Prospectus Supplement No. 4
(to Resale Prospectus dated May 25, 2021)
Registration File No. 333-252810
Prospectus Supplement No. 3
(to PIPE Resale Prospectus dated May 25, 2021)
Registration File No. 333-251390
Filed Pursuant to Rule 424(b)(3)
Rush Street Interactive, Inc.
184,364,810 Shares of Class A Common Stock
This Prospectus Supplement, dated March 7,
2022, is being filed by Rush Street Interactive, Inc. (the
“Company”) to update and supplement the information contained in
the Company’s (i) prospectus, dated May 25, 2021 (as amended and
supplemented from time to time, the “Resale Prospectus”), which
forms a part of the Company’s Registration Statement on Form S-1
(Registration No. 333-252810), as amended from time to time, and
(ii) prospectus, dated May 25, 2021 (as amended and supplemented
from time to time, the “PIPE Resale Prospectus” and together with
the Resale Prospectus, the “Prospectuses”), which forms a part of
the Company’s Registration Statement on Form S-1 (Registration No.
333-251390), as amended from time to time. This prospectus
supplement is being filed to update and supplement the information
in the Prospectuses with the information contained in the Company’s
Annual Report on Form 10-K, filed with the Securities and Exchange
Commission (“SEC”) on March 7, 2022 (the “Annual Report”).
Accordingly, we have attached the Annual Report to this prospectus
supplement.
The Resale Prospectus relates to: (1) the offer and sale, from time
to time, by the selling holders identified in the Resale
Prospectus, or their permitted transferees, of (i) up to
168,321,808 shares of the Company’s Class A Common Stock, par value
$0.0001 per share (the “Class A Common Stock”). The PIPE Resale
Prospectus relates to the resale from time to time by the selling
stockholders named in the PIPE Resale Prospectus, or their
permitted transferees, of up to 16,043,002 shares of Class A Common
Stock.
This prospectus supplement updates and supplements the information
in the Prospectuses and is not complete without, and may not be
delivered or utilized except in combination with, the Prospectuses,
including any amendments or supplements thereto. This prospectus
supplement should be read in conjunction with the Prospectuses and
if there is any inconsistency between the information in the
Prospectuses and this prospectus supplement, you should rely on the
information in this prospectus supplement.
Our Class A Common Stock is traded on The New York Stock Exchange
under the symbol “RSI”. On March 4, 2022, the closing price of our
Class A Common Stock was $8.04 per share.
Investing in our securities involves risks that are described in
the “Risk Factors” section beginning on page 19 of the Resale
Prospectus and page 18 of the PIPE Resale Prospectus, and under
similar headings in any further amendments or supplements to the
Prospectuses before you decide whether to invest in the Company’s
securities.
Neither the SEC nor any state securities commission has approved or
disapproved of the securities to be issued under the Prospectuses
or determined if the Prospectuses or this prospectus supplement is
truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus supplement is March 7,
2022.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021, OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM ______________ TO
Commission File Number
001-39232
RUSH STREET INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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84-3626708 |
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(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
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900 N. Michigan Avenue, Suite 950
Chicago,
Illinois
60611
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(312) 915-2815
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(Address of principal executive offices, including zip
code) |
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(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class |
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Trading Symbol(s) |
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Name of Exchange on Which Registered |
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Class A common stock, $0.0001 par value per share |
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RSI |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
YES ¨ No x
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. YES ¨ No ☒
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required
to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company
x
Emerging growth company x
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or reviews financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ¨
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the
registered public accounting firm that prepared or issued its audit
report. ¨
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of June 30, 2021, the last business day of the registrant’s most
recently completed second fiscal quarter, the aggregate market
value of the Class A common stock held by non-affiliates was
655,236,472 based upon the closing sales price for the registrant’s
Class A common stock of $12.26 as reported by the New York Stock
Exchange. For the purpose of calculating the aggregate market value
of shares held by non-affiliates, we have assumed that all
outstanding shares are held by non-affiliates, except for shares
beneficially owned by each of our executive officers, directors and
5% or greater stockholders. In the case of 5% or greater
stockholders, we have not deemed such stockholders to be affiliates
unless there are facts and circumstances indicating that such
stockholders exercise any control over our company. This
determination of affiliate status is not necessarily a conclusive
determination for any other purpose.
As of March 4, 2022, there were 61,165,151 shares of the
registrant’s Class A common stock, $0.0001 par value per share,
issued and outstanding, and 158,655,584 shares of the registrant’s
Class V common stock, $0.0001 per value per share, issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Definitive Proxy Statement for our 2022 Annual
Meeting of Stockholders, to be filed within 120 days after the end
of the fiscal year covered by this Annual report on Form 10-K, are
incorporated by reference into Part III of this Form 10-K. Except
with respect to information specifically incorporated by reference
in this Annual Report, the Proxy Statement shall not be deemed to
be filed as part hereof.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (this “Annual Report”) contains
forward-looking statements within the meaning of the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995
that reflect future plans, estimates, beliefs and expected
performance. The forward-looking statements depend upon events,
risks and uncertainties that may be outside of our control. The
words “anticipate,” “believe,” “continue,” “could,” “estimate,”
“expect,” “intends,” “may,” “might,” “plan,” “possible,”
“potential,” “predict,” “project,” “should,” “would” and similar
expressions may identify forward-looking statements, but the
absence of these words does not mean that a statement is not
forward-looking. You are cautioned that our business and operations
are subject to a variety of risks and uncertainties, many of which
are beyond our control, and, consequently, our actual results may
differ materially from those projected.
Factors that could cause or contribute to such differences include,
but are not limited to, those identified below and those discussed
in the section entitled “Risk Factors” included elsewhere in this
Annual Report. Any statements contained herein that are not
statements of historical fact may be forward-looking
statements.
•competition
in the online casino, online sports betting and retail sports
betting (i.e., such as within a bricks-and-mortar casino)
industries is intense and, as a result, we may fail to attract and
retain customers, which may negatively impact our operations and
growth prospects;
•economic
downturns and political and market conditions beyond our control,
including a reduction in consumer discretionary spending and sports
leagues shortening, delaying or cancelling parts of their seasons
or certain events due to COVID-19, could adversely affect our
business, financial condition, results of operations and
prospects;
•our
growth prospects may suffer if we are unable to develop successful
offerings, if we fail to pursue additional offerings or if we lose
any of our key executives or other key employees;
•our
business is subject to a variety of U.S. and foreign laws
(including Colombia, where we have business operations), many of
which are unsettled and still developing, and our growth prospects
depend on the legal status of real-money gaming in various
jurisdictions;
•failure
to comply with regulatory requirements or to successfully obtain a
license or permit applied for could adversely impact our ability to
comply with licensing and regulatory requirements or to obtain or
maintain licenses in other jurisdictions, or could cause financial
institutions, online platforms and distributors to stop providing
services to us;
•we
rely on information technology and other systems and platforms
(including reliance on third-party providers to validate the
identity and location of our customers and to process deposits and
withdrawals made by our customers), and any breach or disruption of
such information technology could compromise our networks and the
information stored there could be accessed, publicly disclosed,
lost, corrupted or stolen;
•our
officers and directors allocating their time to other businesses
and potentially having conflicts of interest with our
business;
•our
projections, including for revenues, market share, expenses and
profitability, are subject to significant risks, assumptions,
estimates and uncertainties;
•the
requirements of being a public company, including compliance with
the SEC’s requirements regarding internal controls over financial
reporting, may strain our resources and divert our attention, and
the increases in legal, accounting and compliance expenses that
have resulted and will continue to result from our recent Business
Combination (as defined below) may be greater than we
anticipate;
•we
license certain trademarks and domain names to RSG and its
affiliates, and RSG’s and its affiliates’ use of such trademarks
and domain names, or failure to protect or enforce our intellectual
property rights, could harm our business, financial condition,
results of operations and prospects; and
•we
currently and will likely continue to rely on licenses and service
agreements to use the intellectual property rights of related or
third parties that are incorporated into or used in our products
and services.
Due to the uncertain nature of these factors, management cannot
assess the impact of each factor on the business or the extent to
which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any
forward-looking statements. Any forward-looking statement speaks
only as of the date on which such statement is made, and we
undertake no obligation to update any of these statements to
reflect events or circumstances occurring after the date of this
Annual Report. New factors may emerge, and it is not possible to
predict all factors that may affect our business and
prospects.
Limitations of Key Metrics and Other Data
The numbers for our key metrics, which include our monthly active
users (“MAUs”) and average revenue per MAU (“ARPMAU”), are
calculated using internal company data based on the activity of
user accounts. While these numbers are based on what we believe to
be reasonable estimates of our user base and activity levels for
the applicable period of measurement, there are inherent challenges
in measuring usage of our offerings across large online and mobile
populations based in numerous jurisdictions. In addition, we
continuously seek to improve our estimates of our user base and
user activity, and such estimates may change due to improvements or
changes in our methodology.
We regularly evaluate these metrics to estimate the number of
“duplicate” accounts among our MAUs and remove the effects of such
duplicate accounts on our key metrics. A duplicate account is one
that a user maintains in addition to his or her principal account.
Generally, duplicate accounts arise as a result of users signing up
to use more than one of our brands (i.e., BetRivers, PlaySugarHouse
and RushBet) or to use our offerings in more than one jurisdiction,
for instance when a user lives in New Jersey but works in New York.
The estimates of duplicate accounts are based on an internal review
of a limited sample of accounts, and we apply significant judgment
in making this determination. For example, to identify duplicate
accounts we use data signals such as similar IP addresses or
usernames. Our estimates may change as our methodologies evolve,
including through the application of new data signals or
technologies, which may allow us to identify previously undetected
duplicate accounts and may improve our ability to evaluate a
broader population of our users. Duplicate accounts are very
difficult to measure, and it is possible that the actual number of
duplicate accounts may vary significantly from our
estimates.
Our data limitations may affect our understanding of certain
details of our business. We regularly review our processes for
calculating these metrics, and from time to time we may discover
inaccuracies in our metrics or make adjustments to improve their
accuracy, including adjustments that may result in the
recalculation of our historical metrics. We believe that any such
inaccuracies or adjustments are immaterial unless otherwise stated.
In addition, our key metrics and related information and estimates,
including the definitions and calculations of the same, may differ
from those published by third parties or from similarly titled
metrics of our competitors due to differences in operations,
offerings, methodology and access to information.
The data and numbers used to calculate MAUs and ARPMAU discussed in
this Annual Report only include U.S.-based users unless stated
otherwise.
PART I
ITEM 1. BUSINESS
Unless the context requires otherwise, each of the terms the
“Company,” “Rush Street Interactive,” “RSI,” “we,” “our,” “us” and
similar terms used herein refer collectively to Rush Street
Interactive, Inc., a Delaware corporation, and its consolidated
subsidiaries, following the Business Combination, other than
certain historical information which refers to the business of Rush
Street Interactive, LP prior to the consummation of the Business
Combination.
Overview
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 user-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 customers
where we are transparent and honest, treat our customers 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 our customers 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, as well as social gaming, which involves
free-to-play games that use virtual credits that users can earn or
purchase. 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 thirteen U.S. states as outlined in
the table below.
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U.S. State |
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Online Casino |
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Online Sports
Betting |
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Retail Sports
Betting |
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Arizona |
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Colorado |
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Connecticut |
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Illinois |
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Indiana |
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Iowa |
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Louisiana |
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Michigan |
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New Jersey |
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New York |
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West Virginia |
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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. In addition, we launched our social gaming offering in
Canada during October 2021 and anticipate launching real-money
online casino and sports betting there in 2022. We also expect to
launch online casino and sports betting in Mexico in the second
quarter of 2022.
Our real-money online casino and online sports betting offerings
are currently provided under our BetRivers.com and
PlaySugarHouse.com brands in the United States and under our
RushBet.co brand in Colombia. In certain jurisdictions, we operate
retail sports betting, which is offered under our BetRivers.com or
PlaySugarHouse.com brands. In other jurisdictions, we operate
and/or support retail sports betting for our bricks-and-mortar
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- and
partner-
specific, and is based on brand awareness, market research,
marketing efficiency and applicable gaming rules and
regulations.
Corporate History, Background and Business Combination
We were initially a blank check company called dMY Technology
Group, Inc. (“dMY”), incorporated as a corporation in Delaware on
September 27, 2019, formed for the purpose of effecting a merger,
share exchange, asset acquisition, stock purchase, reorganization,
recapitalization or other similar business combination with one or
more businesses. On December 29, 2020, dMY consummated the
transactions contemplated by the business combination agreement
dated as of July 27, 2020, as amended and amended and restated (the
“Business Combination Agreement” and the transactions contemplated
thereby, the “Business Combination”), and in connection therewith:
(i) dMY acquired Rush Street Interactive, LP (“RSILP”) in an
umbrella partnership–C corporation (“Up-C”) structure, in which
substantially all the assets of the Company are held by RSILP, and
the Company’s only assets are its equity interests in RSILP; (ii)
the holders of equity interests of RSILP (the “Sellers”) retained
certain of their Class A common units of RSILP (the “RSILP Units”)
and received an equal number of Class V common stock, par value
$0.0001 per share, of the Company (the “Class V Voting Stock”);
(iii) the Company issued and sold to subscribers in a private
placement an aggregate of 16,043,002 shares of Class A common
stock, $0.0001 par value per share (“Class A Common Stock” and such
private placement, the “PIPE”); and (iv) dMY changed its name to
“Rush Street Interactive, Inc.”
The Sellers have the right to exchange the RSILP Units retained by
the Sellers (the “Retained RSILP Units”) for either one share of
Class A Common Stock or, upon certain conditions, the cash
equivalent of the market value of one share of Class A Common
Stock. For each Retained RSILP Unit so exchanged, the Company will
cancel one share of the Class V Voting Stock.
A description of the material terms of the Business Combination and
ancillary agreements entered into in connection therewith is set
forth in the Registration Statement on Form S-1, Registration No.
333-252810, filed with the SEC on February 5, 2021, and as amended
from time to time, which is incorporated herein by
reference.
Our Business and Operating Models
We enter new markets by leveraging our proprietary online gaming
platform and our ability to provide either a full-suite service
model or a customized solution to fit a specific situation. Our
business model is designed to be nimble, innovative and
customer-centric. By leveraging our dynamic proprietary online
gaming platform, we aspire to be “first to market” where real-money
online gaming has been newly legalized and where our management
determines that it is desirable to enter such market.
Our principal offerings are our real-money online casino and online
sports betting products. These products can be launched under one
of our existing brands or customized to be incorporated into a
local or third-party brand. We also provide a variety of retail
sports betting solutions to service land-based casino and other
partners and leverage our social gaming offerings to increase
customer engagement and build online databases in key markets both
before and after legalization and regulation.
We currently generate revenue through two operating models: (i)
business-to-consumer (“B2C”) and (ii) business-to-business (“B2B”).
Through our B2C operations, we offer online casino, online sports
betting and social gaming directly to the end customer through our
websites or apps. B2C is our primary operating model, contributing
more than 99% of our total revenue for the years ended December 31,
2021 and 2020, and we expect that it will continue to be our
primary operating model into the future. We believe this is a
flexible operating model that permits us to customize our operating
structure based on applicable gaming regulations, market demands
and, as applicable, our land-based partner’s operations. Through
our B2B operations, we offer retail sports betting services to
land-based businesses, such as bricks-and-mortar casinos, in
exchange for a monthly commission.
Often in advance of markets legalizing online gaming, we build
relationships with local bricks-and-mortar casino operators and
other potential land-based partners who are looking for online
gaming and sports betting partners. In most U.S. jurisdictions, the
applicable gaming regulations require online gaming operators that
offer real-money offerings to operate under the gaming license of,
or partner with, a land-based operator such as a bricks-and-mortar
casino or other type of local partner such as a professional sports
team. Consequently, we leverage our relationships with
bricks-and-mortar casinos and vendors in the gaming industry to
find high-quality and reliable partners for online gaming
collaboration. Upon securing a partner for access to a specific
market (if required or desirable) and before we launch operations
in that market,
we customize our online gaming platform to the laws and regulations
of the jurisdiction. Then, upon entering a new market, we employ a
number of marketing strategies to obtain new customers as well as
leverage our partner’s database when applicable. We continuously
refine our offerings and marketing strategies based on data
collected from each market.
To attract, engage, retain and/or reactivate customers, we offer a
loyalty program that rewards customers in exciting, fair and
transparent ways. We recognize and reward customer loyalty by,
among other things, ensuring that there are exciting benefits at
each of the customer loyalty levels we currently offer. Each of our
online gaming customers is a member of our customer loyalty
program. We grant bonus store points to our customers based upon
completed bets. Once earned, such points can be redeemed to unlock
bonus incentives and to play our proprietary bonus games, providing
further opportunities to win prizes and bonus dollars. Customers
also have the option to “bank” awarded bonuses in our proprietary
“bonus bank”, which they can draw from whenever they wish under our
industry-leading 1x wager playthrough requirement, meaning that
they need only place one bet with the bonus dollars before cashing
out any winnings. Based on research and customer feedback, we
attempt to address customer concerns about the general lack of
transparency in the industry around awarding, redeeming and
tracking bonuses by enabling customers to easily track their
loyalty and bonus progressions and giving customers control over
when and how to redeem their rewards.
We strive to be the first online operator to launch in most new
markets (or launch our online operations on the first day
possible), and we have been successful in doing such in many
markets. However, we have also achieved success when we were not
the first to enter a market. For example, we entered the New Jersey
online casino market approximately three years after that market
opened and there were already numerous competitors in the market at
that time. Less than three years after beginning operations in New
Jersey, we were the #4 online casino brand in New Jersey based on
revenue, out of 19 total operators in the market at that time,
according to the Eilers & Krejcik Gaming (“EKG”) United States
Online Casino Tracker for April 2019.
We believe our success in New Jersey is also noteworthy because we
compete with many other companies that have affiliated land-based
casinos there. Neither us nor RSG, an affiliated land-based casino
operator, operate a bricks-and-mortar casino in New Jersey. Thus,
we believe our performance in New Jersey demonstrates that we can
be successful in entering competitive markets even without the
benefit of an affiliated bricks-and-mortar casino
presence.
Competitive Strengths
As we continue to expand in existing and new jurisdictions, we
believe we are well-positioned to maintain and build upon our
accomplishments by virtue of our competitive
strengths:
Proprietary Online Gaming Platform.
Owning a proprietary online gaming platform has allowed us to
innovate quickly and introduce numerous unique, user-friendly
features. We believe these features have helped increase conversion
rates from registrations to first-time depositors, improve customer
engagement and retention and increase customer spending. Further,
we can update our online gaming platform at a rate that we believe
is among the fastest in the industry. As the U.S. online gaming
industry develops, our online gaming platform should help us better
cater to the evolving needs of our current and potential customers
and partners. In the long run, we believe our online gaming
platform will lead to reduced costs and improved revenue per
customer relative to our peers, many of which license their online
platforms from third parties.
Unique and Diversified Product Offering.
We have prioritized the customization of our offerings, bonusing of
our customers and optimization of our platform. For example, we
have developed some of our own online casino games, which are
higher margin for us than those licensed from third parties. We
have also developed and incorporated numerous proprietary bonusing
features that appeal to casino and sports betting customers alike.
Our omni-channel platform provides a vast amount of functionality
such as location-based decisioning, unified conditional bonusing,
gamified award scenarios, customer dashboards (online and at
retail), promotional games, real-time awards and promotion
management, sophisticated reporting and responsible gaming
features, among others.
Market Access and Speed to Market.
We currently operate online casino and/or online sports betting in
thirteen states (Arizona, Colorado, Connecticut, Illinois, Indiana,
Iowa, Louisiana, Michigan, New Jersey, New York, Pennsylvania,
Virginia and West Virginia) with an aggregate population of
approximately 105 million people. In addition, we have currently
secured potential market access to Ohio, Maryland, Missouri and if
certain conditions are met, Texas, in each case subject to certain
legislative and/or regulatory developments or approvals, which have
an aggregate population of approximately 54 million people. We have
a proven ability to quickly enter markets as they are regulated.
For instance, in the last 24 months, we have been “first to market”
or among the “first to market” where multiple operators were
granted
approval to launch at the same time, in Colorado, Connecticut,
Illinois, Louisiana, Michigan and New York for online sports
betting and in Illinois for retail sports betting.
Flexible Business Model.
We believe we are well positioned to serve newly regulated
jurisdictions regardless of the form of their regulations. Our
flexible business model enables us to function as a B2C operator or
a B2B supplier or joint venturer, depending on market conditions,
applicable laws and regulations, and the needs of our partners.
This flexibility should allow us to have a core advantage in
securing market access and help us address the largest potential
total addressable market (“TAM”).
Large TAM with International Opportunity.
We believe our TAM is larger than most U.S.-only operators because
of our international real-money online gaming and betting
operations in Colombia as well as our flexible business model as
described directly above. We believe this experience will help us
enter other regulated Latin American markets and beyond such as
Mexico, where we anticipate launching operations in the second
quarter of 2022.
Broad Demographic Appeal of our Brands &
Products.
We also believe that our brands, offerings and marketing strategies
have demonstrated an appeal to both female and male customers, as
evidenced by an approximately 55-45 female/male split in our active
U.S. online casino-only customers during calendar year 2021. We
believe that while many sports-centric brands appeal more to male
customers, our brands and offerings (especially our slot machine
game play experience) appeal strongly to female customers – an
important demographic for high-value offerings such as online slot
machine games.
