Aug. 13, 2021, 5:06 p.m. EDT


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(EDGAR Online via COMTEX) -- Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, our Annual Report on Form 10-K for the year ended December 31, 2020, as amended, and our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this "Report"). In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections of this Report captioned "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors." For a discussion of limitations in the measurement of certain of our key metrics, see the section of this Report captioned "Limitations of Key Metrics and Other Data".

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain financial measures, in particular the presentation of Adjusted EBITDA, which are not presented in accordance with generally accepted accounting principles of the United States ("GAAP"). These non-GAAP financial measures are being presented because they provide us and readers of this Report with additional insight into our operational performance relative to earlier periods and relative to our competitors. These non-GAAP financial measures are not a substitute for any GAAP financial information. Readers of this Report should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. Reconciliations of Adjusted EBITDA to Net Loss, the most comparable GAAP measure, are provided in this Report.

Unless the context requires otherwise, all references in this Report to the "Company," "we," "us," or "our" refer to the business of Rush Street Interactive, LP and its subsidiaries prior to the consummation of the previously disclosed business combination between dMY Technology Group, Inc. and Rush Street Interactive, LP on December 29, 2020 (the "Business Combination"), and Rush Street Interactive, Inc. and its subsidiaries after the consummation of the Business Combination.

Our Business

We are a leading online gaming and entertainment company that focuses primarily on online casino and online sports betting in the U.S. and Latin American markets. Our mission is to provide our customers with the most player-friendly online casino and online sports betting experience in the industry. In furtherance of this mission, we strive to create an online community for our players where we are transparent and honest, treat our players fairly, show them that we value their time and loyalty, and listen to feedback. We also endeavor to implement industry leading responsible gaming practices and provide them with a cutting-edge online gaming platform and exciting, personalized offerings that will enhance their user experience.

We provide our customers an array of leading gaming offerings such as real-money online casino, online sports betting, and retail sports betting (i.e., sports betting services provided to bricks-and-mortar casinos), as well as social gaming, which involves free-to-play games that use virtual credits that can be earned or purchased. We launched our first social gaming website in 2015 and began accepting real-money bets in the United States in 2016. Currently, we offer real-money online casino, online sports betting and/or retail sports betting in ten U.S. states as outlined in the table below.

                                          Online Sports     Retail Sports
        U.S. State       Online Casino       Betting           Betting
        Colorado                                �
        Illinois                                �                 �
        Indiana                                 �                 �
        Iowa                                    �
        Michigan               �                �                 �
        Pennsylvania           �                �                 �
        New Jersey             �                �
        New York                                                  �
        Virginia                                �
        West Virginia          �

In 2018, we also became the first U.S.-based online gaming operator to launch in Colombia, which was an early adopting Latin American country to legalize and regulate online casino and sports betting nationally.

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Our real-money online casino and online sports betting offerings are provided under our and brands in the United States and under our brand in Colombia. We operate and/or support retail sports betting for our bricks-and-mortar casino partners primarily under their respective brands. Many of our social gaming offerings are marketed under our partners' brands, although we also offer social gaming under our own brands as well. Our decision about what brand or brands to use is market-specific and partner-specific, and is based on brand awareness, market research and marketing efficiency.

Impact of COVID-19

The COVID-19 pandemic has adversely impacted global commercial activity, disrupted supply chains and contributed to significant volatility in financial markets. In 2020 and continuing into 2021, the COVID-19 pandemic continued to adversely impact many different industries. The ongoing COVID-19 pandemic could have a continued material adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the extent and the duration of the impact of COVID-19. The COVID-19 pandemic therefore presents material uncertainty and risk with respect to us and our performance and could affect our financial results in a materially adverse way.

