| Loss from operations | $(12.2) million | $(50.6) million | $(39.5) million | $(63.4) million |
| Net loss | $(14.0) million | $(50.6) million | $(14.0) million | $(63.5) million |
| Net loss attributable to RSI | $(3.8) million | $(50.6) million | $(3.8) million | $(63.5) million |
| Adjusted EBITDA | $(6.6) million | $3.7 million | $(21.7) million | $4.7 million |
| Operating cash flow | Not separately provided | Not separately provided | $(10.4) million | $1.8 million |
Q2 revenue increased 89%, while six-month revenue increased 134%. Online casino and online sports betting represented approximately 99% of revenue in both periods. Q2 revenue included $111.8 million from the United States and $11.0 million from Colombia. Six-month revenue included $217.1 million from the United States and $17.6 million from Colombia.
Calculated Q2 gross margin, based on revenue less costs of revenue, was approximately 31%, compared with 24% in Q2 2020. Calculated operating margin improved to approximately negative 10%, from negative 78%. Six-month gross margin was approximately 30%, compared with 28%, and operating margin was approximately negative 17%, compared with negative 63%. The filing does not present gross profit as a separate GAAP line item.
Advertising and promotions increased to $37.5 million in Q2 and $79.8 million for the six months, representing approximately 31% and 34% of revenue, respectively. Costs of revenue were $84.8 million in Q2 and $164.4 million for the six months. Share-based compensation was $4.7 million in Q2 and $16.2 million for the six months.
Cash, cash equivalents and restricted cash totaled $372.8 million at June 30, 2021, including $360.8 million of cash and cash equivalents and $12.0 million of restricted cash. The company reported no debt outstanding and an undrawn $0.45 million letter of credit related to Colombia. Cash increased primarily because of $131.6 million of proceeds from public warrant exercises. The company expects existing cash, warrant proceeds and operating cash flows to fund operations and capital expenditures for at least the next 12 months, but notes that additional financing could become necessary if conditions change.
Material changes versus the prior comparable period
- Revenue growth reflected expansion into Michigan, West Virginia, Virginia and Iowa, continued growth in existing markets, and increased activity in Colombia.
- Costs of revenue increased 72% in Q2 and 129% for the six months, but grew more slowly than revenue.
- Advertising and promotions increased 404% in Q2 and 401% for the six months as the company invested heavily in customer acquisition and market expansion.
- General administration expense declined 80% in Q2 and 62% for the six months, primarily because prior-year share-based compensation was substantially higher.
- Adjusted EBITDA shifted from positive $3.7 million to negative $6.6 million in Q2 and from positive $4.7 million to negative $21.7 million for the six months, reflecting increased marketing and operating investment.
- Operating cash flow declined from $1.8 million provided in the first six months of 2020 to $10.4 million used in the first six months of 2021.
- Public warrants were exercised for $131.6 million of cash proceeds, and private warrants were exercised cashlessly. No warrants remained outstanding at June 30, 2021.
- The earnout interests liability was settled into equity after the applicable share-price target was achieved, producing a $13.7 million expense from fair-value remeasurement and a $364.8 million noncash settlement.
Outlook, risks, contingencies and unusual items
The filing does not provide formal revenue, EBITDA or profitability guidance. Management expects continued expansion into additional jurisdictions and increased marketing, capital expenditures and working-capital needs. Management also stated that it intends, for the foreseeable future, to operate without third-party debt.
- COVID-19 may affect consumer spending, sports schedules, casino visitation and sports betting revenue. Online casino may partly offset sports-related disruption.
- The company faces intense competition, uncertain legalization and regulatory requirements, licensing risks, responsible-gaming obligations and potential changes in gaming taxes or market-access arrangements.
- Technology outages, cybersecurity breaches, payment-processing disruptions and reliance on third-party identity, geolocation and platform providers could impair operations.
- Results are seasonal and volatile because of sports calendars, betting outcomes, jackpot payouts and customer engagement. Progressive jackpot payouts may materially reduce cash flow.
- The company had $67.9 million of future contractual commitments, including $29.4 million for marketing vendors, $36.2 million for licenses and market access, and $2.2 million for lease obligations.
- The company is defending a lawsuit alleging that a former employee was promised a 1% equity interest. Management believes the claim lacks merit, but the potential loss cannot be estimated and no accrual was recorded.
- An unrecognized Tax Receivable Agreement liability was $51.6 million. No payments were made or expected in the near term because related tax benefits were not considered more likely than not to be realized.
- Management reported effective disclosure controls as of June 30, 2021, but a previously identified material weakness concerning accounting for complex securities had not yet been considered remediated because the controls had not operated and been tested for a sufficient period.
Important facts for investors to verify
- Whether rapid revenue growth can continue as new markets mature and whether marketing spending produces sustainable customer economics.
- The trend in Adjusted EBITDA and operating cash flow, which were both negative for the first six months of 2021.
- MAU and ARPMAU trends; the filing states that the relevant chart values are not clear in the supplied text and that the metrics rely on internal estimates and duplicate-account adjustments.
- The effect of sports seasonality, COVID-19 developments, regulatory approvals and potential changes in gaming taxes or market-access terms.
- The company’s ability to satisfy $67.9 million of contractual commitments and any future Tax Receivable Agreement payments without additional financing.
- Remediation and testing of the material weakness in internal control over financial reporting.