Compelling Unit Economics.
Based on our performance to date, including in New Jersey, one of
the most highly competitive U.S. market in terms of the number of
online gaming operators, we believe that we can achieve
industry-leading lifetime value to customer acquisition cost
ratios. Despite entering the New Jersey online casino market nearly
three years after it launched, we generated revenue in excess of
five times the advertising costs to acquire those same customers in
those customers’ first three years after becoming active on our
platform. As shown in the table below, we were able to recoup our
acquisition costs on a net revenue basis within seven months of
launching in New Jersey. We believe this rapid return on
advertising spending is a result of our expertise in strategically
targeting, acquiring, engaging and retaining the right
customers.
Lifetime Value / Customer Acquisition Cost in New
Jersey
Source: RSI management estimates. Data represents cumulative gross
gaming revenue before a deduction of promotional credits divided by
customer acquisition costs. Data represents all customer cohorts
that signed up since January 2017.
Seasoned Executive Team.
Our executive team has significant global gaming experience,
including with online market leaders such as WMS Industries (now
Scientific Games), Playtech and the Kindred Group. Our Chief
Executive Officer Richard Schwartz, CIO Einar Roosileht and COO
Mattias Stetz all had online gaming experience prior to joining
RSI, which we believe has been instrumental in helping capture U.S.
market share. Our Executive Chairman Neil Bluhm has a proven track
record of developing world-class land-based casinos and has
developed numerous successful real estate projects.
Social Gaming Platform.
We offer social gaming on the same proprietary online gaming
platform as our real-money offerings, which allows us to build user
databases in jurisdictions where real-money gaming is not yet
regulated or legal. Having both of these products on the same
platform allows us to invest in markets before real-money gaming
has launched. We believe our social gaming offering strengthens
brand awareness and engagement from existing customers, helps to
acquire new customers and drives increased visitation to our
partners’ bricks-and-mortar properties.
Growth Strategies
As we continue to invest in our core competitive advantages and
improve the customer experience, we believe we will remain well
positioned to expand upon our existing leadership position in the
online casino and online sports betting industries. We have
established several key areas of strategic focus that will guide
the way we consider our future growth:
Access new geographies.
With our experience in regulated gaming jurisdictions in the United
States and Latin America, we are prepared to enter new
jurisdictions as online casino and sports betting are authorized.
Whether we enter a new jurisdiction as an online operator marketing
directly to end users or on behalf of our land-based partner (B2C),
as a platform provider to a third-party (B2B), or any permutation
of the foregoing, our goal is to be ready to enter jurisdictions
that provide for legal online casino and sports betting where we
believe conditions enable us to earn a strong return on our
invested capital.
Leverage existing customer-level economics to increase marketing
spending.
Since January 2017, we have generated approximately 5.4 times the
lifetime revenue per the acquisition cost to acquire those same
customers in New Jersey. We
may see opportunities to leverage those attractive economics to
increase marketing spending in New Jersey and other jurisdictions
on a strategic basis and where we project acquiring incremental
customers will generate revenue that exceed our internal
targets.
Continue to invest in our offerings and our
platform.
We have established a set of competencies that we believe position
us at the forefront of the evolving online casino and online sports
industry. We will continue iterating on our core user experiences
while reinforcing the data-driven, marketing and technological
infrastructure that allows us to continue to scale our offerings.
We plan to continue to invest in our customers and our offerings as
we remain driven to keep customers engaged while expanding the
capabilities of our platform that will enable us to rapidly reach
new jurisdictions and attract new customers.
Continue to invest in personnel.
In furtherance of accessing new jurisdictions, we have been and
plan to continue to grow our operational, technology and corporate
services teams to broaden product development capabilities,
innovation and efficiency, reduce reliance on third parties and
scale digital user capabilities.
Acquisitions.
On a targeted basis, we will seek out acquisition targets that
enable us to accelerate our technology plans, obtain exclusive
content, expand our customer reach or add efficiencies that
potentially bring third-party costs in-house.
Human Capital Resources
We strongly believe that our people are a key reason for our
success. As such, we focus heavily on our people, starting with the
recruiting process to ensure we are hiring the right people who
have a desirable skill set while enhancing our corporate culture.
Once hired, we strive to empower our people and encourage
creativity, collaboration and entrepreneurship. We provide, among
other things, on-the-job training and access to professional and
technical coaches to support the development, advancement and
engagement of our employees. Our corporate culture focuses heavily
on valuing employees and enabling them to grow, succeed and take on
roles and projects that utilize their strengths. Recognizing our
people’s accomplishments, both professionally and personally, is
also crucial to our corporate culture. Furthermore, we believe that
developing a diverse, inclusive and safe workplace for our people
will enable our people to be more productive and ultimately will
result in our long-term success. Our flexible paid time off
programs permit our employees to pursue personal interests and
goals away from their day-to-day job responsibilities.
We have built a team of talented industry professionals, primarily
focused on technology and operations, who are supported by a highly
experienced senior management team with significant experience in
the online and land-based gaming industries. We believe our
corporate culture combined with our growth and success has created
very high rates of employee retention.
As of March 2, 2022, we had a global workforce of approximately 468
employees and contractors, with approximately 39% of our people
working in technical roles. Approximately 49% of our people are
based in the United States with the remaining 51% being based
elsewhere in the world, including Canada, Colombia, Estonia and
Mexico.
Our Products and Economic Model
Our Revenue-Generating Product Offerings
We currently offer real-money online casino, online sports betting
and/or retail sports betting in thirteen U.S. states and Colombia.
We also provide social gaming (where permitted, including Ontario,
Canada), where users 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. See Note 4 to our consolidated financial statements,
included elsewhere in this Annual Report. 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 customers 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 sports betting
revenue.
Our online casino offering consists of licensed content from
leading suppliers, customized third-party games and a small number
of proprietary games that we developed in-house. Third-party
content is usually subject to standard revenue-sharing agreements
specific to each supplier, where the supplier generally receives a
percentage of the net gaming revenue generated from its casino
games played on our platform. In exchange, we receive a limited
license to offer the games on our platform to customers 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, Lucky Ladies, 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 customer bets
less amounts paid to customers for winning bets, less incentives
awarded to customers, 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 customers. While sporting event outcomes may result in
revenue volatility, we believe that we can achieve a long-term
betting win margin. In addition to traditional fixed-odds betting,
we also offer other sports betting products including in-game
betting and multi-sport and same-game parlay betting. We have also
incorporated live streaming of certain sporting events into our
online sports betting offering.
Integrated into our online sports betting platform is a third-party
risk and trading platform currently provided by certain
subsidiaries of Kambi Group plc.
Online sports revenue is generated based on total customer bets
less amounts paid to customers for winning bets, less incentives
awarded to customers, plus or minus the change in unsettled sports
bets.
Retail Sports Betting
We provide retail sports services to land-based partners in
exchange for a monthly commission that is calculated based on the
land-based retail sportsbook revenue. Services generally include
ongoing management and oversight of the retail sportsbook (i.e.,
within a bricks-and-mortar location), technical support for the
partner’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 customer bets less amounts paid to customers for winning
bets, less other incentives awarded to customers, plus or minus the
change in unsettled retail sports bets.
Social Gaming
We provide social gaming (where permitted) where users are given
virtual credits to enjoy free-to-play games. Users 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 independent 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 partner properties. Our social
gaming products are a marketing tool that keeps the applicable
brands present in the minds of our users and engages with users
through another channel while providing the entertainment value
that users 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 users purchase virtual credits
and revenue when those 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,
(iv) payment processing fees and chargebacks and (v) salaries,
benefits and share-based compensation for dedicated personnel.
These costs are variable in nature and should, in large part,
correlate with the change in revenue. Revenue share and market
access fees consist primarily of amounts paid to local land-based
partners that hold the applicable gaming license, providing us the
ability to offer our real-money online offerings in the respective
jurisdictions. Our platform and content fees are primarily driven
by costs associated with third-party casino content, sports betting
trading services and certain elements of our platform technology,
such as geolocation and know-your-customer. Gaming taxes primarily
relate to state taxes and are determined on a
jurisdiction-by-jurisdiction basis. We incur payment processing
costs on customer deposits and occasionally chargebacks (i.e., when
a payment processor contractually disallows customer deposits in
the normal course of business).
Advertising and Promotions Costs.
Advertising and promotion costs consist primarily of costs
associated with marketing our offerings via different channels,
promotional activities and the related costs incurred to acquire
new customers. These costs also include salaries, benefits and
share-based compensation for dedicated personnel and are expensed
as incurred.
Our ability to effectively market is critical to our success. Using
dynamic learnings and analytics, we leverage marketing to acquire,
convert, retain and re-engage customers. We use earned media and
paid marketing channels, in combination with compelling offers and
unique game and site features, to attract and engage customers.
Further, 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 and services 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.
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. See Notes 2, 5 and 6 to our consolidated
financial statements, included elsewhere in this Annual
Report.
Distribution
We distribute our online offerings through various channels,
including websites (traditional and mobile), direct application
downloads and global direct-to-consumer digital platforms such as
the Apple App Store and the Google Play store. We distribute our
retail offerings primarily through self-service betting terminals
and standalone computer terminals.
We have developed proprietary technology, product offerings and
partnerships to create a sustainable advantage in the online casino
and sports betting industry. Strategic multi-year arrangements with
land-based partners such as bricks-and-mortar casinos, Native
American tribes or professional sports teams enable us to make our
offerings available to customers in certain jurisdictions using a
B2C operating model. Currently, we have numerous arrangements in
place where legislation or regulations require us to enter the
market through a relationship with a land-based partner or we have
otherwise
determined that entering into such an arrangement is desirable. We
also have relationships with several land-based partners through a
B2B operating model.
Our Development Team
Our development team is led by our Chief Information Officer, Einar
Roosileht, and consists of a set of cross functional product
development teams comprised of talented individuals with expertise
in system architecture, client and server-side product engineering,
database architecture, product, engineering and project management,
website and native app design and development, security and
technical support. Consistent with our overall corporate strategy,
the team constantly aims to innovate and differentiate our online
offerings.
Proprietary Online Gaming Platform
Our proprietary online gaming platform has been developed and is
operated by a seasoned team with global online gaming experience
operating across product categories, with particular expertise in
the two largest online/mobile product categories: casino and sports
betting. We believe our online gaming platform and technology stack
give us the ability to provide a personalized, data-driven user
journey. The ability to customize the playing experience for each
user is a key feature of our online gaming platform. We achieve
user personalization by analyzing user history and transactions,
and offering customized promotions and real-time, betting-driven
bonusing.
As demonstrated in the picture below, in addition to developing a
robust online gaming platform, we have developed and are continuing
to improve proprietary modules for our online casino and sports
betting product verticals in order to offer a unique and
differentiated experience to our customers. Such modules include
both frontend and backend components and flexible management tools,
which our operations teams use to customize experiences for
different user segments. Content for both online casino games and
sports betting offers primarily comes from integrated third
parties. In addition to developing proprietary technology, as a
vertically integrated technology company we operate our own
products and platform, with our customer service and marketing
operations teams leveraging powerful existing analytics solutions,
which are a part of our online gaming platform.
We can develop and implement new features in real-time, which we
believe enhances the customer experience and increases customer
retention. By owning our own online gaming platform, we can more
easily improve and customize the user experience and incorporate
key aspects of our operational services into our
offerings:
•Payments
& Risk Management
•Regulatory
Online Reporting & Accounting / Online Gaming
Compliance
•Website
Management / Games Management / Live Tech Ops /
Security
•Online
Affiliate Management & Tracking
•Retention
/ CRM / Business Intelligence & Analytics
•Customer
Service
In addition, owning our online gaming platform enables us to
prioritize speed to market for new offerings while providing an
engaging and unique user experience. Since 2016, we have leveraged
our platform to expand our real-money operations and launch in new
markets. Additionally, we were the first company to launch (or
among the first to launch if multiple operators launched on the
same day) online or retail sports betting in several of the markets
in which we operate, which we believe has allowed us to acquire
customers at a lower cost than we could have if launching in a more
mature market.
Our Industry and Opportunity
We currently operate within the online gaming and entertainment
industry. The global gaming industry includes a wide array of
products such as lotteries, bingo, slot machines, poker, casino
games, sports betting, horse racing, e-sports and virtual sports,
across land-based and online platforms. The industry has various
operators and stakeholders across the private and public sectors,
including traditional bricks-and-mortar casinos, state-run lottery
operators, Native American tribes, legacy online gaming operators,
non-traditional operators such as consumer goods or services brands
that have entered or intend to enter the industry,
racetracks/racinos/video lottery terminals, private equity or other
investment funds, gaming content providers, gaming regulators,
gaming technology companies and payment processors.
Recently, online gaming has seen outsized growth and increased
penetration. Per the European Gaming & Betting Association (the
“EGBA”), regulated online gaming grew in Europe, the most mature
online gaming market in the world, at an annual rate of 17% from
2019 to 2020 and 19% from 2020 to 2021, despite cancellations and
postponements of major European sports in 2020. The EGBA also
projects a 7% growth rate through 2025 in European online gaming
revenue.
We believe the following trends are potential drivers of growth in
this industry:
•New
U.S. and international jurisdictions authorizing and/or privatizing
their online casino and online sports betting industries;
and
•Increasing
consumer adoption of digital and online activities, including
casino and sports betting. While many other large U.S. industries
(i.e., banks, retail stores, movies, etc.) digitalized over a
decade ago, the U.S. gaming industry has just started to do so more
recently.
In the past decade, there has been significant regulatory momentum
with respect to online gaming across the globe. This momentum has
been particularly relevant in developed nations whose citizens
generally have disposable income to spend on entertainment and
gaming. For example, the UK, Denmark, France, Spain, Italy,
Ireland, Denmark, Poland, Sweden and Switzerland have legalized and
regulated online casino and online sports betting. In addition,
Mexico, and in recent years numerous U.S. states, Colombia and
certain provinces in Argentina and Canada have legalized and/or
regulated online gaming. All these countries are in the “high
income” income group according to the World Bank. We expect this
trend to continue into the future, most notably in the United
States.
U.S. Gaming Industry
We see tremendous opportunity in the U.S. online gaming market. As
U.S. jurisdictions become regulated and mature, online gaming
penetration may approach that of other developed nations. For
example, the UK Gambling Commission (“UKGC”) reported that
approximately 40% of the UK’s gross gaming revenue during the
period April 2019 to March 2020 (a period that was largely
unaffected by the impacts of the COVID-19 pandemic) came from
online gaming. To put that UK figure into context, Pennsylvania,
which launched online casino and sports betting in H1 2019,
generated a combined $1.71 billion in taxable revenue from
land-based casino, online casino and online sports betting revenue
in H2 2019 (a period largely unaffected by the impacts of the
COVID-19 pandemic) according to data from the Pennsylvania Gaming
Control Board. Of this amount, only approximately 4.5% came from
online casino and online sports betting. During H2 2020, when the
United States was experiencing many of the effects of the COVID-19
pandemic, including stay-at-home orders, shutdowns of
bricks-and-mortar businesses and cancellations or postponements of
sporting events, Pennsylvania generated a combined $1.62 billion in
taxable revenue from land-based casino, online casino and
online
sports betting according to Pennsylvania Gaming Control Board. Of
this amount, 29.3% came from online casino and online sports
betting. Although the United States has a much more significant
land-based casino industry than the UK, we believe these statistics
show the future opportunity for online gaming in the United
States.
U.S. Online Casino
Currently, online casino is authorized in fewer states than sports
betting. As of the date hereof, online casino is authorized only in
seven states: Connecticut, Delaware, Michigan, New Jersey,
Pennsylvania, West Virginia and Nevada (although regulators have
not authorized online casino outside of physical casinos in
Nevada). We believe there is great potential for revenue growth as
new markets open in the United States. For example, the mature
land-based U.S. casino industry is sizable, with estimated combined
revenues in 2019 (the most recent full year largely unaffected by
the impacts of COVID-19) and 2020 for U.S. land-based commercial
and tribal casinos of approximately $78.2 billion and $57.8
billion, respectively, based on data from the National Indian
Gaming Commission in Washington D.C. and the American Gaming
Association.
In the latter half of 2013, New Jersey became the first U.S. state
to legally permit online casino. That market got off to a slow
start; however, online casino revenue in New Jersey has risen
steadily over the last several years. Notably, online casino
revenue was not negatively impacted when New Jersey began
permitting online sports betting in 2018. Online casino revenue
from slot machines and table games in New Jersey grew from $277.3
million in 2018 to $461.8 million in 2019 according to the New
Jersey Division of Gaming Enforcement. Furthermore, land-based
casino revenue in New Jersey grew during that same period from
$2.51 billion in 2018 to $2.69 billion in 2019 (a period largely
unaffected by the impacts of the COVID-19 pandemic) according to
the New Jersey Division of Gaming Enforcement, showing that
land-based casino revenue can grow at the same time that online
casino revenue grows. This fact may serve as a catalyst for
lawmakers in other states with land-based casinos to consider
authorizing online casino.
In New Jersey in 2021, online casino revenue continued to increase
to $1.34 billion while revenues from land-based casinos also
increased to $2.55 billion, despite the effects of COVID-19 due to
mandatory or requested stay-at-home orders and shutdowns of
brick-and-mortar casinos. We believe this trend in online and
land-based casino revenues for New Jersey from 2020 to 2021 is
indicative of the expected longer-term trend of continued online
and land-based casino revenue growth, in particular if the global
COVID-19 pandemic starts to subside.
We believe that more states either have and will consider
authorizing online casino for the following reasons, among
others:
•We
believe that COVID-19 has resulted in increased expenses and/or
reduced tax revenue in many states, increasing the need for new
sources of tax revenue.
•In
states that have land-based casinos, COVID-19 caused temporary
casino closures and/or lower patronage, which reduced tax
revenue.
•We
believe that COVID-19 has caused increased general consumer
adoption of digital activity, including online gaming.
•Online
casino generated more tax revenue compared to online sports betting
in New Jersey and Pennsylvania in 2021, meaning authorizing online
sports betting alone may not optimize tax revenue.
•Land-based
casino revenue grew as online casino revenue grew in New Jersey
from 2020 to 2021, demonstrating that land-based casino revenue can
grow with online casino revenue.
•We
believe that the land-based casino industry, an important
stakeholder in many states, generally has shown a wider acceptance
of online casino.
Both Pennsylvania and New Jersey were experiencing online casino
taxable revenue growth prior to COVID-19; however, that growth
accelerated in March 2020 and continued in large part through Q4
2021. The charts below highlight the growth of online slot and
table games taxable revenue in New Jersey and Pennsylvania since Q4
2019:
Pennsylvania Online Slot and Table Taxable Revenue ($ in
millions)
Source: Pennsylvania Gaming Control Board
New Jersey Online Slot and Table Gross Revenue ($ in
millions)
Source: New Jersey Division of Gaming Enforcement
U.S. Sports Betting
On May 14, 2018, the U.S. Supreme Court ruled that the Profession
and Amateur Sports Protection Act of 1992 (“PASPA”) – a nationwide
ban of sports betting – was unconstitutional, thus allowing states
(beyond the few states that were grandfathered into PASPA by virtue
of authorizing sports betting prior to PASPA) to enact their own
sports betting laws. Since the U.S. Supreme Court’s decision, as of
the date hereof, 32 states and the District of Columbia have
authorized sports betting. Of those 33 jurisdictions, 22 states
have authorized statewide online sports betting while 11 remain
authorized for retail-only at casinos or retail
locations.
According to EKG, the United States generated approximately $3.62
billion in online sports betting revenue in 2021. While the overall
industry is still nascent, growth to date has been strong. For
example, online gross revenue in New Jersey, the first state to
regulate sports betting after PASPA was struck down, and
Pennsylvania for the fourth quarter of 2021 grew 52% and 16%
year-over-year, respectively, according to data from the New Jersey
Division of Gaming Enforcement and the Pennsylvania Gaming Control
Board.
U.S. Sports Betting Policy Landscape
Source: EKG United States Sports Betting Policy Monitor – Released
February 2022
We believe the U.S. sports betting market still has significant
opportunity for growth. Only approximately 41% of the United States
currently has access to online sports betting, per EKG. This fact
is significant when one considers that according to the New Jersey
Division of Gaming Enforcement, more than 97% of New Jersey sports
betting revenue in January 2022 and more than 90% of the sports
betting revenue in 2021 came via online betting. Populous states
such as California, Florida and Texas have not yet legalized online
sports betting. We believe the sports betting industry will grow
significantly over the next several years as more states authorize
sports betting and as current operating markets
mature.
Share of Total Monthly Sports Betting Handle (December
2021)
Source: EKG United States Sports Betting Market Monitor – Released
February 2022
New Jersey and Pennsylvania, two states that offer online sports
betting, accounted for approximately 27% of all U.S. sports betting
handle in December 2021 according to EKG. In states that permit
online and retail sports betting, online sports betting handle is
generally higher than retail handle; however, some states have
legalized retail sports betting only (e.g., New Mexico and
Arkansas) while other states have legalized restricted forms of
online sports betting (e.g., in-person registration required in
Nevada and for a period of time in Iowa, Illinois and Rhode
Island). As more states legalize and reduce restrictions around
online sports betting, we expect that New Jersey and Pennsylvania
will hold less dominant positions across the United
States.