The COVID-19 pandemic has significantly impacted our business. The direct impact on our business, beyond disruptions in normal business operations, is primarily through the change in consumer habits as a result of people being required to stay home and restrict their traveling or otherwise voluntarily doing such. During the period of these stay-at-home orders, our business volume significantly increased and has continued to remain strong as many of these orders were lifted. COVID-19 has also directly impacted sports betting due to the rescheduling, reconfiguring, suspension, postponement and cancellation of major sports seasons and sporting events or exclusion of certain players or teams from sporting events. While most major professional sports leagues resumed their activities primarily starting in the second half of 2020, the second quarter of 2021 is still being impacted by the COVID-19 pandemic. For example, the number of games in the NBA's 2020-2021 and NHL's 2021 season were reduced, NCAA basketball has had teams withdraw from conference tournaments due to COVID-19 issues and nearly every major professional sports league has experienced postponed, rescheduled or canceled games, or players or teams being excluded from certain games or events due to COVID-19.

The return of major sports and sporting events during the second half of 2020, as well as the unique and concentrated sports calendar, generated significant customer interest and activity in our sports betting offerings. However, sports seasons and calendars continue to remain uncertain and could be further suspended, cancelled or rescheduled due to additional COVID-19 outbreaks.

The alteration of sports seasons and sporting events, including the postponement or cancelation of events, during the second quarter of 2021 reduced our customers' use of, and spending on, our sports betting offerings and from time to time caused us to issue refunds for canceled events. Additionally, while many bricks-and-mortar casinos where we operate retail sports betting have reopened, visitation at these casinos is still generally below their pre-COVID-19 levels. Ongoing or future closures of bricks-and-mortar casinos and certain ongoing limitations on visitations to such casinos due to COVID-19 may provide additional opportunities for us to market online casino and sports betting to traditional bricks-and-mortar casino patrons.

Our revenues vary based on sports seasons and sporting events, among other things, and cancellations, suspensions or alterations resulting from COVID-19 have the potential to adversely affect our revenue, possibly materially. However, our online casino offerings do not rely on sports seasons and sporting events, thus, they may partially offset this adverse impact on revenue.

The ultimate impact of COVID-19 and the related restrictions on consumer behavior is currently unknown. A significant or prolonged decrease in consumer spending on entertainment or leisure activities would likely have an adverse effect on demand for our offerings, reducing cash flows and revenues, thus materially harming our business, financial condition and results of operations. In addition, a recurrence of COVID-19 cases or an emergence of additional variants or strains could cause other widespread or more severe impacts depending on where infection rates are highest. As steps taken to mitigate the spread of COVID-19 have necessitated a shift away from a traditional office environment for many employees, we have business continuity programs in place to ensure that employees are safe and that the business continues to function with minimal disruptions to normal work operations while employees work remotely. We will continue to monitor developments relating to disruptions and uncertainties caused by COVID-19.

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Trends in Key Metrics

Monthly Active Uniques

MAUs is the number of unique players per month who have placed at least one real-money bet across one or more of our online casino or online sports betting offerings. For periods longer than one month, we average the MAUs for the months in the relevant period. We exclude players who have made a deposit but have not yet placed a real-money bet across one of our online offerings. We also exclude players who have placed a real-money bet but only with promotional incentives. The numbers of unique players included in calculating MAUs include U.S.-based players only.

MAUs is a key indicator of the scale of our user base and awareness of our brands. We believe that year-over-year MAUs is also generally indicative of the long-term revenue growth potential of our business, although MAUs in individual periods may be less indicative of our longer-term expectations. We expect the number of MAUs to grow as we attract, retain and re-engage users in new and existing jurisdictions and expand our offerings to appeal to a wider audience.

The chart below presents our average MAUs for the six months ended June 30, 2021 and 2020:

[[Image Removed: Graphic]]

The increase in MAUs was mainly due to our continued growth in existing markets such as Pennsylvania, New Jersey, Illinois, Indiana, Colorado and Colombia, as well as our expansion into new markets such as Michigan, West Virginia, Virginia and Iowa, that had not launched until after June 30, 2020. Additionally, we continue to achieve a positive response from our strategic advertising and marketing efforts.