U.S. Online Gaming: Estimating the Total Addressable Industry
Size
If every U.S. state was to legalize online casino, based on state
level projections from EKG, it is projected that the U.S. market
would generate approximately $29 billion in revenue. Similarly, if
every U.S. state was to legalize online sports betting, based on
state level projections from EKG, it is projected that the U.S.
market would generate approximately $22 billion in
revenue.
Latin America Gaming Industry
Latin America is another area of focus for us. Since 2018, we have
been operating online gaming in Colombia, a country with a
population of approximately 50 million. We believe this experience
will enable us to expand further in Latin America and other
countries as more markets become regulated. Online gaming is also
authorized in Mexico, where we anticipate launching online casino
and sports betting in the second quarter of 2022, and Brazil, which
have populations of approximately 129.0 million and 209.5 million,
respectively. Both Mexico and Brazil still have relatively low
internet penetration, with 71% and 76%, respectively, of the
population having internet access compared to 95% in the United
States and 97% in the UK, so the expansion of internet penetration
in these countries would allow us to grow our revenues from online
gaming there to the extent we make our offerings available in those
countries.
The highest populated country in Latin America, Brazil, legalized
sports betting in December 2018. Before operators can launch sports
betting in Brazil, the Brazilian government needs to adopt
regulations and a licensing process. We believe given our
experience and success in neighboring Colombia, we will be
well-qualified to obtain a sports betting license in
Brazil.
Competition
We operate in the global gaming and entertainment industry.
Therefore, we generally view any type of discretionary leisure and
entertainment provider to be a competitor with respect to our
customers’ time and share of wallet. Specifically, in the online
casino and sports betting space in the United States (our primary
market), our competitors come from two main groups – (i)
established online-first companies and (ii) bricks-and-mortar
casino and similar gaming establishments. Established online-first
companies in the U.S. market include companies such as Flutter
Entertainment / The Stars Group (through their FanDuel and FoxBet
brands), DraftKings (including through their Golden Nugget Online
Gaming and theScore brands), 888, Roar Digital (through its BetMGM
brand and partnership with GVC), Bet365, Betfred and PointsBet,
among others. Additionally, we face competition from U.S. casinos
such as Penn National Gaming through its Barstool brand, Hard Rock
through its Hard Rock Digital brand, Caesars Entertainment through
its partnership with William Hill, and Churchill Downs
Incorporated. In addition, Circa Sports and Smarkets have recently
entered the U.S. market.
We compete on a number of factors across our B2C offerings. These
include, without limitation, our front-end online gaming platform,
our back-end infrastructure, our ability to retain and monetize
existing customers, re-engage prior customers and attract new
customers, and our regulatory access, compliance and customer
service experience.
In the B2B space, primarily in the retail sportsbook market, our
competitors for include, without limitation, SBTech (which was
acquired by DraftKings), US Bookmaking, International Gaming
Technology (IGT), Kambi, Playtech and Scientific Games. We compete
primarily on the quality and breadth of our technology solutions
and support services.
Intellectual Property
Our business relies significantly on the creation, authorship,
development, use and protection of intellectual property. This
intellectual property consists of, for example, software code,
proprietary technology, trademarks, domain names, copyrights,
patents and trade secrets that we use to develop and provide our
offerings and related services, as well as online betting and
gaming content (both proprietary and licensed) and proprietary data
acquired from our customers’ use of our offerings and related
services.
We own the copyrights in the software code we author. From time to
time, we may seek patent protection covering inventions we conceive
and pursue the registration of our domain names, trademarks and
service marks in the United States and in certain foreign
jurisdictions.
We rely on common law rights or contractual restrictions to protect
certain of our intellectual property rights, and we control access
to our software source code and other trade secrets by entering
into confidentiality and intellectual property assignment
agreements with our employees and contractors and confidentiality
agreements with third parties that have access to our software
source code or trade secrets. From time to time, we may assert our
rights in our intellectual property as appropriate or desirable
against third parties who may be infringing such
rights.
Some of the intellectual property we use is owned by affiliated
entities or third parties, and we have entered into licenses and
other agreements with applicable affiliated entities or third
parties to obtain rights to use such intellectual property.
Although we believe we have sufficient rights under such agreements
for the intended operation of our business, such agreements often
restrict our use of the third parties’ intellectual property and
limit such use to specific time periods.
Pursuant to the Business Combination Agreement, RSG and its
affiliates assigned to us several of the trademarks and domain
names that we use in connection with our business, and we granted
to RSG and its affiliates a perpetual, royalty-free license to use
certain of these trademarks and domain names in certain fields of
use. This license may be either exclusive or non-exclusive based on
the field of use and the particular trademark or domain name. This
license precludes our use of certain trademarks and domain names in
the exclusive fields of use.
We have a license agreement, as may be amended from time to time,
with Rivers IP Holdings, LLC (“Rivers IP”), an affiliated entity,
pursuant to which Rivers IP granted to us a fully paid-up,
exclusive license for the use of the trademarks “Rivers,”
“betrivers,” “betrivers.com” and domain names incorporating any of
the foregoing trademarks, including the domain name
“playsugarhouse.com” in each case in connection with real-money
gaming and fantasy sports (only in jurisdictions where such
activities are legal) and play-for-fun or free-to-play offerings
(anywhere in the world). Either party may terminate this license by
giving the other party 180 days’ written notice. This agreement
provides us with a license to use the “Rivers,” “betrivers,”
“betrivers.com” trademarks and domain names in jurisdictions in
which RSG operates
“Rivers” branded casinos. However, in those jurisdictions we
received a sublicense from the applicable “Rivers” branded casinos
to utilize such trademarks and domain names in connection with our
operation of retail and online sports betting and online gaming
under the casinos’ regulatory licenses. We also have similar
license agreements, as may be amended from time to time, with Sugar
House HSP Gaming, LP, pursuant to which we can use the “Sugarhouse”
and “playsugarhouse” marks and related domains.
Third parties in the sports betting, online gaming and casino,
technology and other industries may own patents, copyrights and
trademarks and may occasionally threaten litigation or file suit
against us or request us to enter into license agreements, in each
case based on allegations of infringement or other violations of
intellectual property rights. Occasionally we have received, and we
expect to receive in the future, third-party allegations or
cease-and-desist letters, including from our competitors and
non-practicing entities, that we have infringed such parties’
intellectual property rights, such as their trademarks, copyrights,
and patents. Such allegations may increase as our business
grows.
Government Regulation
We are subject to various U.S. and foreign laws and regulations
that affect our ability to operate in the gaming and entertainment
industry, in particular in the online gaming industry. These
industries are generally subject to extensive and evolving
regulations that could change based on political and social norms
and that could be interpreted or enforced in ways that could
negatively impact our business.
The gaming industry (inclusive of our online casino and sports
betting offerings) is highly regulated, and we must maintain
licenses and pay gaming taxes or a percentage of revenue in each
jurisdiction in which we operate in order to continue our
operations. Our business is subject to extensive regulation under
the laws, rules and regulations of the jurisdictions in which we
operate. These laws, rules and regulations generally concern the
responsibility, financial stability, integrity, honesty and
character of the owners, managers and persons with material
financial interests in the gaming operations along with the
integrity and security of the online casino and sports betting
offerings. Violations of laws or regulations in one jurisdiction
could result in disciplinary action in that and other
jurisdictions.
Gaming laws are generally based upon declarations of public policy
designed to protect customers and the viability and integrity of
the gaming industry. Gaming laws also may be designed to protect
and maximize state and local tax revenues, as well as to enhance
economic development and tourism. To accomplish these public policy
goals, gaming laws establish stringent procedures to ensure that
participants in the gaming industry meet certain standards of
character and responsibility. Among other things, gaming laws
require gaming industry participants to:
•ensure
that unsuitable individuals and organizations have no role in
gaming operations;
•establish
procedures designed to prevent cheating and fraudulent
practices;
•establish
and maintain anti-money laundering practices and
procedures;
•establish
and maintain responsible accounting practices and
procedures;
•maintain
effective controls over their financial practices, including
establishing minimum procedures for internal fiscal affairs and the
safeguarding of assets and revenues;
•maintain
systems for reliable record keeping;
•file
periodic reports with gaming regulators;
•establish
programs to promote responsible gaming; and
•enforce
minimum age and as applicable, location, requirements.
Typically, a U.S. state regulatory environment is established by
statute and underlying regulations and is administered by one or
more regulatory agencies (typically a gaming commission or state
lottery) who regulate the affairs of owners,
managers and persons with financial interests in gaming operations.
Among other things, gaming authorities in the various jurisdictions
in which we conduct our business:
•adopt
rules and regulations under the implementing statutes;
•interpret
and enforce gaming laws and regulations;
•impose
fines and penalties for violations;
•review
the character and fitness of participants in gaming operations and
make determinations regarding their suitability or qualification
for licensure;
•grant
licenses for participation in gaming operations;
•collect
and review reports and information submitted by participants in
gaming operations;
•review
and approve certain transactions, which may include acquisitions or
change-of-control transactions of gaming industry participants and
securities offerings and debt transactions engaged in by such
participants; and
•establish
and collect fees and taxes in jurisdictions where
applicable.
While we believe that we comply in all material respects with all
applicable sports betting and online casino laws, licenses and
regulatory requirements, we cannot provide assurance that our
activities or the activities of our customers, partners or
suppliers will not become the subject of any regulatory or law
enforcement investigation, proceeding or other governmental action
or that any such proceeding or action, as the case may be, would
not have a material adverse impact on us or our business, financial
condition or results of operations.
Licensing and Suitability Determinations
In order to operate in certain jurisdictions, we must obtain either
a temporary or permanent license or determination of suitability
from the responsible authorities. We seek to ensure that we obtain
all necessary licenses to develop and put forth our offerings in
the jurisdictions in which we operate and where our customers are
located.
Gaming laws generally require us, and each of our direct and
indirect subsidiaries engaged in gaming operations, certain of our
directors, officers and employees, and in some cases, certain of
our stockholders holding 5% or more of our outstanding equity, to
obtain licenses from gaming authorities. Licenses typically require
a determination that the applicant qualifies or is suitable to hold
the license. Where not mandated by statute, rule or regulation,
gaming authorities typically have broad discretion in determining
who must apply for a license or finding of suitability and whether
an applicant qualifies for licensing or should be deemed suitable
to conduct operations within a given jurisdiction. When determining
to grant a license to an applicant, gaming authorities generally
consider: (i) the financial stability, good character, honesty,
integrity and responsibility of the applicant (including
verification of the applicant’s sources of funding); (ii) the
quality and security of the applicant’s online real-money gaming
platform, hardware and related software, including the platform’s
ability to operate in compliance with local regulation, as
applicable; (iii) the applicant’s history; (iv) the applicant’s
ability to operate its gaming business in a socially responsible
manner; and (v) in certain circumstances, the effect on
competition.
Gaming authorities may, subject to certain administrative
procedural requirements: (i) deny an application, or limit,
condition, revoke or suspend any license issued by them; (ii)
impose fines, either on a mandatory basis or as a consensual
settlement of a regulatory action; (iii) demand that named
individuals or stockholders be disassociated from a gaming
business; and (iv) in serious cases, liaise with local prosecutors
to pursue legal action, which may result in civil or criminal
penalties.
Events that may trigger revocation of a gaming license or another
form of sanction vary by jurisdiction. However, typical events
include, among others: (i) conviction in any jurisdiction of
certain persons with an interest in, or key personnel of, the
licensee of an offense that is punishable by imprisonment or may
otherwise cast doubt on such person’s integrity; (ii) failure
without reasonable cause to comply with any material term or
condition of a gaming license; (iii) declaration of, or otherwise
engaging in, certain bankruptcy, insolvency, winding-up or
discontinuance activities, or an order or application with respect
to the same; (iv) obtaining a gaming license by a materially false
or misleading representation or in some other improper way; (v)
violation of applicable anti-money laundering or terrorist
financing laws
or regulations; (vi) failure to meet commitments to customers,
including social responsibility and responsible gaming commitments;
(vii) failure to pay in a timely manner all gaming or betting taxes
or fees due; or (viii) determination by the gaming authority that
there is another material and sufficient reason to revoke or impose
another form of sanction upon the licensee.
As noted above, in addition to us and our direct and indirect
subsidiaries engaged in gaming operations, gaming authorities
generally also have the right to investigate individuals or
entities having a material relationship to, or material involvement
with, us or any of our subsidiaries, to determine whether such
individual or entity is suitable as a business associate.
Specifically, as part of our obtaining sports betting and online
casino licenses, certain of our officers, directors, and employees
and in some cases, certain of our stockholders (typically,
beneficial owners of 5% or more of a company’s outstanding equity,
with most jurisdictions providing that “institutional investors”
(as defined by a particular jurisdiction) can seek a waiver of
these requirements) must file applications with the gaming
authorities and may be required to be licensed or to qualify or be
found suitable in many jurisdictions. Qualification and suitability
determinations generally require the submission of extensive and
detailed personal and financial disclosures followed by a thorough
investigation. The applicant must pay all the costs of the
investigation. Changes with respect to the individuals who occupy
licensed positions must be reported to gaming authorities and in
addition to the authority to deny an application for licensure,
qualification or a finding of suitability, gaming authorities have
jurisdiction to disapprove a change in a corporate position. If any
director, officer, employee or significant stockholder is found
unsuitable (including due to the failure to submit required
documentation) by a gaming authority, we may deem it necessary, or
be required, to sever our relationship with such person.
Furthermore, our charter provides that any equity interests of RSI
owned or controlled by an unsuitable person or its affiliates will
be subject to mandatory sale and transfer to either RSI or one or
more third party transferees and in such number and
class(es)/series of equity interests as determined by the charter
in good faith (following consultation with reputable outside and
independent gaming regulatory counsel) pursuant to a resolution
adopted by a majority of our Board of Directors (the
“Board”).
Generally, any person who fails or refuses to apply for a finding
of suitability or a license within the prescribed period after
being advised that it is required by gaming authorities may be
denied a license or found unsuitable, as applicable. Furthermore,
we may be subject to disciplinary action or our licenses may be in
peril if, after we receive notice that a person is unsuitable to be
a stockholder or to have any other relationship with us or any of
our subsidiaries, we: (i) pay that person any dividend or interest
upon our voting securities; (ii) allow that person to exercise,
directly or indirectly, any voting right conferred through
securities held by that person; (iii) pay remuneration in any form
to that person for services rendered or otherwise; or (iv) fail to
pursue all lawful efforts to require such unsuitable person to
relinquish his voting securities.
Product-Specific Licensing
Online Casino
We currently offer online casino in Michigan, New Jersey,
Pennsylvania and West Virginia, pursuant to licenses granted by the
Michigan Gaming Control Board, New Jersey Division of Gaming
Enforcement, the Pennsylvania Gaming Control Board and the West
Virginia Lottery. In addition, we are currently pursuing a license
in Ontario and have partnered with a licensed operator of online
gaming in Mexico to offer online casino there in 2022.
Generally, online gambling in the United States is only lawful when
specifically permitted under applicable state law. At the federal
level, several laws provide federal law enforcement with the
authority to enforce and prosecute gambling operations conducted in
violation of underlying state gambling laws. These enforcement laws
include the Unlawful Internet Gambling Enforcement Act (“UIGEA”),
the Illegal Gambling Business Act and the Travel Act. No violation
of UIGEA, the Illegal Gambling Business Act or the Travel Act can
be found absent a violation of an underlying state law or other
federal law. In addition, the Wire Act of 1961 (the “Wire Act”)
provides that anyone engaged in the business of betting or wagering
knowingly uses a wire communication facility for the transmission
in interstate or foreign commerce of bets or wagers or information
assisting in the placing of bets or wagers on any sporting event or
contest, or for the transmission of a wire communication which
entitles the recipient to receive money or credit as a result of
bets or wagers, or for information assisting in the placing of bets
or wagers, will be fined or imprisoned, or both. However, the Wire
Act notes that it shall not be construed to prevent the
transmission in interstate or foreign commerce of information for
use in news reporting of sporting events or contests, or for the
transmission of information assisting in the placing of bets or
wagers on a sporting event or contest from a state or foreign
country where betting on that sporting event or contest is legal
into a state or foreign country in which such betting is legal.
There is ongoing legal action as to whether the Wire Act applies
beyond sports betting. A federal court of first instance has ruled
that it does not.
Sports Betting
North America
In North America we currently operate our online sports betting
offering via the PlaySugarHouse app in Connecticut, New Jersey and
Pennsylvania and the BetRivers app in Arizona, Colorado, Illinois,
Indiana, Iowa, Louisiana, Michigan, Pennsylvania, New York and
Virginia pursuant to our licenses granted by the gaming commission
of such states, specifically, the Connecticut Department of
Consumer Protection, the New Jersey Division of Gaming Enforcement,
the Pennsylvania Gaming Control Board, the Arizona Department of
Gaming, the Colorado Division of Gaming, the Illinois Gaming Board,
the Indiana Gaming Commission, the Iowa Racing and Gaming
Commission, the Louisiana Gaming Control Board, the Michigan Gaming
Control Board, the New York State Gaming Commission and the
Virginia Lottery Board. We also operate retail sportsbooks in
Illinois, Indiana, Michigan (see “Native
American Gaming Regulation”),
New York and Pennsylvania pursuant to applicable state and tribal
licensing regimes, and anticipate operating a retail sportsbook in
Ohio in the future.
On May 14, 2018, the U.S. Supreme Court issued an opinion
determining that PASPA was unconstitutional. PASPA prohibited a
state from “authorizing by law” any form of sports betting. In
striking down PASPA, the U.S. Supreme Court opened the potential
for state-by-state authorization of sports betting. Numerous states
and territories already have laws authorizing and regulating some
form of sports betting online or in bricks-and-mortar
establishments. Sports betting in the United States is subject to
additional laws, rules and regulations at the state level. See
“Risk
Factors — Risk Related to Government Regulation — Our business is
subject to numerous U.S. and foreign laws, many of which are
unsettled and still developing. Any change in regulations or their
interpretation, or the regulatory climate applicable to our
business and offerings, or changes in tax rules and regulations or
interpretation thereof related to our business and offerings, could
adversely impact our ability to operate our business, which could
have a material adverse effect on our business, financial
condition, results of operations and prospects.”
Native American Gaming Regulation
Gaming on Native American lands is governed by federal law,
tribal-state compacts and tribal gaming regulations. The Indian
Gaming Regulatory Act of 1988 (the “IGRA”) provides the framework
for federal and state control over all gaming on Native American
lands and is administered by the National Indian Gaming Commission
and the Secretary of the U.S. Department of the Interior. The IGRA
requires that a tribe and the state in which the tribe is located
enter into a written agreement, a tribal-state compact, which
governs the terms of the gaming activities. Tribal-state compacts
vary from state-to-state and in many cases require vendors to meet
ongoing registration and licensing requirements. In addition,
tribal gaming commissions have been established by many Native
American tribes to regulate gaming-related activity on tribal
lands. Through our subsidiaries, we provide play-for-fun sports
betting and online casino services to Native American tribes who
have negotiated compacts with their respective states and have
received federal approval. Currently, we are authorized as a vendor
to provide online casino and online and retail sports betting
services to the Little River Casino Resort, a wholly owned and
operated enterprise of the Little River Band of Ottawa Indians, and
we also provide certain social casino offerings to Coushatta Casino
Resort, a gaming enterprise owned and operated by the Coushatta
Tribe of Louisiana.
South America
In Colombia, we operate our online casino and sports betting
offering via a web-based solution. We also operate nine retail
shops where customers can use provided terminals to place bets and
make deposits and withdrawals. We operate pursuant to a concession
contract with the Colombian gaming regulatory agency, Coljuegos
Empresa Industrial Comercial Del Estado Administradora Del
Monopolio Rentistico De Los Juegos De Suerte y Azar Linea
Gratuita.
Data Protection and Privacy
In addition to our licensing regime for our offerings, we also take
significant measures to protect our customers’ personal information
and data.
We handle, collect, store, receive, transmit and otherwise process
certain personal information of our customers and employees, thus
we are also subject to federal, state and foreign laws related to
the privacy and protection of such data. Regulations in
jurisdictions in which we operate, such as the Virginia Consumer
Data Protection Act
and the Colorado Privacy Act, and regulations in other
jurisdictions where we do not operate but that could otherwise
impact our operations,
such as the California Consumer Privacy Act, the California Privacy
Rights Act
and the Freedom of Information and Protection of Privacy Act
(Ontario) may be new or are relatively untested laws (some of which
may not yet be effective) that could affect our business, and the
potential impact is unknown. We also handle, collect, store,
receive, transmit and otherwise process certain personal
information of job applicants and employees in Estonia or the
European Union, thus we are also subject to the General Data
Protection Regulation of the European Union for such
data.
Compliance
We have developed and implemented an internal compliance program
designed to ensure that we comply with legal and regulatory
requirements imposed on us in connection with our online casino and
sports betting activities. Our internal compliance program focuses,
among other things, on reducing and managing problematic gaming and
providing tools to assist users in making educated choices related
to gaming activities.