Average Revenue Per Monthly Active User

ARPMAU for an applicable period is average revenue divided by average MAUs. This key metric represents our ability to drive usage and monetization of our online offerings.

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The chart below presents our ARPMAU for the six months ended June 30, 2021 and 2020:

[[Image Removed: Graphic]]

The year-over-year decrease in ARPMAU was mainly due to our recent expansion into new markets that only offer online sports betting (e.g., Colorado, Illinois, Iowa, Virginia), as sports betting customers generally generate less revenue per user than casino customers.

Non-GAAP Information

This Report includes Adjusted EBITDA, which is a non-GAAP performance measure that we use to supplement our results presented in accordance with U.S. GAAP. We believe Adjusted EBITDA provides useful information to investors regarding our results of operations and operating performance, as it is similar to measures reported by our public competitors and is regularly used by security analysts, institutional investors and other interested parties in analyzing operating performance and prospects. Non-GAAP financial measures are not intended to be considered in isolation or as a substitute for any GAAP financial measures and, as calculated, may not be comparable to other similarly titled measures of performance of other companies in other industries or within the same industry.

We define Adjusted EBITDA as net income (loss) before interest, income taxes, depreciation and amortization, share-based compensation, adjustments for certain one-time or non-recurring items and other adjustments. Adjusted EBITDA excludes certain expenses that are required in accordance with U.S. GAAP because certain expenses are either non-cash (for example, depreciation and amortization, and share-based compensation) or are not related to our underlying business performance (for example, interest income or expense).

We include Adjusted EBITDA because management uses it to evaluate our core operating performance and trends and to make strategic decisions regarding the allocation of capital and new investments. Management believes that Adjusted EBITDA provides investors with useful information on our past financial and operating performance, enable comparison of financial results from period-to-period where certain items may vary independent of business performance, and allow for greater transparency with respect to metrics used by our management in operating our business. Management also believes this non-GAAP financial measure is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary from company to company for reasons unrelated to overall operating performance.

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The table below presents our Adjusted EBITDA reconciled from our Net loss, the closest U.S. GAAP measure, for the periods indicated:

                                                     Three Months Ended           Six Months Ended
                                                          June 30,                    June 30,
        ($ in thousands)                              2021          2020          2021          2020
        Net loss                                   $ (13,954)    $ (50,590)    $ (14,030)    $ (63,533)
        Depreciation and amortization                     914           457         1,588           916
        Interest expense, net                              17            40            30            85
        Income tax expense                              1,752             -         2,556             -
        Change in fair value of warrant
        liability                                           -             -      (41,802)             -
        Change in fair value of earnout
        interests liability                                 -             -        13,740             -
        Share-based compensation                        4,661        53,769        16,237        67,259
        Adjusted EBITDA                            $  (6,610)    $    3,676    $ (21,681)    $    4,727

Key Components of Revenue and Expenses


We offer real-money online casino, online sports betting and/or retail sports betting in ten U.S. states and Colombia. We also provide social gaming (where permitted), where players are given virtual credits to enjoy free-to-play games.

Our revenue is predominantly generated from our U.S. operations with the remaining revenue being generated from our Colombian operations. We generate revenue primarily through the following offerings.

Online Casino

Online casino offerings typically include the full suite of games available in bricks-and-mortar casinos, such as table games (i.e., blackjack and roulette) and slot machines. For these offerings, we function similarly to bricks-and-mortar casinos, generating revenue through hold, or gross winnings, as players play against the house. Like bricks-and-mortar casinos, there is volatility with online casino, but as the number of bets placed increases, the revenue retained from bets placed becomes easier to predict. Our experience has been that online casino revenue is less volatile than online sports betting revenue.