Additionally, we use various methods and tools across our
operations such as geolocation blocking, which restricts access
based on a user’s geographical location determined through a series
of data points such as mobile devices and Wi-Fi networks; age
verification to ensure our users are old enough to participate;
routine monitoring of user activity; and risk-based user due
diligence to ensure customer funds are legitimately derived. We
have a zero-tolerance approach to money laundering, terrorist
financing, fraud and collusion. While we are firmly committed to
full compliance with all applicable laws and have developed
appropriate policies and procedures to comply with the requirements
of the evolving regulatory regimes, we cannot provide assurance
that our compliance program will prevent all violations of
applicable laws or regulations, or that a violation by us or our
personnel will not result in a monetary fine or suspension or
revocation of one or more of our licenses.
We have built our online platform to meet the needs of differing
regulatory regimes, including configurable regulatory and
responsible gaming controls such as responsible gaming tests,
operator alerts on customer behavior, deposit limits, betting
limits, loss limits, timeout facilities, session limits, reality
checks, balance thresholds and intended gaming amounts. These
features are intended to provide our customers full control of
their gaming to allow them to play responsibly.
Responsible and Safer Gaming
We view the safety and welfare of our customers as critical to our
business and have made corresponding investments in our processes
and systems to help ensure such safety and welfare. We are
committed to industry-leading responsible gaming practices and seek
to provide our customers with the resources and services they need
to play responsibly. These practices, resources and services
include deposit limits, voluntary restrictions on access and use of
certain offerings, temporary self-exclusion and cooling-off
periods, voluntary permanent exclusion from our offerings and
applications and data science technology, which helps us flag any
suspicious or abnormal betting activity. We also participate in
national self-exclusion registers where they are in operation. We
prominently promote our responsible gaming tools, resources and
initiatives on our website and mobile applications. We also
maintain a self-excluded customer list, which prohibits
self-identified customers from placing bets or participating in
real-money gaming and have embedded the software to limit or
restrict the amount individual customers spend. We also train our
frontline personnel to identify signs of problematic gaming,
ensuring that we are not only utilizing data and technology but
also our human resources.
In May 2019, we joined the National Council on Problem Gambling
(“NCPG”) as a Platinum Member. The NCPG is the leading national
organization for people and their families who are affected by
problem gambling and gambling addiction. Our NCPG membership
supports wide-ranging problem gambling prevention, treatment,
education and research programs, as well as innovative responsible
gambling policies provided by the NCPG. Our membership helps build
on NCPG efforts, including the Safer Sports Betting Initiative and
Internet Responsible Gambling Standards, which assist operators
like us by providing best practice responsible gambling policies
and procedures for all online gambling activities, including sports
betting. We are also members of the Sports Wagering Integrity
Monitoring Association and the American Gaming
Association.
In 2021, we partnered with the AGA by participating in its “Have a
Game Plan®” public service campaign, which brought together
organizations across the gaming and sports industries to advance
responsible sports wagering. As an official partner to the Chicago
Bears, we leveraged our relationship to create a combined
in-stadium message to raise awareness of our partnership with the
AGA and show our support for the Have a Game Plan responsible
gaming tools.
Available Information
Our Internet address is www.RushStreetInteractive.com. Our website
and the information contained therein or linked thereto are not
part of this Annual Report. We make available free of charge
through our Internet website our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, proxy
statements, registration statements and amendments to those reports
filed or furnished pursuant to the Exchange Act as soon as
reasonably practicable after we electronically file such material
with, or furnish them to the SEC. The SEC maintains a website that
contains reports, proxy statements and other information regarding
issuers that file electronically with the SEC. These materials may
be obtained electronically by accessing the SEC’s website at
www.sec.gov.
ITEM 1A. RISK FACTORS
Our business is subject to numerous risks and uncertainties that
you should be aware of in evaluating our business. If any such
risks and uncertainties actually occur, our business, prospects,
financial condition and results of operations could be materially
and adversely affected. The risks described below are not the only
risks that we face. Additional risks and uncertainties not
currently known to us, or that we currently deem to be immaterial
may also materially adversely affect our business, prospects,
financial condition and results of operations. The risk factors
described below should be read together with the other information
set forth in this Annual Report, including our consolidated
financial statements and the related notes, as well as in other
documents that we file with the SEC. You should not interpret our
disclosure of any risks in this Annual Report as implying that such
risks have not already materialized.
Summary of the Material Risks Associated with Our
Business
These risks include, but are not limited to, the
following:
•Competition
in the retail and online sports betting and online gaming industry
is intense and, as a result, we may fail to attract and retain
customers, which may negatively impact our operations and growth
prospects.
•Our
projections, including for revenues, market share, expenses and
profitability, are subject to significant risks, assumptions,
estimates and uncertainties and may therefore differ materially
from our expectations.
•Our
operating results may vary, which may make future results difficult
to predict with certainty.
•Recruitment
and retention of our employees, including certain key employees, is
vital to growing our business and meeting our business plans. The
loss of any of our executives or other key employees could harm our
business.
•Clear
errors in the posting of sports betting odds or event information
have occurred occasionally, resulting in large liabilities. To
date, it has been general industry practice to void bets associated
with such clear errors or to correct the odds, but it cannot be
assured that in every case of such clear error regulators will
continue the practice of approving the voiding of such
errors.
•The
success, including win or hold rates, of existing or future online
offerings depends on a variety of factors and is not completely
controlled by us.
•We
rely on strategic relationships with local partners such as casinos
or professional sports teams to be able to provide our offerings in
certain jurisdictions. If we cannot establish and manage
relationships with these partners, our business, financial
condition, results of operations and prospects could be adversely
affected.
•Our
current and projected performance relies heavily upon continued
compatibility and interoperability between our app, platform and
the major mobile operating systems, distribution of our offerings
on third-party platforms and high-bandwidth data capabilities.
Disruptions in the availability of these may negatively impact our
business, financial conditions, results of operations and
prospects.
•Due
to the nature of our business, we are subject to taxation in
numerous jurisdictions and changes in, or new interpretation of,
tax laws, tax rulings or their application by tax authorities could
result in additional tax liabilities and could materially affect
our business, financial condition, results of operations and
prospects.
•Our
business is subject to numerous U.S. and foreign laws, many of
which are unsettled and still developing. Any change in regulations
or their interpretation, or the regulatory climate applicable to
our business and offerings, or changes in tax rules and regulations
or interpretation thereof related to our business and offerings,
could adversely impact our ability to operate our business, which
could have a material adverse effect on our business, financial
condition, results of operations and prospects.
•Our
growth prospects depend on the legal status of real-money gaming in
various jurisdictions, and legalization may not occur in as many
states as we expect, may occur at a slower pace than we anticipate
or may be accompanied by legislative or regulatory restrictions or
taxes that make it impracticable or less attractive to operate,
which could adversely affect our future results of operations and
make it more difficult to meet our expectations for financial
performance.
•Failure
to comply with regulatory requirements or to successfully obtain a
license or permit applied for could adversely impact our ability to
comply with licensing and regulatory requirements or to obtain or
maintain licenses in other jurisdictions, or could cause financial
institutions, online platforms and distributors to stop providing
services to us.
•We
rely on information technology and other systems and platforms, and
failures, errors, defects or disruptions therein could diminish our
brand and reputation, subject us to liability, disrupt our
business, affect our ability to scale our technical infrastructure
and adversely affect our operating results and growth prospects.
Our offerings, online gaming platform and other software
applications and systems, and certain third-party platforms that we
use could contain undetected errors.
•Despite
our security measures, our information technology and
infrastructure may be vulnerable to attacks by hackers or breached
due to employee error, malfeasance or other disruptions. Any such
breach could compromise our networks and the information stored
there could be accessed, publicly disclosed, lost, corrupted or
stolen. Any such access, disclosure, loss, corruption or theft
could result in legal claims or proceedings, liability under
applicable privacy and data protection laws, and regulatory
penalties, disruption of our operations and the services we provide
to customers, damage to our reputation, and a loss of confidence in
our products and services, each of which could adversely affect our
business, financial condition, results of operations and
prospects.
•We
rely on licenses and service agreements to use the intellectual
property rights of affiliated and third parties that are
incorporated into or used in our products and services. Failure to
renew or expand existing licenses or service agreements may require
us to modify, limit or discontinue certain product or services,
which could materially affect our business, financial condition,
results of operations and prospects.
•We
are a “controlled” company within the meaning of the NYSE rules
and, as a result, we qualify for, and intend to rely on, exemptions
from certain corporate governance requirements. You will not have
the same protections as those afforded to stockholders of companies
that are subject to such governance requirements.
•Pursuant
to the Tax Receivable Agreement, dated as of December 29, 2020, by
and among the Special Limited Partner, RSILP, the Sellers and the
Sellers’ Representative (the “Tax Receivable Agreement” or “TRA”),
the Special Limited Partner is required to pay to the Sellers
and/or the exchanging holders of RSILP Units, as applicable, 85% of
the net income tax savings that we and our consolidated
subsidiaries (including the Special Limited Partner) realize as a
result of increases in tax basis in RSILP’s assets related to the
transactions contemplated under the Business Combination Agreement
and the future exchange of the Retained RSILP Units (for shares of
Class A Common Stock (or cash) pursuant to the RSILP A&R LPA
and tax benefits related to entering into the Tax Receivable
Agreement, including tax benefits attributable to payments under
the Tax Receivable Agreement, and those payments may be
substantial.
The summary risk factors described above should be read together
with the text of the full risk factors below and in the other
information set forth in this Annual Report, including our
consolidated financial statements and the related notes, as well as
in other documents that we file with the SEC. If any such risks and
uncertainties actually occur, our business, prospects, financial
condition and results of operations could be materially and
adversely affected. The risks summarized above or described in full
below are not the only risks that we face. Additional risks and
uncertainties not currently known to us, or that we currently deem
to be immaterial may also materially adversely affect our business,
prospects, financial condition and results of
operations.
Risks Related to Our Business and Industry
Competition in the online and retail sports betting and online
gaming industry is intense and, as a result, we may fail to attract
and retain customers, which may negatively impact our operations
and growth prospects.
The industries in which we operate are characterized by intense
competition. We compete against other providers of retail or online
sports betting and online or bricks-and-mortar casino, as well as
against providers of online and mobile entertainment and leisure
products more generally. Other companies that provide these
products and services are often established and well-financed, and
other well-capitalized companies may introduce competitive products
or services. Our competitors may spend more money and time on
developing and testing products and services, undertake more
extensive or far-reaching marketing campaigns, adopt more
aggressive pricing, bonusing or promotions or otherwise develop
more commercially successful products or services than ours, which
could negatively impact our business. Our competitors may also
develop products, features or services that are similar to ours or
that achieve greater market acceptance. New competitors, whether
licensed or not, may enter the retail or online sports betting or
gaming industries. If we are unable to maintain or improve our
market share, or if our offerings do not continue to be popular,
our business, financial condition, results of operations and
prospects could be adversely affected.
Competitive pressures may also adversely affect our margins. For
example, as competition increases, we may need to lower our margins
in order to attract or retain customers. Further, as we expand to
become a more national brand, we may need to increase our marketing
spending, as we have recently been doing, to compete more
effectively.
We operate in the global gaming and entertainment industry with our
online casino, online sports betting, retail sports betting and
social gaming offerings. Our customers face a vast array of
entertainment choices. Other forms of entertainment, such as
television, movies and digital streaming and on-demand services
(which continue to gain popularity), social media, sporting events
and in-person casinos, are more well-established, and our customers
may view them as offering greater variety, affordability,
interactivity and enjoyment. We compete with these and other forms
of entertainment for our customers’ discretionary time and income.
If we are unable to sustain sufficient interest in our online and
retail product and service offerings in comparison to other forms
of entertainment, including new forms of entertainment, our
business, financial condition, results of operations and prospects
could be adversely affected.
Our ability to growth our revenue in the future will depend, in
large part, upon our ability to attract new customers to our
offerings and retain and engage existing customers, as well as
continued user adoption of online casino and retail and online
sports betting more generally. Growth in the online casino, sports
betting and gaming industries and the level of demand for and
market acceptance of our offerings will be subject to a high degree
of uncertainty. We cannot provide assurance that customer adoption
of our offerings will continue at their current levels or increase
in the future (in particular in light of the ongoing COVID-19
pandemic, which has significantly impacted many types of in-person
entertainment as well as global supply chains), that the industry
will achieve more widespread acceptance or that we will be able to
retain our customers if we are unable to keep pace with
technological innovation and customer experiences.
Our projections, including for revenues, market share, expenses and
profitability, are subject to significant risks, assumptions,
estimates and uncertainties and may therefore differ materially
from our expectations.
We operate in rapidly changing and competitive industries, and our
projections are subject to risks and assumptions made by management
with respect to our industries. Operating results are difficult to
forecast because they generally depend on our assessment of the
timing of adoption of future legislation and regulations by
different states and countries as well as anticipated tax rates in
such states and countries, all of which are uncertain. Furthermore,
if we invest in new product development or distribution channels
that do not achieve significant commercial success, whether because
of competition or otherwise, we may not recover the often
substantial up-front costs of developing and marketing those
products and distribution channels, or recover the opportunity cost
of diverting management and financial resources away from other
products or distribution channels.
Additionally, as described below under “—
Economic downturns and political and market conditions beyond our
control, including reduced consumer discretionary spending, could
adversely affect our business, financial condition, results of
operations and prospects,”
our business may be affected by reduced consumer spending from time
to time as a result of factors that may be difficult to predict.
This may result in decreased revenue, and we may be unable to adopt
measures in a timely manner to mitigate any unexpected shortfall in
income. This inability could cause our operating results in a given
quarter to be higher or lower than expected. If actual results
differ from our estimates, analysts may negatively react, and our
stock price could be materially impacted.
We have a history of losses and we may continue to incur losses in
the future.
Since our formation in 2012, we have experienced net losses and
negative cash flows from operations. We experienced net losses in
accordance with accounting principles generally accepted in the
United States of America of $71.1 million and $131.6 million in the
years ended December 31, 2021 and 2020, respectively. We may
continue to experience losses in the future, and we cannot assure
you that we will achieve profitability. We may continue to incur
significant losses in future periods. We expect our operating
expenses to increase in the future as we expand our operations in
existing and new markets. Furthermore, as a public company we have
incurred and expect to continue to incur additional legal,
accounting and other expenses that we did not incur as a private
company. If our revenue does not grow at a greater rate than our
expenses, we will not be able to achieve or maintain profitability.
We may incur significant losses in the future for many reasons,
including those described in the other risks and uncertainties
described in this Annual Report. Additionally, we may encounter
unforeseen expenses, operating delays, or other unknown factors
that may result in losses in future periods. If our expenses exceed
our revenue, our business may be negatively impacted and we may
never achieve or maintain profitability.
Our operating results may vary, which may make future results
difficult to predict with certainty.
Our results of operations can fluctuate due to seasonal trends and
other factors such as level of customer engagement, online casino
and sports betting results and other factors that are outside of
our control or that we cannot reasonably predict. Our quarterly
financial performance depends on, among other things, our ability
to attract and retain customers. Customer engagement in our online
casino and sports betting offerings may vary due to numerous
factors, including customers satisfaction with our platform, the
number and timing of sporting events, the length of professional
sports seasons, our offerings and those of our competitors, our
marketing efforts, climate and weather conditions, public sentiment
or an economic downturn. As customer engagement varies, so may our
quarterly financial performance.
Our quarterly financial results may also be impacted by the number
and amount of betting losses and jackpot payouts we experience.
Although our losses are limited per stake to a maximum payout in
our online casino offering, when looking at bets across a period of
time, these losses can be significant. As part of our online casino
offering, we offer progressive jackpot games. Each time a customer
plays a progressive jackpot game, we contribute a portion of the
amount bet to the jackpot for that game or group of games. When a
progressive jackpot is won, the jackpot is paid out and is reset to
a predetermined base amount. As winning the jackpot is determined
by a random mechanism, we cannot foresee when a jackpot will be won
and we do not insure against jackpot payouts. Paying the
progressive jackpot decreases our cash position and depending upon
the size of the jackpot it may have a significant negative affect
on our cash flow and financial condition.
Our online and retail sports betting operations experience
seasonality based on the relative popularity of certain sporting
events. Although sporting events occur throughout the year, our
online sports betting customers are most active during the American
football season as well as during the NBA and NCAA basketball
seasons. In addition, the suspension, postponement or cancellation
of major sports seasons and sporting events due to COVID-19 or
other reasons such as lock outs or strikes like the currently
ongoing MLB lockout that began in December 2021, may adversely
impact our quarterly results.
Recruitment and retention of our employees, including certain key
employees, is vital to growing our business and meeting our
business plans. The loss of any of our executives or other key
employees could harm our business.
We depend on a limited number of key personnel to manage and
operate our business, including both our Executive Chairman and our
CEO. The leadership of our current executive officers has been a
critical element of our success and the departure, death or
disability of any one of our executive officers or other extended
or permanent loss of any of their services, or any negative market
or industry perception with respect to any of them or their loss,
could have a material adverse effect on our business.
Our ability to compete and grow depends in large part on the
efforts and talents of our employees. Labor is subject to external
factors that are beyond our control, including our industry’s
highly competitive market for skilled workers and leaders, cost
inflation, the COVID-19 pandemic and workforce participation rates.
Our employees, particularly engineers and other product developers,
are in high demand, and we devote significant resources to
identifying, hiring, training, successfully integrating, and
retaining these employees. Because we face significant competition
for personnel to attract top talent, we have had to offer, and
believe we will need to continue to offer, competitive compensation
packages before we can validate the productivity of those
employees. In addition, the recent move by many companies to offer
a remote or
hybrid work environment may increase the competition for such
employees from employers outside of our traditional office
locations. To retain employees, we also may need to increase our
employee compensation levels in response to competition. We cannot
provide assurance that we will be able to attract or retain such
highly qualified personnel in the future. In addition, the loss of
employees or the inability to hire necessary skilled employees
could result in significant disruptions to our business, and the
integration of replacement personnel could be time-consuming,
expensive and cause additional disruptions to our business. If we
do not succeed in attracting, hiring and integrating qualified
personnel, or retaining and motivating existing personnel, we may
be unable to grow effectively and our business, financial
condition, results of operations and prospects could be adversely
affected.
Clear errors in the posting of sports betting odds or event
information have occurred occasionally, resulting in large
liabilities. To date, it has been general industry practice to void
bets associated with such clear errors or to correct the odds, but
it cannot be assured that in every case of such clear error
regulators will continue the practice of approving the voiding of
such errors.
Our sports betting offerings allow our customers to bet across
thousands of sports events. The odds for such events are set
through a combination of algorithmic and manual odds-making, with
bet acceptance also being a combination of automatic and manual
acceptance. At times, the odds offered for or the information about
an event on our website or app are incorrect. For example, such
errors have consisted of inverted lines between teams, start times
of games that, due to time zone differences, have already commenced
or odds that are significantly different from the true odds of the
outcome in a way that reasonable persons would agree is an error.
Such errors have, in certain instances, resulted in large
liabilities. When such errors occur, it is currently commonly
accepted in nearly all jurisdictions for operators to void bets
associated with such clear errors. Further, in mature
jurisdictions, bets based upon clear error can be voided without
prior regulatory approval. However, there can be no guarantee that
this voiding of bets practice will continue. If regulators were to
not allow voiding of bets associated with clear errors, we could be
subject to covering significant liabilities associated with such
errors.
The success, including win or hold rates, of existing or future
online offerings depends on a variety of factors and is not
completely controlled by us.
The online casino and retail and online sports betting businesses
are characterized by an element of chance. Accordingly, we employ
theoretical win rates to estimate what a certain type of online
casino or retail or online sports bet, on average, will win or lose
in the long run. Revenue is impacted by variations in the hold
percentage (the ratio of winnings to total amount bet) of the
online casino and retail and online sports betting we offer to our
customers. We use the hold percentage as an indicator of an online
casino game or retail or online sports bet’s performance against
its expected outcome. Although each online casino or retail or
online sports bet generally performs within a defined statistical
range of outcomes in the long run, actual outcomes may vary for any
given period, particularly in the short term. For online casino and
retail and online sports betting, the element of chance may affect
win rates (hold percentages); these win rates, particularly for
retail and online sports betting, may also be affected in the short
term by factors largely beyond our control, such as unanticipated
event outcomes, a customer’s skill, experience and behavior, the
mix of games played or bets placed, customer financial resources,
the volume of bets placed and the amount of time spent gambling.
For online casino games, it is possible a random number generator
outcome or game will malfunction and award errant prizes. For
retail and online sports betting, it is possible that erroneous or
incorrect odds are posted that are highly favorable to bettors and
bets are placed and/or winning are paid before the odds are
corrected. Additionally, odds compilers and risk managers are
capable of human error, so even if our betting offerings are
subject to a capped payout, significant volatility can occur. As a
result of the variability in these factors, the actual win rates on
our online casino games and retail and online sports bets may
differ from the theoretical win rates we have estimated and could
result in our customers’ winnings exceeding those anticipated. The
variability of win rates (hold rates) also has the potential to
adversely affect our business, financial condition, results of
operations, prospects and cash flows.
Our success also depends in part on our ability to anticipate and
satisfy customer preferences in a timely manner. As we operate in a
dynamic environment characterized by rapidly changing industry,
technological and legal standards, our offerings are subject to
changing standards and customer preferences that cannot be
predicted with certainty. We need to continually introduce new
technologies, offerings or features and identify future
technologies, offerings or features that complement our existing
platform and offerings, respond to changing standards and our
customers’ preferences and improve our existing platform and
offerings to maintain or increase our customer engagement and
growth of our business. We may be unable to compete effectively
unless our offerings keep up with trends in the digital sports
entertainment and gaming industries, or trends in new gaming
products. If we are unable to anticipate or satisfy the changing
industry, technological or legal standards or customer preferences
in a timely manner or within reasonable cost parameters, or if
we
are unable to appropriately and timely train our personnel to
operate within these new standards and preferences, our business
could suffer. We also may not achieve the benefits that we
anticipate from any new technology, offering or feature, and a
failure to do so could result in higher than anticipated costs,
lower customer demand or could otherwise impair our operating
results.
If we fail to detect fraud or theft, including by our customers and
employees, our reputation may suffer, which could harm our brand
and reputation and negatively impact our business, financial
condition, results of operations and prospects, and can subject us
to investigations and litigation.
We have in the past incurred, and may in the future incur, losses
from various types of financial fraud, including use of stolen or
fraudulent credit card data, customer claims of unauthorized
payments and attempted payments or cash outs by customers with
insufficient funds. Bad actors use increasingly sophisticated
methods to engage in illegal activities involving personal
information, such as unauthorized use of another person’s identity,
account information or payment information, and unauthorized
acquisition or use of credit or debit card details, bank account
information and mobile phone numbers and accounts. Under current
credit card practices, we may be liable for use of funds on our
platform with fraudulent credit card data, even if the associated
financial institution approved the credit card
transaction.
Fraud or other forms of cheating by our customers may involve
various tactics, including collusion with our employees and
exploiting loopholes in our promotions or offerings. Successful
exploitation of our systems could harm our reputation and
negatively affect our offerings and customer experience. Failure to
discover such fraud or cheating in a timely manner could harm our
operations. Negative publicity related to such fraud or cheating
could adversely affect our reputation, potentially causing a
material adverse effect on our business, financial condition,
results of operations and prospects. Additionally, we may
inadvertently send overly generous promotions that customers or
regulators force us to honor. If any such issues were to occur with
our existing platform or offerings, substantial engineering,
marketing and management resources may be diverted from other
projects to correct these issues, which may delay other projects
and the achievement of our strategic objectives.
In addition, any misappropriation of, or access to, customers’ or
other proprietary information or other breach of our information
security could result in legal claims or proceedings, including
regulatory investigations and actions, or liability for failure to
comply with privacy and information security laws, including for
failure to protect personal information or for misusing personal
information, which could disrupt our operations, force us to modify
our business practices, damage our reputation and expose us to
claims from our customers, regulators, employees and other persons,
any of which could have an adverse effect on our business,
financial condition, results of operations and
prospects.
Despite measures we have taken to detect and reduce the occurrence
of fraudulent or other malicious activity on our platform, we
cannot guarantee that any of our measures will be effective or will
scale efficiently with our business. Our failure to adequately
detect or prevent fraudulent transactions could harm our reputation
or brand, result in litigation or regulatory action and lead to
expenses that could adversely affect our business, financial
condition, results of operations and prospects.
We rely on strategic relationships with local partners such as
land-based casinos or professional sports teams to be able to
provide our offerings in certain jurisdictions. If we cannot
establish and manage relationships with these partners, our
business, financial condition, results of operations and prospects
could be adversely affected.
Some jurisdictions’ betting and gaming laws limit online casino,
online sports betting and retail sports betting to a finite number
of local entities, such as land-based casinos, tribes, tracks or
professional sports teams, which own one or more “skins” under that
jurisdiction’s law. A “skin” is a legally authorized license from a
jurisdiction to offer online sports betting or online casino. The
“skin” provides a market access opportunity for retail and online
betting and gaming operators to operate in the jurisdiction pending
licensure and other required approvals by the relevant gaming
regulator. The entities that control those “skins’ and the numbers
of “skins” available are typically determined by a jurisdiction’s
betting and gaming laws. In most jurisdictions where we offer
online casino and sports betting, we currently rely on a casino,
tribe, track or professional sports team to get a “skin.” If we
cannot establish, renew or manage our relationships with our local
partners, our relationships could terminate, and we would not be
allowed to operate in those jurisdictions until we enter into new
ones. As a result, our business, financial condition, results of
operations and prospects could be adversely affected.
Further, in certain jurisdictions in which we operate where we are
required to have a relationship with a local partner, customers who
want to participate in online sports betting or online casino may
be required to sign-up for an online account at our retail location
within the facilities of our partners. Certain of these facilities
were closed by government
order for a time in response to the COVID-19 pandemic. Although
these facilities have re-opened, if they were to close again or
have limited hours due to the ongoing COVID-19 pandemic, our
ability to register new customers from these states could be
negatively impacted. On the other hand, the re-opening of these
facilities could slow the growth of our online offerings as
consumers will have the ability to spend time and money at
land-based facilities instead of with our online
offerings.
Our current and projected performance relies heavily upon continued
compatibility and interoperability between our app, platform and
the major mobile operating systems, distribution of our offerings
on third-party platforms and high-bandwidth data capabilities.
Disruptions in the availability of these may negatively impact our
business, financial conditions, results of operations and
prospects.
Our customers primarily access our online sports betting and online
casino offerings through our app on their mobile devices, and we
believe that this will continue going forward. To enable our
customers to use our offerings through our app on their mobile
devices, our app must be compatible with the major mobile operating
systems such as iOS and Android. We rely heavily on third-party
platforms to distribute our app and offerings, interoperability of
our platform with popular mobile operating systems, technologies,
networks and standards and continued high-bandwidth data
capabilities. Third parties with whom we do not have any formal
relationships control the design of mobile devices and operating
systems. These parties frequently introduce new devices, and from
time to time they may introduce new operating systems or modify
existing ones. Network carriers may also impact the ability to
download apps or access specified content on mobile devices.
Further, we rely upon third-party platforms for distribution of our
app and offerings. Our online sports betting and online casino
offerings are primarily distributed through the Apple App Store,
the Google Play store and traditional websites. In light of this,
the promotion, distribution and operation of our app are subject to
the applicable distribution platform terms and policies for
application developers, which are very broad and subject to
frequent changes and interpretation and may not be uniformly
enforced across all applications and with all
publishers.
Moreover, we are, and will continue to be, dependent on the
interoperability of our platform with popular mobile operating
systems, such as iOS and Android, technologies, networks and
standards that we do not control. Any changes, bugs, technical or
regulatory issues in such systems, or any changes in our
relationships with mobile manufacturers and carriers, or in their
terms of service or policies that negatively affect our offerings’
functionality, or that reduce or eliminate our ability to
distribute our offerings, provide preferential treatment to
competitive products, limit our ability to deliver our offerings,
or impose fees or other charges related to delivering our
offerings, could adversely affect the use and monetization of our
offerings on mobile devices.
Our offerings require high-bandwidth data capabilities for
placement of time-sensitive bets and streaming of content. If
high-bandwidth capabilities do not continue to grow or grow more
slowly than anticipated, particularly for mobile devices, our
customer growth, retention and engagement may be negatively
impacted. To deliver high-quality content over cellular networks,
our offerings must work well with a range of mobile technologies,
systems, networks, regulations and standards that we do not
control. In particular, any future changes to the iOS or Android
operating systems (which likely will occur) may impact the
accessibility, speed, functionality and other performance aspects
of our platform. In addition, the adoption of any laws or
regulations that adversely affect the growth, popularity or use of
the Internet, including laws governing Internet neutrality, could
decrease the demand for our offerings and increase our cost of
doing business. Specifically, any laws that would allow mobile
providers in the jurisdictions in which we operate to impede access
to content or otherwise discriminate against content providers like
us over their data networks, could have a material adverse effect
on our business, financial condition, results of operations and
prospects.
Furthermore, if it becomes more difficult for our customers to
access and use our offerings on their mobile devices, if they
choose not to access or use our offerings on their mobile devices,
or if they choose to use mobile products that do not offer access
to our offerings, our customer growth, retention and engagement
could be materially harmed. Additionally, if any of the third-party
platforms used to distribute our offerings were to limit or
disallow advertising on their platforms for whatever reason or
technologies are developed that block the display of our ads, our
ability to generate revenue could be negatively impacted. These
changes could materially impact our business activities and
practices, and if we or our advertising partners are unable to
timely and effectively adjust to those changes, there could be an
adverse effect on our business, financial condition, results of
operations and prospects.
Our growth prospects may suffer if we are unable to develop
successful offerings or if we fail to pursue additional offerings.
In addition, if we fail to make the right investment decisions in
our offerings and technology platform, we may not attract and
retain customers and our revenue and results of operations may
decline.
We were founded in 2012 and have primarily focused our efforts
since then on growing our current offerings. We have rapidly
expanded, and we anticipate expanding further as new markets open
up, our offerings mature and we pursue our growth strategies. The
industries in which we operate are characterized by rapid
technological change, evolving industry, regulatory and legal
standards, frequent new offering introductions and changes in
customer demands and expectations. To keep pace with the
technological developments, achieve product acceptance and remain
relevant to customers, we will need to continue developing new and
upgraded functionality of our offerings and adapt to new business
environments and competing technologies and products developed by
our competitors. The process of developing new technology is
complex, costly and uncertain. To the extent we are unable to adapt
to new technologies and/or standards, experience delays in
implementing adaptive measures or fail to accurately predict
emerging technological trends and the changing needs or preferences
of customers, we may lose customers.
The requirements of being a public company may strain our resources
and divert management’s attention, and the increases in legal,
accounting and compliance expenses as a result of being a public
company may be greater than we anticipate.
We became a public company in December 2020, and as a public
company (and particularly after we are no longer an “emerging
growth company”) we incur significant legal, accounting and other
expenses that we did not incur as a private company. We are subject
to the reporting requirements of the Securities Exchange Act of
1934 (the “Exchange Act”) and must comply with the applicable
requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall
Street Reform and Consumer Protection Act, as well as the rules and
regulations subsequently implemented by the SEC and the listing
standards of the New York Stock Exchange (the “NYSE”), including
applicable corporate governance requirements and establishing and
maintaining effective disclosure and financial controls. Compliance
with these rules and regulations can be complex and burdensome. Our
management and other personnel devote a substantial amount of time
to these compliance initiatives. Moreover, these rules and
regulations increase our historical legal and financial compliance
costs and make some activities more time-consuming and costly. For
example, the Business Combination and becoming a public company has
made it more difficult and expensive for us to obtain director and
officer liability insurance, and could also make it more difficult
for us to attract and retain qualified board members as compared to
when we were a private company. In particular, we have incurred and
continue to expect to incur significant expenses and devote
substantial management effort toward ensuring compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act, which will
increase when we are no longer an “emerging growth company.” We
have hired, and may need to continue to hire, additional accounting
and financial staff, and engage outside consultants, all with
appropriate public company experience and technical accounting
knowledge, and maintain an internal audit function, which have and
will likely continue to increase our operating expenses. Moreover,
we could incur additional compensation costs if we decide to pay
cash compensation closer to that of other public companies, which
would increase our general and administrative expenses and could
materially and adversely affect our profitability. We continue to
evaluate these rules and regulations, and cannot predict or
estimate the amount of additional costs we may incur or the timing
of such costs.
Our failure to maintain adequate financial, information technology
and management processes and controls has in the past resulted in,
and could in the future result in, material weaknesses that could
lead to errors in our financial reporting, which in turn could
adversely affect our business.
As an emerging growth company, we are currently exempt from certain
of the SEC’s internal control reporting requirements. However, we
will lose our emerging growth company status and become subject to
additional internal control over financial reporting management and
auditor attestation requirements in the year in which we are deemed
to be a large accelerated filer, which occurs once we are subject
to Exchange Act reporting requirements for 12 months, have filed at
least one SEC annual report and the market value of our common
equity held by non-affiliates exceeds $700 million as of the end of
the prior fiscal year’s second fiscal quarter.
While we have not identified any “material weaknesses” in our
internal control over financial reporting as of and for the fiscal
year ended December 31, 2021, we have identified material
weaknesses in the past. For instance, as of and for the year ended
December 31, 2020 and the quarters ended March 31, 2021 and June
30, 2021, we identified a material weakness in our internal control
over financial reporting related to the accounting for a
significant and unusual transaction related to the warrants we
issued in connection with our initial public offering in February
2020 and the closing of the Business Combination in December 2020.
As a result of this material weakness, our management concluded
that our
disclosure controls and procedures were not effective as of
December 31, 2020, March 31, 2021 and June 30, 2021. This
material weakness resulted in a material misstatement of our
warrant liabilities, change in fair value of warrant liabilities,
additional paid-in capital, accumulated deficit, non-controlling
interests and related financial disclosures for the affected
periods. Following the identification of the material weakness and
other control deficiencies, we implemented measures to remedy the
same.
We can give no assurance that any measures we take in the future
will remediate any material weakness we may identify or that any
additional material weaknesses or restatements of financial results
will not arise in the future due to a failure to implement and
maintain adequate disclosure controls and procedures or internal
control over financial reporting or circumvention of these
controls. In addition, even if we are successful in strengthening
our controls and procedures, in the future those controls and
procedures may not be adequate to prevent or identify
irregularities or errors or to facilitate the fair presentation of
our consolidated financial statements. Furthermore, we may be
unable to complete our evaluation, testing and any required
remediation with respect to any identified material weakness in a
timely fashion.
In addition, our current controls and any new controls that we
develop may become inadequate because of design-related issues and
changes in our business, including increased complexity resulting
from any revenue sharing arrangements and expansion into new
markets, in particular internationally. Any failure to implement
and maintain effective internal controls over financial reporting
could adversely affect the results of assessments by our
independent registered public accounting firm and their attestation
reports. If we are unable to certify the effectiveness of our
internal controls or remedy the identified material weakness, or if
our internal controls have any additional material weaknesses, we
may not detect errors timely, our consolidated financial statements
could be misstated, and we could be subject to regulatory scrutiny
and a loss of confidence by stakeholders, which could harm our
business and adversely affect the market price of our
securities.
Due to the nature of our business, we are subject to taxation in
numerous jurisdictions and changes in, or new interpretation of,
tax laws, tax rulings or their application by tax authorities could
result in additional tax liabilities and could materially affect
our business, financial condition, results of operations and
prospects.
Our tax obligations are varied and include U.S. federal, state, and
local and international taxes due to the nature of our business.
The tax laws that apply to our business are subject to
interpretation, and significant judgment is required in determining
our worldwide provision for income taxes. In the course of our
business, there will be many transactions and calculations where
the ultimate tax determination is uncertain.
The gaming industry represents a significant source of tax revenue
to the jurisdictions in which we operate. Gaming companies and B2B
providers in the gaming industry (directly and/or indirectly by way
of their commercial relationships with operators) are currently
subject to significant taxes and fees in addition to normal
corporate income taxes, and such taxes and fees are subject to
increase at any time. From time to time, various legislators and
other government officials have proposed and adopted changes in tax
laws, or in the administration, interpretation or enforcement of
such laws, affecting the gaming industry. In addition, any
worsening of economic conditions and the large number of
jurisdictions with significant current or projected budget
deficits, many of which have been made worse due to COVID-19, could
intensify government efforts to raise revenues through increases in
gaming and/or other taxes. It is not possible to determine with
certainty the likelihood of changes in tax laws or in the
administration, interpretation or enforcement of such laws. Any
material increase, or the adoption of additional taxes or fees,
could have a material adverse effect on our business, financial
condition, results of operations and prospects.
Additionally, tax authorities may impose indirect taxes on
Internet-related commercial activity or digital services based on
existing statutes and regulations which, in some cases, were
established prior to the advent of the Internet. Tax authorities
may interpret laws originally enacted for mature industries and
apply it to newer industries, such as ours. Such laws may be
applied inconsistently from jurisdiction to jurisdiction. Our
in-jurisdiction activities may vary from period to period, which
could result in differences in nexus from period to
period.
We are subject to periodic review and audit by domestic and foreign
tax authorities. Tax authorities may disagree with certain
positions we have taken or will take, and any adverse outcome of
such a review or audit could have a negative effect on our
business, financial condition, results of operations and prospects.
Although we believe our tax provisions, positions and estimates are
reasonable and appropriate, tax authorities may disagree with
certain positions we have taken. In addition, economic and
political pressures to increase tax revenue in various
jurisdictions may make resolving tax disputes favorably more
difficult.
Increases in our income tax rates, changes in income tax laws or
disagreements with tax authorities can adversely affect our
business, financial condition or results of
operations.
Increases in our income tax rates or other changes in income tax
laws in the United States or any particular jurisdiction in which
we operate could reduce our after-tax income from such jurisdiction
and adversely affect our business, financial condition or results
of operations. Existing U.S. tax laws have been and could in the
future be subject to significant change. For example, in December
2017, the 2017 U.S. Tax Cuts and Jobs Act (the “TCJA”) was signed
into law in the United States, which provided for significant
changes to then-existing tax laws and additional guidance issued by
the IRS pursuant to the TCJA may continue to impact us in future
periods. Additional changes in the U.S. tax regime, including
changes in how existing tax laws are interpreted or enforced, can
adversely affect our business, financial condition or results of
operations.
We will also be subject to regular reviews, examinations and audits
by the IRS and other taxing authorities with respect to income and
non-income-based taxes. Economic and political pressures to
increase tax revenues in jurisdictions in which we operate, or the
adoption of new or reformed tax legislation or regulation, may make
resolving tax disputes more difficult and the final resolution of
tax audits and any related litigation can differ from our
historical provisions and accruals, resulting in an adverse impact
on our business, financial condition or results of
operations.
We have international business operations, which subjects us to
additional costs and risks that could adversely affect our
operating results.
Portions of our operations are located in foreign jurisdictions
such as Colombia, Estonia and Canada, and we may in the future
pursue opportunities in other non-U.S. jurisdictions such as
Mexico. Such operations may expose us to high levels of currency,
political, economic and compliance risk. Compliance with
international, Colombian, Estonian, Canadian, U.S. and other laws
and regulations that apply to our international operations
increases our cost of doing business. As a result of our
international operations, we are subject to a variety of risks and
challenges in managing an organization operating in various
countries, including those related to:
•challenges
caused by distance as well as language, cultural and time zone
differences;
•general
economic conditions in Colombia, Estonia and Canada (and any other
jurisdictions where we pursue non-U.S. opportunities);
•regulatory
changes;
•political
unrest, government instability, terrorism and the potential for
other hostilities;
•public
health risks, particularly in areas in which we have significant
operations;
•constantly
evolving geopolitical environment, international and domestic
political, regulatory and economic landscapes, including trends
such as populism, economic nationalism and negative sentiment
toward multinational companies;
•trade
actions, tariffs, export controls and sanctions;
•longer
payment cycles and difficulties in collecting accounts
receivable;
•overlapping
or changes in tax regimes;
•differing
labor and employment laws, rules, regulations and
practices;
•capital
controls, difficulties in transferring funds from certain countries
and managing foreign exchange rate fluctuations and
risks;
•laws
such as the U.S. Foreign Corrupt Practices Act and local laws that
also prohibit corrupt payments to governmental
officials;
•local
laws that prohibit money-laundering and financing of terrorist and
other unlawful financial activities; and
•reduced
protection for intellectual property rights in some
countries.
If we are unable to expand or adequately staff and manage our
existing development operations located outside of the United
States, we may not realize, in whole or in part, the anticipated
benefits from these initiatives (including lower development
expenses), which in turn could materially adversely affect our
business, financial condition, results of operations and
prospects.
Negative publicity of us or an adverse shift in public opinion
regarding sports betting or online casino may adversely impact our
business and customer retention.
A negative change in the public’s opinion of sports betting or
online casino, or how politicians and other governmental
authorities view sports betting or online casino could result in
future legislation or new regulations restricting or prohibiting
certain (or all) sports betting or online casino activities in
certain jurisdictions, the result of which may negatively impact
our business, financial condition, results of operations and
prospects. Further, negative publicity about us or our offerings,
platform or customer experience or the sports betting and online
casino industry generally could lead to new restrictions and
limitations on us or sports betting and online casino generally,
which may negatively impact our business, financial condition,
results of operations and prospects.
To date, COVID-19 has significantly impacted our business and the
impact of any eventual recovery from the ongoing COVID-19 pandemic
on our business, operating results and growth rates is currently
unknown or uncertain.
To date, COVID-19 has significantly impacted our business. It has
directly impacted our business, beyond disruptions in normal
business operations, primarily through changes in consumer habits
as a result of people being required to work from home and limit
traveling or otherwise voluntarily doing such. During the period of
these mandatory or voluntary work-from-home orders and travel
restrictions, our user activity significantly increased and has
continued to remain strong as many of these orders were lifted.
COVID-19 has also impacted sports betting due to the rescheduling,
reconfiguring, suspension, postponement and cancellation of
portions of major sports seasons and sporting events. The timing of
many major sporting events is still uncertain. However,
bricks-and-mortar casino closures and certain ongoing limitations
on visitations due to COVID-19 have provided additional
opportunities for us to market online gaming to traditional
bricks-and-mortar casino patrons. If and when the United States and
the rest of the world recovers from the ongoing COVID-19 pandemic
and bricks-and-mortar casino and other traditional forms of leisure
and entertainment such as movie theaters and sporting events return
to their pre-COVID-19 levels, it is currently unknown or uncertain
how such a recovery would impact our business, operating results,
growth rates and customer engagement levels.