Our online casino offering consists of a combination of licensed content from leading suppliers in the industry, customized third-party games and a small number of proprietary games that we developed in-house. Third-party content is subject to standard revenue-sharing agreements specific to each supplier, where the supplier generally receives a percentage of the net gaming revenue generated from their casino games played on our platform. In exchange, we receive a limited license to offer the games on our platform to players in jurisdictions where use is approved by the regulatory authorities. We pay much lower fees on revenue generated through our in-house developed casino games such as our multi-bet blackjack (with side bets:21+3)(with side bets:Lucky Ladies)(with side bets:Lucky Lucky) and single-deck blackjack, which primarily relate to hosting/remote gaming server fees and certain intellectual property license fees.

Online casino revenue is generated based on total player bets less amounts paid to players for winning bets, less incentives awarded to players, plus or minus the change in the progressive jackpot reserve.

Online Sports Betting

Online sports betting involves a user placing a bet on the outcome of a sporting event, or a series of sporting events, with the chance to win a pre-determined amount, often referred to as fixed odds. Online sports betting revenue is generated by setting odds such that there is a built-in theoretical margin in each sports bet offered to its customers. While sporting event outcomes may result in revenue volatility, we believe that we can achieve a long-term betting win margin.

Integrated into our online sports betting platform is a third-party risk and trading platform currently provided by certain subsidiaries of Kambi Group plc. In addition to traditional fixed-odds betting, we also offer other sports betting products including in-game betting and multi-sport parlay betting. We have also incorporated live streaming of certain sporting events into our online sports betting offering.

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Online sports revenue is generated based on total player bets less amounts paid to players for winning bets, less incentives awarded to players, plus or minus the change in unsettled sports bets.

Retail Sports Betting

We provide retail sports services to land-based casinos in exchange for a monthly commission that is calculated based on the land-based casino's retail sportsbook revenue. Services include ongoing management and oversight of the retail sportsbook (i.e., within a bricks-and-mortar casino), technical support for the casino's customers, risk management, advertising and promotion, and support for third-party sports betting equipment.

In addition, certain relationships with business partners provide us the ability to operate the retail sportsbook at the land-based partner's facility. In this scenario, revenue is generated based on total player bets less amounts paid to players for winning bets, less other incentives awarded to players.

Social Gaming

We provide social gaming (where permitted) where players are given virtual credits to enjoy free-to-play games. Players who exhaust their credits can either purchase additional virtual credits from the virtual cashier or wait until their virtual credits are replenished for free. Virtual credits have no monetary value and can only be used within our social gaming platform.

Our social gaming business has three main goals: building online databases in key markets ahead of and post-legalization and regulation; generating revenues; and increasing engagement and visitation to our bricks-and-mortar casino partner properties. Our social gaming products are a marketing tool that keeps the applicable brands present in the minds of our players and engages with players through another channel while providing the entertainment value that players seek. We also leverage our social gaming products to cross-sell to our real-money offerings in jurisdictions where real-money gaming is authorized.

We recognize deferred revenue when players purchase virtual credits and revenue when the virtual credits are redeemed. We pay a percentage of the social gaming revenue derived from the sale and redemption of the virtual credits to content suppliers as well as to our land-based partners.

Costs and Expenses

Costs of Revenue. Costs of revenue consist primarily of (i) revenue share and market access fees, (ii) platform and content fees, (iii) gaming taxes,

Advertising and Promotions Costs. Advertising and promotion costs consist primarily of costs associated with marketing the product via different channels, promotional activities and the related costs incurred to acquire new customers. These costs include salaries, benefits and share-based compensation for dedicated personnel and are expensed as incurred.

Our ability to effectively market is critical to operational success. Using experience, dynamic learnings and analytics, we leverage marketing to acquire, convert, retain and re-engage customers. We use a variety of earned media and paid marketing channels, in combination with compelling offers and unique game and site features, to attract and engage customers. Furthermore, we continuously optimize our marketing spend using data collected from our operations. Our marketing spend is based on a return-on-investment model that considers a variety of factors, including the products offered in the jurisdiction, the performance of different marketing channels, predicted lifetime value, marginal costs and expenses and behavior of customers across various product offerings.