Sports leagues shortening, delaying or cancelling their events or
seasons due to COVID-19 could adversely affect our business,
financial condition, results of operations and
prospects.
The outbreak of COVID-19 has resulted in, and may in the future
result in, among other things, suspension, shortening, delay and/or
cancellation of sports events and seasons. If the suspension,
shortening, delay or cancellation of sports events and/or seasons
continues, we may be unable to accept bets on such sports events or
sustain sufficient interest in our retail and online sports betting
offerings. Further, shortened seasons for sports leagues may result
in a smaller amount of money bet on sports events throughout the
course of each sport’s season. As a result, our business, financial
condition, results of operations and prospects could be adversely
affected.
We are dependent on RSG and certain of its affiliates to provide us
with certain services, which may not be sufficient to meet our
needs, and we may have difficulty finding replacement services or
be required to pay increased costs to replace these services to the
extent that our services agreement with RSG terminates or
expires.
Historically, RSG and certain of its affiliates have provided, and
in certain cases continue to provide, under a services agreement
between us and RSG, certain corporate and shared services related
to functions such as government affairs, certain business
development, insurance and other services. We reimburse RSG for all
third-party costs it incurs in providing services to us at cost
(with no mark-up) and reimburse RSG for an allocable portion of
payroll, benefits and overhead (calculated at 150% of an employee’s
salary, bonus and benefits cost) with respect to RSG employees who
perform or otherwise assist with providing services to us. While
RSG provides these services to us, we will be dependent on them for
services that are critical to our operation as a publicly traded
company, and our operational flexibility to modify or implement
changes with respect to such services and the amounts we pay for
them will be limited. If the services agreement with RSG terminates
or expires, we may be unable to replace these services or enter
into appropriate third-party agreements on terms, including cost
and quality, comparable to those that we receive under the services
agreement.
Although we may in the future replace some or all of the services
that RSG currently provides, we may encounter difficulties
replacing certain services or be unable to negotiate pricing or
other terms as favorable as those we currently have in
effect.
Risks Related to Government Regulation
Our business is subject to numerous U.S. and foreign laws, many of
which are unsettled and still developing. Any change in regulations
or their interpretation, or the regulatory climate applicable to
our business and offerings, or changes in tax rules and regulations
or interpretation thereof related to our business and offerings,
could adversely impact our ability to operate our business, which
could have a material adverse effect on our business, financial
condition, results of operations and prospects.
We are subject to laws and regulations relating to real-money
online casino and retail and online sports betting in the
jurisdictions in which we conduct our business or in some
circumstances, where our offerings are available. We are also
subject to the general laws and regulations that apply to all
e-commerce businesses, such as those related to privacy and
personal information, tax and consumer protection. These laws and
regulations vary among jurisdictions and future legislative and
regulatory action, court decisions or other governmental action,
which may be affected by, among other things, political pressures,
attitudes and climates, as well as personal biases, may have a
material impact on our operations and financial results. In
particular, some jurisdictions have introduced regulations or
legislation attempting to restrict or prohibit online gaming, while
others have taken the position that online gaming should be
licensed and regulated and have adopted or are considering
legislation and regulations to enable that to happen. Additionally,
some jurisdictions in which we may operate could presently be
unregulated or partially regulated and therefore more susceptible
to the enactment or change of laws and regulations.
We offer our real-money offerings in thirteen states that have
adopted legislation and regulations permitting online casino,
online sports betting or retail sports betting. In those states
that currently require a license or registration, we have obtained
the appropriate license or registration or have obtained a
provisional license. We also currently operate under one foreign
license in Colombia and expect to operate under applicable foreign
licenses in Ontario, Canada and Mexico during 2022.
In May 2018, the U.S. Supreme Court struck down as unconstitutional
PASPA. This decision effectively lifted federal restrictions on
sports betting, thus allowing states to determine by themselves the
legality of sports betting. Since the repeal of PASPA, numerous
states (plus Washington D.C.) have legalized online sports betting.
To the extent new real-money online casino or retail or sports
betting jurisdictions are established or expanded, we cannot
guarantee that we will be successful in penetrating such new
jurisdictions or expanding our business or customer base in line
with the growth of existing jurisdictions. If we are unable to
effectively develop and operate directly or indirectly within these
new jurisdictions or if our competitors are able to successfully
penetrate geographic jurisdictions that we cannot access or where
we face other restrictions, there could be a material adverse
effect on our business, financial condition, results of operations
and prospects. Our failure to obtain or maintain the necessary
regulatory approvals in jurisdictions, whether individually or
collectively, would have a material adverse effect on our business.
See “Business
— Government Regulation.”
To expand into new jurisdictions, we may need to be licensed and
obtain approvals of our offerings. This is a time-consuming process
that can be extremely costly and can divert management’s attention
away from operating the business. Any delays in obtaining or
difficulty in maintaining regulatory approvals needed for expansion
within existing jurisdictions or into new jurisdictions can
negatively affect our opportunities for growth, including the
growth of our customer base, or delay our ability to recognize
revenue from our offerings in any such jurisdictions.
Future legislative and regulatory action, and court decisions or
other governmental action, may have a material impact on our
operations and financial results. Governmental authorities could
view us as having violated local laws, despite our efforts to
obtain all applicable licenses or approvals. Further, governmental
authorities or courts could determine that our free-to-play, social
gaming offerings constitute unauthorized gambling or that
legislation is enacted in jurisdictions in which we operate
free-to-play, social gaming offerings that makes such offerings
unauthorized gambling, which could negatively impact our operations
and business results and expose us and certain of our third-party
providers, including the app stores that distribute our apps, to
potential litigation. There is also a risk that civil and criminal
proceedings, including class actions brought by or on behalf of
prosecutors, public entities, incumbent monopoly providers or
private individuals, could be initiated against us, Internet
service providers, credit card and other payment processors,
financial institutions, advertisers and others involved in the
online casino and gaming industries. Such potential proceedings
could involve substantial litigation expense, penalties, fines,
seizure of assets, injunctions or other restrictions being imposed
upon us, our licensees or other business partners, while diverting
the attention of key executives. Such proceedings could have
a
material adverse effect on our business, financial condition,
results of operations and prospects, as well as impact our
reputation.
There can be no assurance that legislation will not be proposed and
passed in jurisdictions relevant or potentially relevant to our
business to prohibit, legislate or regulate various aspects of the
online casino and retail and online gaming industries (or that
existing laws in those jurisdictions will not be interpreted or
enforced negatively). Compliance with any such legislation may have
a material adverse effect on our business, financial condition,
results of operations and prospects, either as a result of us
determining that a jurisdiction should be blocked, or because a
local license or approval may be costly for us or our business
partners to obtain and/or such licenses or approvals may contain
other commercially undesirable conditions.
In the United States, the UIGEA prohibits, among other things, a
business accepting a wager by means of the Internet where such
wager is prohibited by any federal or state law where initiated,
received or otherwise made. Under UIGEA severe criminal and civil
sanctions may be imposed on the owners and operators of such
systems and on financial institutions that process wagering
transactions. The law contains a safe harbor for wagers placed
within a single state (disregarding intermediate routing of the
transmission) where the method of placing the wager and receiving
the wager is authorized by that state’s law, provided the
underlying regulations establish appropriate age and location
verification.
The U.S. Illegal Gambling Business Act (“IGBA”) makes it a crime to
conduct, finance, manage, supervise, direct or own all or part of
an “illegal gambling business” and the U.S. Travel Act makes it a
crime to use the mail or any facility in interstate commerce with
the intent to “distribute the proceeds of any unlawful activity” or
“otherwise promote, manage, establish, carry on, or facilitate the
promotion, management, establishment, or carrying on, of any
unlawful activity.” For there to be a violation of either the IGBA
or the Travel Act there must be a violation of underlying state
law.
Until 2011, it was uncertain whether the Wire Act prohibited states
from conducting intrastate lottery transactions via the Internet if
such transactions crossed state lines. In late 2011, the Office of
Legal Counsel (the “OLC”) of the Department of Justice (“DOJ”)
issued an opinion that concluded that the prohibitions of the Wire
Act were limited to sports gambling and thus did not apply to state
lotteries at all (the “2011 DOJ opinion”). Following the issuance
of the 2011 DOJ opinion, within the past several years
state-authorized Internet casino gaming has been launched in
Connecticut, Delaware, Michigan, New Jersey, Pennsylvania and West
Virginia and state-authorized online poker has launched in
Delaware, Michigan, New Jersey, Nevada, Pennsylvania and West
Virginia. In 2018, at the request of the Criminal Division, the OLC
reconsidered the 2011 DOJ opinion’s conclusion that the Wire Act
was limited to sports gambling. On January 14, 2019, the OLC
published a legal opinion dated November 2, 2018 (the “2018 DOJ
opinion”), which concluded that the 2011 DOJ opinion had
incorrectly interpreted the Wire Act. In the 2018 DOJ opinion, the
OLC concluded that the restrictions on the transmission in
interstate or foreign commerce of bets and wagers in the Wire Act
were not limited to sports gambling but instead applied to all bets
and wagers. The OLC also found that the enactment of the UIGEA
described above did not modify the scope of the Wire Act. The OLC
acknowledged that its conclusion in the 2018 DOJ opinion, which was
contrary to the 2011 DOJ opinion, will make it more likely that the
executive branch’s view of the law will be tested in the courts.
Subsequently, a lawsuit was filed challenging the 2018 DOJ opinion
interpretation. At both the district and appellate court levels,
the courts held that the 2011 DOJ opinion was the correct
interpretation. The DOJ did not appeal the matter to the U.S.
Supreme Court. Consequently, at this time it appears that the 2011
DOJ opinion is the prevailing view with respect to the Wire Act’s
applicability; however, we cannot provide any assurance that there
won’t be future interpretations, challenges, case law or
legislation that may alter the Wire Act’s
applicability.
Our growth prospects depend on the legal status of real-money
gaming in various jurisdictions, and legalization may not occur in
as many states as we expect, may occur at a slower pace than we
anticipate or may be accompanied by legislative or regulatory
restrictions or taxes that make it impracticable or less attractive
to operate, which could adversely affect our future results of
operations and make it more difficult to meet our expectations for
financial performance.
Numerous states have legalized, or are currently considering
legalizing, real-money gaming, and our growth, business, financial
condition, results of operations and prospects significantly depend
upon the legalization of real-money gaming expanding to new
jurisdictions. Our business plan is partly based on real-money
gaming becoming legal for a specific percentage of the population
annually; however, this legalization may not occur as we have
anticipated. Additionally, if a large number of additional states
or the federal government enact real-money gaming legislation and
we are unable to obtain or are otherwise delayed in obtaining the
necessary licenses to operate online sports betting or online
gaming websites in U.S. jurisdictions where such games are
legalized, our future growth could be materially
impaired.
As we enter new jurisdictions, states or the federal government may
legalize real-money gaming in a manner unfavorable to us. As a
result, we may encounter legal, regulatory or political challenges
that are difficult or impossible to foresee and which could result
in an unforeseen adverse impact on projected revenues or costs
associated with the new opportunity. For example, certain states
require us to have a relationship with a local partner for online
sportsbook or online gaming access, which tends to increase our
costs of revenue. States that have established state-run monopolies
may limit opportunities for private sector participants like us.
States also impose substantial taxes on online sports betting and
online gaming revenue, in addition to sales taxes in certain
jurisdictions and a federal excise tax of 25 basis points on the
amount of each wager. As most state product taxes apply to various
measures of modified gross profit, tax rates, whether federal- or
state-based, that are higher than we expect will make it more
costly and less desirable for us to launch in a given jurisdiction,
while tax increases in any of our existing jurisdictions may
adversely impact our profitability.
Even in cases where a jurisdiction purports to license and regulate
online sports betting and online casino, the licensing and
regulatory regimes can vary considerably in their
business-friendliness and at times may be intended to provide
incumbent operators with advantages over new licensees. Thus, some
“liberalized” regulatory regimes are considerably more commercially
attractive than others.
Failure to comply with regulatory requirements or to successfully
obtain a license or permit applied for could adversely impact our
ability to comply with licensing and regulatory requirements or to
obtain or maintain licenses in other jurisdictions, or could cause
financial institutions, online platforms and distributors to stop
providing services to us.
Compliance with the various regulations applicable to real-money
gaming is costly and time-consuming. Regulatory authorities at the
foreign, U.S. federal, state and local levels have broad powers
with respect to regulating and licensing real-money gaming
operations and may revoke, suspend, condition or limit our gaming
licenses, impose substantial fines on us and take other actions,
any of which could have a material adverse effect on our business,
financial condition, results of operations and prospects. These
laws and regulations are dynamic and subject to potentially
differing interpretations, and various legislative and regulatory
bodies may expand current laws or regulations or enact new laws and
regulations regarding these matters. We strive to comply with all
applicable laws and regulations relating to our business. It is
possible, however, that these requirements may be interpreted and
applied in a manner that is inconsistent from one jurisdiction to
another and may conflict with other rules. Non-compliance with any
such law or regulations could expose us to claims, proceedings,
litigation and investigations by private parties and regulatory
authorities, as well as substantial fines and negative publicity,
each of which may materially and adversely affect our business,
financial condition, results of operations and
prospects.
Our ability to grow our business will depend on in part on our
ability to obtain and maintain licenses to make our offerings
available in a large number of jurisdictions or in heavily
populated jurisdictions. If we fail to obtain and maintain licenses
in large jurisdictions or in a greater number of mid-market
jurisdictions, this may prevent us from expanding the footprint of
our offerings, increasing our customer base and/or generating
revenues. We cannot be certain that we will be able to obtain and
maintain licenses and related approvals necessary to conduct our
online casino and retail and online sports betting operations. Any
failure to obtain and maintain licenses, registrations, permits or
approvals could have a material adverse effect on our business,
financial condition, results of operations and
prospects.
Any of our real-money gaming licenses could be revoked, suspended
or conditioned at any time. Losing a license in one jurisdiction
could trigger the loss of a license or affect our eligibility for
such a license in another jurisdiction, and any of such losses, or
potential for such loss, could cause us to cease offering some or
all of our offerings in the impacted jurisdictions. We may be
unable to obtain or maintain all necessary registrations, licenses,
permits or approvals, and could incur fines or experience delays
related to the licensing process, which could adversely affect our
operations. Our delay or failure to obtain or maintain licenses in
any jurisdiction may prevent us from distributing our offerings,
increasing our customer base and/or generating revenues. We cannot
provide assurance that we will be able to obtain and maintain the
licenses and related approvals necessary to conduct our gaming
operations. Any failure to maintain or renew our existing licenses,
registrations, permits or approvals could have a material adverse
effect on our business, financial condition, results of operations
and prospects.
Additionally, a gaming regulatory body may refuse to issue or renew
a gaming license or restrict or condition the same, based on our
past or present activities or our current or former directors,
officers, employees, stockholders or third parties with whom we
have relationships, which could adversely affect our business,
financial condition, results of operations and prospects. If
additional gaming regulations are adopted in a jurisdiction in
which we operate, such regulations could impose restrictions or
costs that could have a significant adverse effect on us. From time
to time, the legislatures of some of the jurisdictions in which we
have existing or planned operations introduce various proposals
that, if
enacted, could adversely affect our directors, officers, key
employees, or other aspects of our operations. To date, we believe
we have obtained all governmental licenses, findings of
suitability, registrations, permits and approvals necessary for our
operations. However, we can give no assurance that any additional
licenses, permits and approvals that may be required will be given
or that existing ones will be renewed or will not be revoked.
Renewal is subject to, among other things, continued satisfaction
of suitability requirements of our directors, officers, key
employees and stockholders. Any failure to renew or maintain our
licenses or to receive new licenses when necessary would have a
material adverse effect on our business, financial condition,
results of operations and prospects.
We follow the industry practice of restricting and managing betting
limits at the individual customer level based on individual
customer profiles and risk level; however, there is no guarantee
that states will allow operators such as us to impose limits at the
individual customer level.
Similar to a credit card company managing individual risk on the
customer level through credit limits, it is customary for retail
and online sports betting operators to manage customer betting
limits at the individual level to manage enterprise risk levels. We
believe this practice is beneficial overall because if it were not
possible, the betting options would be restricted globally and
limits available to customers would be much lower to insulate
overall risk due to the existence of a small segment of highly
sophisticated syndicates and algorithmic bettors, or bettors
looking to take advantage of site errors and omissions. We believe
virtually all online operators balance taking reasonable bets from
all customers against the risk of individual customers
significantly harming the business viability. We cannot assure you
that all state legislation and regulators will always allow
operators to execute limits at the individual customer level, or at
their sole discretion.
In some jurisdictions, our key executives, certain employees or
other individuals related to the business are subject to licensing
or compliance requirements. Failure by such individuals to obtain
the necessary licenses or comply with individual regulatory
obligations could cause the business to be non-compliant with its
obligations or imperil its ability to obtain or maintain licenses
necessary for the conduct of the business.
As part of obtaining real-money gaming licenses, the responsible
gaming authority generally determines suitability of certain
directors, officers and employees and, in some instances,
significant stockholders. The criteria used by gaming authorities
to make determinations as to who requires a finding of suitability
or the suitability of an applicant to conduct gaming operations
varies among jurisdictions, but generally requires extensive and
detailed application disclosures followed by a thorough
investigation. Gaming authorities typically have broad discretion
in determining whether an applicant should be found suitable to
conduct operations within a given jurisdiction. If any gaming
authority with jurisdiction over our business were to find an
applicable officer, director, employee or significant stockholder
of ours unsuitable for licensing or unsuitable to continue having a
relationship with us, we would be required to sever our
relationship with that person, including by requiring a sale of the
equity interests such individual holds in us to us or other third
party. Furthermore, such gaming authorities may require us to
terminate the employment of any person who refuses to file required
applications. Either result could have a material adverse effect on
our business, financial condition, results of operations and
prospects.
Our Charter includes provisions that may require stockholders to
sell their securities if the stockholder is deemed to be
“unsuitable” for purposes of certain gaming
regulations.
Our second amended and restated certificate of incorporation (the
“Charter”) provides that any equity interests of the Company owned
or controlled by an unsuitable person or its affiliates will be
subject to mandatory sale and transfer to either us or one or more
third party transferees and in such number and class(es)/series of
equity interests as determined by the Board in good faith
(following consultation with reputable outside and independent
gaming regulatory counsel) pursuant to a resolution adopted by a
majority of the directors of the Board.
Our gaming activities are regulated by gaming authorities in each
jurisdiction in which we operate. To operate in any given gaming
jurisdiction, we and our directors, officers, certain other key
employees and, in certain cases, our significant stockholders, must
be found suitable by the relevant gaming authority. Gaming
authorities typically have broad discretion in determining whether
an applicant is suitable to conduct or be associated with gaming
activities within a given jurisdiction. Though criteria for
suitability varies by jurisdiction, such criteria generally include
(among other things) an evaluation of the applicant’s reputation
for good character, criminal and financial history and character of
those with whom the applicant associates. Our association with
individuals or entities that are or are likely to be deemed
unsuitable in any particular jurisdiction would present risk to our
ability to obtain or maintain the gaming license we need to operate
in such jurisdiction.
Risks Related to Intellectual Property and Data
Security
We license certain trademarks and domain names to RSG and its
affiliates, and RSG’s and its affiliates’ use of such trademarks
and domain names may harm our business.
We entered into a license agreement (the “License Agreement”) with
RSG, pursuant to which we granted to it and its affiliates a
perpetual, royalty-free license to use in specific fields of use
certain trademarks and domain names that RSG and certain of its
affiliates assigned to us in connection with the Business
Combination. This license may be either exclusive or non-exclusive
based on the field of use and the particular trademark or domain
name. This license precludes our use of certain trademarks and
domain names in the exclusive fields of use. Certain trademarks and
domain names that we licensed to RSG may include the words “Rush
Street,” and RSG’s use of such trademarks and domain names may
disrupt our reputation in the marketplace, damage any goodwill we
may have generated, and otherwise harm our business, financial
condition, results of operations and prospects.
We rely on information technology and other systems and platforms,
and failures, errors, defects or disruptions therein could diminish
our brand and reputation, subject us to liability, disrupt our
business, affect our ability to scale our technical infrastructure
and adversely affect our operating results and growth prospects.
Our offerings, online gaming platform and other software
applications and systems, and certain third-party platforms that we
use could contain undetected errors.
Our technology infrastructure is critical to the performance of our
platform and offerings and to customer satisfaction. We devote
significant resources to network and data security to protect our
systems and data. However, our systems may not be adequately
designed with the necessary reliability and redundancy to avoid
performance delays or outages that could harm our business. We
cannot assure you that absolute security will be provided by the
measures we take to: detect, prevent, stop or respond to
cyber-attacks and protect our systems, data and customer
information; prevent outages, data or information loss; and prevent
or detect security breaches or fraud. Such measures include a
disaster recovery strategy for server and equipment failure,
back-office systems and the use of third parties for certain
cybersecurity services. We have experienced, and we may in the
future experience, disruptions, outages and other performance
problems on our platform or offerings due to a variety of factors,
including human or software errors, infrastructure changes and
capacity constraints. To date, such disruptions, individually and
in the aggregate, have not had a material impact on us; however,
future disruptions from unauthorized access to, fraudulent
manipulation of, or tampering with our systems, technological
infrastructure and data, or those of third parties, could result in
a wide range of negative outcomes, each of which could materially
adversely affect our business, financial condition, results of
operations and prospects.
Because our platform and offerings are complex and incorporate a
variety of hardware, proprietary software and third-party software,
our platform and/or offerings may contain errors, bugs, flaws or
corrupted data, which may become apparent only after their launch
and could result in unanticipated downtime or vulnerabilities that
could compromise our systems’ security. If an offering is
unavailable when customers attempt to access it or navigation
through our platform is slower than expected, customers may be
unable to use our offerings as desired and may be less likely to
return to our platform as often, if at all. Further, programming
errors, defects and data corruption could disrupt our operations,
adversely affect our customers’ experience, harm our reputation,
cause our customers to stop using our platform or offerings, divert
our resources or delay market acceptance of our offerings, any of
which could result in legal liability to us or harm our business,
financial condition, results of operations and prospects.
Insufficient business continuity management could diminish our
brands and reputation, subject us to liability, disrupt our
business and adversely affect our operating results and growth
prospects, and failure of planned availability and continuity
solutions and disaster recovery when activated in response to an
incident could result in system interruptions and degradation of
service.
If our customer base and engagement continue to grow, and the
amount and types of offerings continue to grow and evolve, we will
need additional technical infrastructure, including network
capacity and computing power, to continue to satisfy our customers’
needs. Such infrastructure expansion may be complex, and
unanticipated delays in completing these projects or availability
of components, in particular in light of supply chain issues caused
by the ongoing COVID-19 pandemic, may lead to increased project
costs, operational inefficiencies or interruptions in the delivery
or degradation of the quality of our offerings. In addition, there
may be issues related to this infrastructure that are not
identified during the testing phases of design and implementation,
which may become evident only after we have started to fully use
the underlying equipment or software, that could further degrade
the customer experience or increase our costs. As such, we could
fail to continue to effectively scale and grow our technical
infrastructure to accommodate increased demands. In addition, a
lack of resources (e.g., hardware, software, personnel and service
providers) could result in an inability to scale our services to
meet business needs, system interruptions, degradation of service
or operational mistakes. Our business also
may be subject to interruptions, delays or failures resulting from
adverse weather conditions, other natural disasters, power loss,
terrorism, cyber-attacks, public health emergencies (such as
COVID-19) or other catastrophic events, any of which could have a
material adverse impact on our business and
operations.
We believe that if our customers have negative experiences with our
offerings or if our brands or reputation are negatively affected,
customers may be less inclined to use our offerings or recommend
them to others. Thus, a failure or significant interruption in our
platform could harm our reputation, our business, financial
condition, results of operations and prospects.
Despite our security measures, our information technology and
infrastructure may be vulnerable to attacks by hackers or breached
due to employee error, malfeasance or other disruptions. Any such
breach could compromise our networks and the information stored
there could be accessed, publicly disclosed, lost, corrupted or
stolen. Any such access, disclosure, loss, corruption or theft
could result in legal claims or proceedings, liability under
applicable privacy and data protection laws, and regulatory
penalties, disruption of our operations and the services we provide
to customers, damage to our reputation, and a loss of confidence in
our products and services, each of which could adversely affect our
business, financial condition, results of operations and
prospects.
We and our business partners maintain significant amounts of data
electronically in locations around the world. The secure
maintenance and transmission of such data, which may include
customer and employee information is critical to our operations.
Our information technology and other systems that maintain and
transmit customer information, or the systems of third-party
service providers and business partners, may be compromised by
malicious third-party penetration of our network security, or the
network security of a third-party service provider or business
partner, or impacted by intentional or unintentional actions or
inaction by our employees or third-party service providers or
business partners. As a result, our customers’ information may be
lost, disclosed, corrupted, accessed or taken without such
customers’ consent. Given the data intensive nature of our
business, we have experienced attempts to breach our systems and
other similar incidents in the past. For example, we have been and
will likely continue to be subject to attempts to gain unauthorized
access to customer accounts through our information systems or
those we develop for our customers, including through phishing
attacks or credential stuffing by malicious actors who may try to
deploy viruses, worms or other malicious programs. To date, these
attacks have not had a material impact on our operations or
financial results, but we cannot assure you that they will not have
a material impact in the future, including by overloading our
systems and network and preventing our offerings from being
accessed by legitimate customers.
We rely on third-party encryption and authentication technology in
an effort to securely store and transmit confidential and sensitive
information. Advances in computer capabilities, new technological
discoveries or other developments may result in failures of this
technology to protect transaction data or other confidential and
sensitive information from being breached or compromised. In
addition, websites are often attacked through compromised
credentials, including those obtained through phishing and
credential stuffing. Our security measures, and those of our
third-party providers, may not detect or prevent all attempts to
breach our systems, denial-of-service attacks, viruses, malicious
software, break-ins, phishing attacks, social engineering, security
breaches or other attacks and similar disruptions that may
jeopardize the security of information stored in or transmitted by
our websites, apps, networks and systems or that we or such third
parties otherwise maintain, including payment card systems, which
may subject us to fines or higher transaction fees, or limit or
terminate our access to certain payment methods. We and such third
parties may not anticipate or prevent all types of attacks until
after they have already been launched. Further, techniques used to
obtain unauthorized access to, or sabotage, systems change
frequently and may not be known until launched against us or our
third-party service providers.
In addition, security breaches can also occur as a result of
non-technical issues, including intentional or inadvertent breaches
by our employees or by third parties. These risks may increase over
time as the complexity and number of technical systems and
applications we use increases. Breaches of our security measures or
those of our third-party providers, or cybersecurity incidents
could result in: unauthorized access to our sites, apps, networks
and systems; unauthorized access to and misappropriation of
customer or personnel data, including personally identifiable
information, or our or third parties’ other confidential or
proprietary information; viruses, worms, spyware or other malware
being served from our sites, apps, networks or systems; deletion or
modification of content or the display of unauthorized content on
our sites; interruption, disruption or malfunction of operations;
costs relating to breach remediation, deployment of additional
personnel and protection technologies, response to governmental
investigations and media inquiries and coverage; engagement of
third-party experts and consultants; or litigation, regulatory
action and other potential liabilities. In the past, the online
gaming industry has experienced social engineering, phishing,
malware and similar attacks and threats of denial-of-service
attacks, none of which to date have been material to our business;
however, such attacks could in the future have a material adverse
effect on our operations. If any of these security breaches should
occur and be
material, our reputation and brands could be damaged, our business
may suffer, we could be required to expend significant capital and
other resources to alleviate problems caused by such breaches, and
we could be exposed to a risk of loss, litigation or regulatory
action and possible liability. We cannot guarantee that recovery
protocols and backup systems will be sufficient to prevent data
loss. Actual or anticipated attacks may cause us to incur increased
costs, including costs to deploy additional personnel and
protection technologies, train employees and engage third-party
experts and consultants.
In addition, a party who can illicitly obtain a customer’s password
could access that customer’s transaction data or personal
information, resulting in the perception that our systems are
insecure. Any compromise or breach of our security measures, or
those of our third-party providers, could violate applicable
privacy, data protection, data security, network and information
systems security and other laws and cause significant legal and
financial exposure, adverse publicity and a loss of confidence in
our security measures, which could have a material adverse effect
on our business, financial condition, results of operations and
prospects. We continue to devote significant resources to protect
against security breaches, and we may need to in the future to
address problems caused by breaches, including notifying affected
customers and responding to any resulting litigation or
investigations, which in turn, diverts resources from the growth
and expansion of our business.
Failure to protect or enforce our intellectual property rights or
the costs involved in such enforcement could harm our business,
financial condition, results of operations and
prospects.
We rely on trademark, copyright, patent, trade secret and domain
name-protection laws to protect our rights in intellectual
property. In the United States and in certain foreign
jurisdictions, we have filed applications to protect aspects of our
intellectual property. We currently hold several patent
applications in multiple jurisdictions, and in the future we may
acquire additional patents, which could require significant cash
expenditures. However, third parties may knowingly or unknowingly
infringe our rights in intellectual property, third parties may
challenge our intellectual property rights, and pending and future
trademark, copyright and patent applications may not be approved.
In any of these cases, we may be required to expend significant
time and expense to prevent infringement of or to enforce our
rights. Notwithstanding our intellectual property rights, there can
be no assurance that others will not offer products or services
that are substantially similar to ours and compete with our
business.
Circumstances outside our control could pose a threat to our
intellectual property rights. For example, effective intellectual
property protection may not be available in the United States or
other countries in which we operate or intend to operate our
business. Also, the efforts we have taken to protect our
intellectual property rights may not be sufficient or effective,
and any significant impairment of our intellectual property rights
could harm our business or our ability to compete. If we are unable
to effectively protect our proprietary offerings and features,
competitors may reverse engineer and/or copy them. Additionally,
protecting our intellectual property rights is costly and
time-consuming. Any unauthorized use of our intellectual property
or disclosure of our confidential information or trade secrets
could make it more expensive to do business, thus harming our
operating results. Furthermore, if we are unable to protect our
intellectual property rights or prevent unauthorized use or
appropriation by third parties, the value of our brands,
intellectual property and other intangible assets may be
diminished, and competitors may be able to more effectively mimic
our offerings and services. Any of these events could seriously
harm our business, financial condition, results of operations and
prospects.
We rely on licenses and service agreements to use the intellectual
property rights of affiliated and third parties that are
incorporated into or used in our products and services. Failure to
renew or expand existing licenses or service agreements may require
us to modify, limit or discontinue certain product or services,
which could materially affect our business, financial condition,
results of operations and prospects.
We rely on products, technologies and intellectual property such as
certain “Bet Rivers” and “PlaySugarHouse” trademarks and domains,
that we license or that are made available to us through service
agreements from affiliated and third parties, for use in our
platform, offerings and/or operations. Substantially all our
offerings, products and services use intellectual property licensed
or made available to us through service agreements from affiliated
entities or third parties. See “Intellectual
Property”.
The future success of our business may depend, in part, on our
ability to obtain, retain and/or expand licenses or service
agreements for certain technologies. We cannot assure you that
these third-party licenses and services agreements, or support for
the technologies licensed or provided to us thereunder, will
continue to be available to us on commercially reasonable terms, if
at all. If we cannot renew and/or expand existing licenses or
services agreements, we may have to discontinue or limit our use of
the offering, product and/or service that include or incorporate
the licensed or provided technology.
Some of our license agreements contain minimum guaranteed payments
to the third party. If we are unable to generate sufficient revenue
to offset the minimum guaranteed payments, it could negatively
affect our business, financial condition,
results of operations, prospects and cash flows. Our license
agreements generally allow for assignment in the event of a
strategic transaction but contain some limited termination rights
post-assignment. Certain of our license agreements grant the
licensor rights to audit our use of their intellectual property.
Disputes with licensors over uses or terms could result in our
payment of additional fees or penalties, cancellation or
non-renewal of the underlying license or litigation.
The regulatory review process and licensing requirements also may
preclude us from using technologies owned or developed by
affiliated entities or third parties if those parties are unwilling
to subject themselves to regulatory review or do not meet
regulatory requirements. Some gaming authorities require gaming
manufacturers to obtain approval before engaging in certain
transactions, such as acquisitions, mergers, reorganizations,
financings, stock offerings and share repurchases. Obtaining such
approvals can be costly and time consuming, and we cannot assure
you that such approvals will be granted or that the approval
process will not result in delays or disruptions to our strategic
objectives.
Risks Related to our Third-Party Vendor Relationships
We rely on third-party cloud infrastructure and hosting providers
and server rooms hosted by certain of our land-based casino
partners. Disruption or interference with this infrastructure or
server rooms could adversely affect our business, financial
condition, results of operations and prospects.
We host our online gaming platform and our sports betting and
online casino offerings using third-party public and on-premise
private cloud infrastructure and hosting services and on-premise
server rooms hosted by certain of our land-based casino partners.
We do not have full control over the operations of the
infrastructure of the third-party service providers that we use or
anticipate using such as cloud-hosting providers (i.e., Amazon Web
Services and Google Cloud) and on-premises hosting and related
service providers or the facilities (including the server rooms) of
our casino partners. Such infrastructure and facilities are
vulnerable to damage or interruption from natural disasters,
cybersecurity attacks, terrorist attacks, power outages, and
similar events or acts of misconduct. We have experienced and
expect in the future to experience, interruptions, delays and
outages in service and availability from these providers on account
of, among other things, infrastructure changes, human or software
errors, website hosting disruptions and capacity constraints. Any
such interruptions, delays or outages result in sustained or
repeated system failures with respect to our platform could reduce
the attractiveness of our offerings. Any capacity constraints may
also impact our ability to maintain performance of our offerings.
Should our agreements with any third-party cloud service provider
terminate or we add new cloud infrastructure service providers, we
may experience additional costs and platform performance downtime
in adding or transitioning to new or additional service providers.
These impacts (and any associated negative publicity regarding
them) may harm our brands or reduce customers using our platform,
which may negatively impact our business, financial condition,
results of operations and prospects.
We rely on third-party providers to validate the identity and
location of our customers, and if such providers fail to perform
adequately or provide accurate information or we do not maintain
business relationships with them, our business, financial
condition, results of operations and prospects could be adversely
affected.
We rely on third-party geolocation and identity verification
systems and service providers to ensure that we comply with certain
laws and regulations, and any disruption to those systems would
prohibit us from operating our platform and would adversely affect
our business. There is no guarantee that these third-party systems
or service providers will perform adequately or will be effective.
Additionally, incorrect or misleading geolocation and identity
verification data with respect to current or potential customers
received from third-party service providers may result in us
inadvertently allowing access to our offerings to individuals who
should not be permitted to access them, or otherwise inadvertently
deny access to individuals who should be able to access them, in
each case based on inaccurate identity or geographic location
determinations. Our third-party geolocation services provider
relies on its ability to obtain information necessary to determine
geolocation from mobile devices, operating systems and other
sources. Changes, disruptions or temporary or permanent failure to
access such sources by our third-party services providers may
result in their inability to accurately determine the location of
our customers. Moreover, our inability to maintain our existing
contracts with third-party services providers, or to replace them
with equivalent third parties, may result in our inability to
access geolocation and identity verification data necessary for our
operations. If any of these risks materialize, we may be subject to
disciplinary action, fines and lawsuits, and our business,
financial condition, results of operations and prospects could be
adversely affected.
Our platform contains third-party open-source software components,
and failure to comply with the terms of the underlying open-source
software licenses could restrict our ability to provide our
offerings.
Our platform contains software components licensed to us by
third-party authors under “open source” licenses (“Open-Source
Software”). Using and distributing Open-Source Software may entail
greater risks than using third-party commercial software as
licensors of Open-Source Software generally do not provide support,
warranties, indemnification or other contractual protections
regarding infringement claims or the quality of the licensed code.
In addition, the public availability of Open-Source Software may
make it easier for others to compromise our platform or
offerings.
Some Open-Source Software licenses require us to make available
source code for modifications or derivative works we create or
grant other licenses to our intellectual property if we use such
Open-Source Software in certain ways. If we combine our proprietary
software with Open-Source Software in a certain manner, we could,
under certain licenses for Open-Source Software, be required to
release the source code of our proprietary software to the public.
This would allow our competitors to create similar offerings with
lower development effort and time and ultimately could result in a
loss of our competitive advantages. Alternatively, to avoid the
public release of the affected portions of our source code, we
could be required to expend substantial time and resources to
re-engineer some or all of our proprietary software.
Although we review our use of Open-Source Software to avoid
subjecting our platform and offerings to conditions we do not
intend, the terms of many licenses for Open-Source Software have
not been interpreted by U.S. or foreign courts, and these licenses
could be construed in a way that could impose unanticipated
conditions or restrictions on our ability to provide or distribute
our platform or offerings. From time to time, there have been
claims challenging the ownership of Open-Source Software against
companies that incorporate Open-Source Software into their
solutions. As a result, we could be subject to lawsuits by parties
claiming ownership of what we believe to be Open-Source Software.
Moreover, we cannot assure you that our processes for controlling
Open-Source Software use in our platform and offerings will be
effective. If we are held to have breached or failed to comply with
the terms of an Open-Source Software license, we could face
infringement or other liability, or be required to seek costly
licenses from third parties to continue providing our platform and
offerings on terms that are not economically feasible, to
re-engineer our platform, to discontinue or delay the provision of
our offerings if re-engineering could not be accomplished on a
timely basis or to make generally available, in source code form,
our proprietary software, any of which could adversely affect our
business, financial condition, results of operations and
prospects.
We rely on third-party payment processors to process customer
deposits and withdrawals made on our platform, and if we cannot
manage our relationships with such third parties and other
payment-related risks, our business, financial condition, results
of operations and prospects could be adversely
affected.
We rely on third-party payment processors to process customer
payments on our platform. If a third-party payment processor
terminates its relationship with us or refuses to renew its
agreement with us on commercially reasonable terms, we may need to
find an alternate payment processor, and may be unable to secure
similar terms or replace such payment processor in an acceptable
time frame. Further, the software and services provided by our
third-party payment processors may not meet our expectations,
contain errors or vulnerabilities, be compromised or experience
outages. Any of these could cause us to be unable to accept online
payments or other payment transactions or make timely payments to
customers, any of which could make our platform less trustworthy
and convenient and adversely affect our ability to attract and
retain our customers.
Nearly all payments on our platform are made by credit card, debit
card or through other third-party payment services, which subjects
us to certain regulations and to the risk of fraud. We may in the
future offer new payment options to customers that may be subject
to additional regulations and risks. We are also subject to a
number of other laws and regulations relating to the payments we
accept from our customers, including with respect to money
laundering, money transfers, privacy and information security. If
we fail to comply with applicable rules and regulations, we may be
subject to civil or criminal penalties, fines and/or higher
transaction fees and may lose our ability to accept online payments
or other payment card transactions, which could make our offerings
less convenient and attractive to our customers. If any of these
events were to occur, our business, financial condition, results of
operations and prospects could be adversely affected.
For example, if we are deemed to be a money transmitter as defined
by applicable regulations, we could be subject to certain laws,
rules and regulations enforced by multiple authorities and
governing bodies in the United States and numerous state and local
agencies that may define money transmitter differently. Certain
states may have a more expansive view of who qualifies as a money
transmitter. Additionally, outside of the United States, we could
be subject to additional laws, rules and regulations related to the
provision of payments and financial services, and if we expand into
new
jurisdictions, the foreign regulations and regulators to which we
are subject will expand as well. If we are found to be a money
transmitter under any applicable regulation and we are not
complying with such regulations, we may be subject to fines or
other penalties in one or more jurisdictions levied by federal,
state or local regulators, including state Attorneys General, as
well as those levied by foreign regulators. In addition to fines,
penalties for failing to comply with applicable rules and
regulations could include criminal and civil proceedings,
forfeiture of significant assets or other enforcement actions. We
could also be required to make changes to our business practices or
compliance programs as a result of regulatory
scrutiny.
Additionally, certain of our payment processors require us to
comply with payment card network operating rules, which are set and
interpreted by the payment card networks. The payment card networks
could adopt new operating rules or interpret or reinterpret
existing rules in ways that might prohibit us from providing
certain offerings to some customers, or be costly to implement or
difficult to follow. We have agreed to reimburse our payment
processors for fines they are assessed by payment card networks if
we or the customers on our platform violate these rules. Any of the
foregoing risks could adversely affect our business, financial
condition, results of operations and prospects.
We rely on third-party service and content providers (including
sports betting risk management and trading providers, sports data
providers and online slot providers) and if such third parties do
not perform adequately or terminate their relationships with us,
our costs may increase and our business, financial condition,
results of operations and prospects could be adversely
affected.
Our success depends in part on our relationships with third-party
service providers. For example, we receive sports betting odds
data, sports betting risk management services and sports betting
trading services from a third party, and in some jurisdictions we
are required to obtain official league data. We also rely on third
parties for content delivery (such as online slots), load balancing
and certain cybersecurity protections such as against distributed
denial-of-service attacks. If those providers do not perform
adequately, our customers may experience issues or interruptions
with their experiences, and gaming regulators may hold us
responsible for these third-party providers’ errors. Further, if
any of our third-party service or data providers terminates its
relationship with us or refuses to renew its agreement with us on
commercially reasonable terms, we would need to find an alternate
provider, and as consolidation in the industries in which we
operate continues, if a competitor acquires any of our third-party
providers, we may need to find an alternate provider, and in each
case we may be unable to secure similar terms or replace such
providers in an acceptable timeframe. We also rely on other
third-party software and services such as communications and
internal software, and our business may be adversely affected to
the extent such software and services do not meet our expectations,
contain errors or vulnerabilities, are compromised or experience
outages. Any of these could increase our costs and adversely affect
our business, financial condition, results of operations and
prospects. Further, any negative publicity related to any of our
third-party providers, including any publicity related to
regulatory concerns or allegations of bad or unethical actions,
could adversely affect our reputation and brand, result in us
severing our relationship with such third-party service provider
and could potentially lead to increased regulatory or litigation
exposure.
We incorporate technology from third-party vendors into our
platform. We cannot be certain that these vendors are not
infringing the intellectual property rights of others or that they
have sufficient rights to such technology in all jurisdictions in
which we may operate. Some of our material third-party license and
services agreements allow the vendor to terminate for convenience.