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With respect to paid marketing, we use a broad array of advertising channels, including television, radio, social media platforms, sponsorships, affiliates and paid search, and other digital channels. We also use other forms of marketing and outreach, such as our social media channels, first-party websites, media interviews and other media spots and organic searches. These efforts are primarily concentrated within the specific jurisdictions where we operate or intend to operate. We believe there is significant benefit to having a flexible approach to advertising spending as we can quickly redirect our advertising spending based on dynamic testing of our advertising methods and channels.

General Administration and Other. General administration and other expenses consist primarily of administrative personnel costs, including salaries, bonuses and benefits, share-based compensation expense, professional fees related to legal, compliance, audit and consulting services, rent and insurance costs.

Depreciation and Amortization. Depreciation and amortization expense consists of depreciation on our property and equipment and amortization of market access licenses, gaming jurisdictional licenses, internally developed software, and finance lease right-of-use asset amortization over their useful lives.

Results of Operations

The following tables set forth a summary of our consolidated results of operations for the interim periods indicated, and the changes between periods. We have derived these data from our unaudited condensed consolidated financial statements included elsewhere in this Report. The results of historical periods are not necessarily indicative of the results of operations for any future period.

        Comparison of the Three Months Ended June 30, 2021 and 2020
                                               Three Months Ended
                                                   June 30,                  Change
        ($ in thousands)                       2021          2020           $          %
        Revenue                             $  122,800    $   65,038    $   57,762     89 %
        Costs of revenue                        84,760        49,287        35,473     72 %
        Advertising and promotions              37,543         7,445        30,098    404 %
        General administration and other        11,768        58,399      (46,631)     80 %
        Depreciation and amortization              914           457           457    100 %
        Loss from operations                  (12,185)      (50,550)        38,365     76 %
        Interest expense, net                     (17)          (40)            23     58 %
        Loss before income taxes              (12,202)      (50,590)        38,388     76 %
        Income tax expense                       1,752             -         1,752    100 %
        Net loss                            $ (13,954)    $ (50,590)    $   36,636     72 %

Revenue. Revenue increased by $57.8 million, or 89%, to $122.8 million for the three months ended June 30, 2021 as compared to $65.0 million for the same period in 2020. The increase was mainly due to and directly correlated with our continued growth in existing markets such as Pennsylvania, New Jersey, Illinois, Indiana, Colorado and Colombia, as well as our expansion into new markets such as Michigan, West Virginia, Virginia and Iowa, that had not launched until after June 30, 2020. The increase reflects higher period-over-period online casino and sports betting revenue of $57.1 million, social gaming revenue of $0.1 million and retail sports betting revenue of $0.6 million.

Costs of Revenue. Costs of revenue increased by $35.5 million, or 72%, to $84.8 million for the three months ended June 30, 2021 as compared to $49.3 million for the same period in 2020. The increase was mainly due to and directly correlated with our expansion and continued growth in existing and new markets. Market access costs, operating expenses, gaming taxes and payment processing costs contributed $4.5 million, $6.8 million, $18.1 million and $5.1 million, respectively, to the period-over-period increase in costs of revenue, with personnel costs and other costs of revenue contributing to the remainder of the period-over-period increase. Costs of revenue as a percentage of revenue decreased to 69% for the three months ended June 30, 2021 as compared to 76% for the same period in 2020.

Advertising and Promotions. Advertising and promotions expense increased by $30.1 million, or 404%, to $37.5 million for the three months ended June 30, 2021 as compared to $7.4 million for the same period in 2020. The increase was mainly due to new and increased marketing efforts and strategies in newly entered and existing markets to increase customer awareness and use of our offerings, such as executing strategic marketing or sponsorship arrangements with the Chicago Bears. Advertising and promotions expense as a percentage of revenue increased to 31% for the three months ended June 30, 2021 as compared to . . .

Aug 13, 2021


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