If we are unable to obtain or maintain rights to any of this
technology because of third-party intellectual property
infringement claims against our vendors or us, if our vendors
terminate any license or services agreements, or if we are unable
to continue to obtain the technology or enter into new agreements
on commercially reasonable terms, our ability to develop our
platform or offerings containing that technology could be severely
limited and our business could be harmed. Additionally, if we are
unable to obtain necessary technology from third parties, we may be
forced to acquire or develop alternate technology, which may
require significant time, effort and skillsets that we currently do
not have, and may be of lower quality or performance standards.
This would limit and delay our ability to provide new or
competitive offerings and increase our costs. If alternate
technology cannot be obtained or developed, we may be unable to
offer certain functionality as part of our offerings, which could
adversely affect our business, financial condition, results of
operations and prospects.
If Internet and other technology-based service providers experience
service interruptions, our ability to conduct our business may be
impaired and our business, financial condition, results of
operations and prospects could be adversely affected.
A substantial portion of our network infrastructure is provided by
third parties, including Internet service providers and other
technology-based service providers. We use technology-based service
providers such as CloudFlare to mitigate any
distributed denial-of-service attacks. However, if Internet service
providers experience service interruptions, including because of
cyber-attacks or due to an event causing an unusually high volume
of Internet use (such as a pandemic or public health emergency like
COVID-19), communications over the Internet may be interrupted and
impair our ability to conduct our business. Internet service
providers and other technology-based service providers may in the
future roll out upgraded or new mobile or other telecommunications
services, such as 5G or 6G services, which may not be successful
and thus may impact our customers’ ability to access our platform
or offerings in a timely fashion or at all. In addition, our
ability to process e-commerce transactions depends on bank
processing and credit card systems. To prepare for system problems,
we continuously seek to strengthen and enhance our current
facilities and system infrastructure and support capabilities.
Nevertheless, there can be no assurance that the Internet
infrastructure or our own network systems will continue to be able
to meet the demand placed on us by the continued growth of the
Internet, the overall online gaming industry and our customers. Any
difficulties these providers face, including the potential of
certain network traffic receiving priority over other traffic
(i.e., lack of net neutrality), may adversely affect our business,
and we exercise little control over these providers, which
increases our vulnerability to problems with the services they
provide. Any system failure as a result of reliance on third
parties, such as network, software or hardware failure, including
as a result of cyber-attacks, which causes a loss of our customers’
property or personal information or a delay or interruption in our
online services, products and e-commerce services, including our
ability to handle existing or increased traffic, could result in a
loss of anticipated revenue, interruptions to our platform and
offerings, cause us to incur significant legal, remediation and
notification costs, degrade the customer experience and cause our
customers to lose confidence in our offerings, any of which could
have a material adverse effect on our business, financial
condition, results of operations and prospects.
Our growth will depend, in part, on the success of our strategic
relationships with third parties. Overreliance on certain third
parties or our inability to extend existing relationships or agree
to new relationships may cause unanticipated costs for us and
impact our financial performance in the future.
We rely, and expect to continue to rely, on relationships with
casinos, tribes and other third parties to attract customers to our
platform. These relationships, along with our use of providers of
online services, search engines, social media, directories,
affiliate networks and other websites and e-commerce businesses
direct individuals to our online platform. While we believe there
are other third parties that could drive individuals to our
platform, adding or transitioning to them may disrupt our business
and increase our costs. If any of our existing relationships or our
future relationships fail to provide services to us in accordance
with the terms of our applicable arrangement, or at all, and we are
unable to find suitable alternatives, this could impact our ability
to cost-effectively attract customers and harm our business,
financial condition, results of operations and
prospects.
Risks Related to Our Arrangements with Affiliates
We are a “controlled” company within the meaning of the NYSE rules
and, as a result, we qualify for, and intend to rely on, exemptions
from certain corporate governance requirements. You will not have
the same protections as those afforded to stockholders of companies
that are subject to such governance requirements.
Neil G. Bluhm and Gregory A. Carlin and their respective trusts and
entities controlled by them (collectively, the “Controlling
Holders”) control a majority of the voting power of our outstanding
common stock. As a result, we are a “controlled company” within the
meaning of the NYSE’s corporate governance standards. Under these
rules, a company of which more than 50% of the voting power for the
election of directors is held by an individual, group or another
company is a “controlled company” and may elect not to comply with
certain corporate governance requirements, including:
•having
a majority of our Board consist of independent
directors;
•having
a nominating and corporate governance committee that is composed
entirely of independent directors with a written charter addressing
the committee’s purpose and responsibilities;
•having
a compensation committee that is composed entirely of independent
directors with a written charter addressing the committee’s purpose
and responsibilities; and
•conducting
an annual performance evaluation of the nominating and corporate
governance and compensation committees.
We currently, and intend to continue to, use these exemptions. As a
result, we may not have a majority of independent directors on our
Board, our compensation and our nominating and corporate governance
committees may not consist
entirely of independent directors and our compensation and our
nominating and corporate governance committees may not be subject
to annual performance evaluations. Accordingly, you will not have
the same protections afforded to stockholders of companies that are
subject to all the NYSE corporate governance requirements.
Furthermore, the Controlling Holders have entered into a voting
agreement where they agree to vote together on certain matters
presented to the Company’s stockholders as long as the voting
agreement is in effect, which may have the effect of extending the
period in which we are a “controlled company” and our utilizing the
exemptions discussed above.
The Controlling Holders control us, and their interests may
conflict with ours or yours in the future.
The Controlling Holders own more than 50% of our common stock and
have entered into a voting agreement where they agree to vote
together on certain matters presented to our stockholders. This
means that, based on their combined voting power, the Controlling
Holders together will control the vote of all or nearly all matters
submitted to a vote of our stockholders, which will enable them to
control the election of the members of the Board and all or nearly
all other corporate decisions. Even when the Controlling Holders
cease to own shares of our stock representing a majority of the
total voting power, as long as the Controlling Holders continue to
own a significant percentage of our stock, the Controlling Holders
will still be able to significantly influence the composition of
our Board and the approval of actions requiring stockholder
approval. Accordingly, for such period of time, the Controlling
Holders will have significant influence with respect to our
management, business plans and policies, including the appointment
and removal of our officers, decisions on whether to raise future
capital and amending our charter and bylaws, which govern the
rights attached to our common stock. In particular, as long as the
Controlling Holders continue to own a significant percentage of our
stock, the Controlling Holders will be able to cause or prevent a
change of control of the Company or a change in the composition of
our Board and could preclude any unsolicited acquisition of the
Company. The concentration of ownership could deprive you of an
opportunity to receive a premium for your securities as part of a
sale of the Company and ultimately might affect the market price of
our securities.
In addition, the Company entered into an Investor Rights Agreement
(the “Investor Rights Agreement”), pursuant to which, as long as
the Company is a “controlled company” under applicable NYSE rules,
the Rush Street Interactive GP, LLC, in its capacity as the
Sellers’ Representative of the Controlling Holders and the other
original equity-holders in RSILP under the Business Combination
Agreement (in such capacity, the “Sellers’ Representative”) and dMY
Sponsor, LLC (the “Sponsor”) will have the right to nominate up to
nine (or the maximum number that may be nominated by the Sellers’
Representative without violating the NYSE’s controlled company
requirements) and up to two directors, respectively, to the Board,
subject to certain independence and holdings requirements. In the
event the Company is no longer a “controlled company” under the
applicable NYSE rules, the Sponsor will have the right to nominate
up to two directors and the Sellers’ Representative will have the
right to nominate a number of directors equal to the greater of the
number of directors permitted by NYSE or a number equal to the
total number of directors multiplied by the percentage of the
Company’s issued and outstanding voting securities held by the
Sellers and their permitted transferees at such time, in each case
subject to certain independence and holdings
requirements.
The Controlling Holders and their affiliates engage in a broad
spectrum of activities, including investing in the gaming and
casino industries generally. In the ordinary course of their
business activities, the Controlling Holders and their affiliates
may engage in activities such as investing in or advising
businesses that directly or indirectly compete with certain
portions of our business or are our suppliers, partners or
customers. Our Charter provides that none of the Controlling
Holders, their affiliates or affiliated entities or any director
who is not employed by us or its affiliates or affiliated entities
will have any duty to refrain from engaging, directly or
indirectly, in the same business activities or similar business
activities or lines of business in which we operate. The
Controlling Holders also may pursue acquisition opportunities that
may be complementary to our business, and, as a result, those
acquisition opportunities may not be available to us. In addition,
the Controlling Holders may have an interest in pursuing
acquisitions, divestitures and other transactions that, in their
judgment, could enhance their investment, even though such
transactions might involve risks to you.
We have arrangements with our affiliates that impact our
operations.
We have engaged, and may in the future engage, in transactions with
affiliates and other related parties, including, for example,
entering into agreements with the “Rivers” branded casinos located
in Pennsylvania, Illinois, New York and the anticipated “Rivers”
branded casino in Portsmouth, Virginia, to operate retail and
online sports betting and/or online casino on behalf of such
casinos as and when retail and online sports betting and online
casino are legalized in each respective jurisdiction. We have also
entered into a services agreement with RSG, under which RSG and/or
its affiliates provided certain corporate and shared services
related to functions such as government affairs, certain business
development,
insurance and other services, and currently continues to provide
some of these services. We reimburse RSG for all third-party costs
it incurs in providing services to us at cost (with no mark-up) and
reimburse RSG for an allocable portion of payroll, benefits and
overhead with respect to RSG and its affiliates’ employees who
perform or otherwise assist with providing services to us. While an
effort has been made and will continue to be made to obtain
services from affiliated persons and other related parties at rates
and on terms at least as favorable as would be charged by others,
if that were not to be achieved in the future that could have a
negative impact on our operations. Both Mr. Bluhm, our Executive
Chairman and a significant stockholder, and Mr. Carlin, a
significant stockholder and former CEO and vice chairman, have an
indirect ownership interest in certain of our related parties,
including RSG and the “Rivers” branded casinos. Mr. Carlin is also
CEO of RSG. See “Certain
Relationships and Related Transactions, and Director
Independence”.
Our Controlling Holders may economically benefit from our
arrangements with related parties. If we engage in related party
transactions on unfavorable terms, our operating results will be
negatively impacted.
Risks Related to our Liquidity and Capital Resources
We may require additional capital to support our growth plans, and
such capital may not be available on terms acceptable to us, if at
all. This could hamper our growth and adversely affect our
business.
We have and intend to continue to make significant investments to
support our business growth and may require additional funds to
respond to business challenges, including the need to develop new
offerings and features or enhance our existing platform, improve
our operating infrastructure or acquire complementary businesses,
personnel and technologies. Accordingly, we may need to engage in
equity or debt financings to secure additional funds. Our ability
to obtain additional capital, if and when required, will depend on
our business plans, investor demand, our operating performance,
capital markets conditions and other factors. If we raise
additional funds by issuing equity, equity-linked or debt
securities, such as preferred stock as authorized by our Charter,
those securities may have rights, preferences or privileges senior
to the rights of our currently issued and outstanding equity or
debt, and our existing stockholders may experience dilution. If we
are unable to obtain additional capital when required, or on
satisfactory terms, our ability to continue to support our business
growth or to respond to business opportunities, challenges or
unforeseen circumstances could be adversely affected, and our
business, financial condition, results of operations and prospects
may be harmed.
We may invest in or acquire other businesses, and our business may
suffer if we are unable to successfully integrate acquired
businesses or otherwise manage the growth associated with multiple
acquisitions.
As part of our business strategy, we have made and may continue to
make acquisitions or investments as opportunities arise to add new
or complementary businesses, products, brands or technologies. In
some cases, the costs of such acquisitions or investments may be
substantial, including as a result of professional fees and due
diligence efforts. There is no assurance that the time and
resources expended on pursuing a particular acquisition or
investment will result in a completed transaction, or that any
completed transaction will ultimately be successful. In addition,
we may be unable to identify suitable acquisition or strategic
investment opportunities or may be unable to obtain any required
financing or regulatory approvals, and therefore may be unable to
complete such acquisitions or strategic investments on favorable
terms, if at all. We may decide to pursue acquisitions or
investments with which our investors may not agree, and we cannot
assure investors that any acquisition or investment will be
successful or otherwise provide a favorable return. In addition,
acquisitions and the integration thereof require significant time
and resources and place significant demands on our management, as
well as on our operational and financial infrastructure. In
addition, if we fail to successfully close transactions or
integrate the products, personnel and technologies associated with
these acquisitions or investments into our business, our business
could be seriously harmed. Acquisitions may expose us to
operational challenges and risks, including:
•the
ability to profitably manage acquired businesses or successfully
integrate the acquired businesses’ operations, personnel, financial
reporting, accounting and internal controls, technologies and
products into our business;
•increased
indebtedness and the expense of integrating acquired businesses,
including significant administrative, operational, technological,
economic, geographic or cultural challenges in managing and
integrating the expanded or combined operations;
•entry
into jurisdictions or acquisition of products or technologies with
which we have limited or no prior experience, and the potential of
increased competition with new or existing competitors as a result
of such acquisitions;
•diversion
of management’s attention and the over-extension of our operating
infrastructure and our management systems, information technology
systems, and internal controls and procedures, which may be
inadequate to support growth;
•the
ability to fund our capital needs and any cash flow shortages that
may occur if anticipated revenue is not realized or is delayed,
whether by general economic or market conditions, or unforeseen
internal difficulties;
•the
ability to obtain and/or maintain appropriate or required licenses,
permits or approvals from applicable regulators; and
•the
ability to retain or hire qualified personnel required for expanded
operations.
Our acquisition strategy may not succeed if we are unable to remain
attractive to target companies or expeditiously close transactions.
Issuing shares of Class A Common Stock to fund an acquisition would
cause economic dilution to existing stockholders. If we develop a
reputation for being a difficult acquirer or having an unfavorable
work environment, or target companies view our Class A Common Stock
unfavorably, we may be unable to consummate key acquisitions
essential to our corporate strategy and our business, financial
condition, results of operations and prospects may be seriously
harmed.
Risks Related to our Securities, Corporate Structure, Governing
Documents and Tax Receivable Agreement
If we raise capital in the future by issuing shares of common or
preferred stock or other equity or equity-linked securities,
convertible debt or other hybrid equity securities, existing
stockholders may experience dilution, such new securities may have
rights senior to those of our common stock, and the market price of
our securities may be adversely affected.
If we raise capital in the future then existing stockholders may
experience dilution. Our Charter provides that preferred stock may
be issued from time to time in one or more series, and the Board is
authorized to fix the voting rights, if any, designations, powers,
preferences, the relative, participating, optional or other special
rights and any qualifications, limitations and restrictions
thereof, applicable to the shares of each series. The Board may,
without stockholder approval, issue preferred stock with voting and
other rights that could adversely affect the voting power and other
rights of the holders of our common stock and could have
anti-takeover effects. The Board’s ability to issue preferred stock
without stockholder approval could have the effect of delaying,
deferring or preventing a change of control of us or the removal of
existing management. The issuance of any such securities may
adversely affect the market price of our securities.
Our principal asset is our interests in RSILP (held through our
wholly owned subsidiaries), and accordingly we depend on
distributions from RSILP to pay taxes and expenses.
We are a holding company and have no material assets other than our
indirect ownership of RSILP. We are not expected to have
independent means of generating revenue or cash flow, and our
ability to pay taxes, operating expenses and dividends in the
future, if any, will depend on RSILP’s financial results and cash
flows. There can be no assurance that RSILP will generate
sufficient cash flow to distribute funds to us or that applicable
state law and contractual restrictions, including negative
covenants under any debt instruments will permit such
distributions. If RSILP does not distribute sufficient funds to us
to pay our taxes or other liabilities, we may default on
contractual obligations or have to borrow additional funds. If we
are required to borrow additional funds it could adversely affect
our liquidity and subject us to additional restrictions imposed by
lenders.
RSILP is a partnership for U.S. federal income tax purposes and, as
such, generally will not be subject to any entity-level U.S.
federal income tax. Instead, taxable income will be allocated, for
U.S. federal income tax purposes, to the holders of RSILP Units,
including the RSI ASLP, Inc. (the “Special Limited Partner”), which
is a member of our consolidated group for U.S. federal income tax
purposes. Accordingly, we will be required to pay U.S. federal
income taxes on the Special Limited Partner’s allocable share of
RSILP’s net taxable income. Under the terms of the Second Amended
and Restated Limited Partnership Agreement of RSILP, dated as of
December 29, 2020 (the “RSILP A&R LPA”), RSILP must make tax
distributions to holders of RSILP Units (including the Special
Limited Partner) calculated at certain assumed rates. In addition
to tax expenses, we and the Special Limited Partner will also incur
expenses related to their operations, including the Special Limited
Partner’s payment obligations under the Tax Receivable Agreement,
which could be significant and some of which will be reimbursed by
RSILP (excluding payment obligations under the Tax Receivable
Agreement). The Special Limited Partner intends to cause RSILP to
make ordinary distributions and tax
distributions to the holders of RSILP Units on a pro rata basis in
amounts sufficient to cover all applicable taxes, relevant
operating expenses, payments under the Tax Receivable Agreement and
dividends, if any, declared by us. However, as discussed below,
RSILP’s ability to make such distributions may be subject to
various limitations and restrictions, including, but not limited
to, retention of amounts necessary to satisfy the obligations of
RSILP and its subsidiaries and restrictions on distributions that
would violate any applicable restrictions contained in RSILP’s debt
agreements (if any), or any applicable law, or that would have the
effect of rendering RSILP insolvent. To the extent the Special
Limited Partner is unable to make payments under the Tax Receivable
Agreement for any reason, such payments will be deferred and will
accrue interest until paid, provided, however, that nonpayment for
a specified period and/or under certain circumstances may
constitute a material breach of a material obligation under the Tax
Receivable Agreement and therefore accelerate payments under the
Tax Receivable Agreement, which could be substantial.
Additionally, although RSILP generally will not be subject to any
entity-level U.S. federal income tax, it may be liable under recent
federal tax legislation for adjustments to its tax return, absent
an election to the contrary. If RSILP’s taxable income calculations
are incorrect, RSILP and/or its partners, including the Special
Limited Partner, in later years may be subject to material
liabilities pursuant to this federal legislation and its related
guidance.
We anticipate that the distributions the Special Limited Partner
will receive from RSILP may, in certain periods, exceed our and the
Special Limited Partner’s actual liabilities and the Special
Limited Partner’s obligations to make payments under the Tax
Receivable Agreement. The Board, in its sole discretion, will make
any determination from time to time with respect to the use of any
such excess cash so accumulated, which may include, among other
uses, to pay dividends on our Class A Common Stock. We will have no
obligation to distribute such cash (or other available cash other
than any declared dividend) to our stockholders. If necessary, we
may undertake ameliorative actions, which may include pro rata or
non-pro rata reclassifications, combinations, subdivisions or
adjustments of outstanding RSILP Units, to maintain one-for-one
parity between RSILP Units held by the Special Limited Partner and
shares of Class A Common Stock.
Dividends on our Class A Common Stock, if any, will be paid at the
discretion of the Board, which will consider, among other things,
our available cash, available borrowings and other funds legally
available therefor, taking into account the retention of any
amounts necessary to satisfy our obligations that RSILP will not
reimburse, including taxes and amounts payable under the Tax
Receivable Agreement and any restrictions in then-applicable
financing agreements. Financing arrangements may include
restrictive covenants restricting our ability to pay dividends or
make other distributions to our stockholders. In addition, RSILP is
generally prohibited under Delaware law from making distributions
to partners to the extent that, at the time of the distribution,
after giving effect to the distribution, RSILP’s liabilities (with
certain exceptions) exceed the fair value of its assets. RSILP’s
subsidiaries are generally subject to similar legal limitations on
their ability to make distributions to RSILP. If RSILP does not
have sufficient funds to make distributions, our ability to declare
and pay cash dividends may also be restricted or
impaired.
Pursuant to the Tax Receivable Agreement, the Special Limited
Partner is required to pay to the Sellers and/or the exchanging
holders of RSILP Units, as applicable, 85% of the net income tax
savings that we and our consolidated subsidiaries (including the
Special Limited Partner) realize as a result of increases in tax
basis in RSILP’s assets related to the transactions contemplated
under the Business Combination Agreement and the future exchange of
the Retained RSILP Units for shares of Class A Common Stock (or
cash) pursuant to the RSILP A&R LPA and tax benefits related to
entering into the Tax Receivable Agreement, including tax benefits
attributable to payments under the Tax Receivable Agreement, and
those payments may be substantial.
On December 29, 2020, the Sellers sold an aggregate of 12,500,000
RSILP Units for $125,000,000 and may in the future exchange their
RSILP Units, together with the cancellation of an equal number of
shares of Class V Voting Stock, for shares of Class A Common Stock
(or cash) pursuant to the RSILP A&R LPA, subject to certain
conditions and transfer restrictions as set forth therein and in
the Investor Rights Agreement. These sales and exchanges are
expected to result in increases in the Special Limited Partner’s
allocable share of the tax basis of RSILP’s tangible and intangible
assets. These increases in tax basis may increase (for income tax
purposes) depreciation and amortization deductions and therefore
reduce the amount of income or franchise tax that we and the
Special Limited Partner would otherwise be required to pay in the
future had such sales and exchanges never occurred.
In connection with the Business Combination, the Special Limited
Partner entered into the Tax Receivable Agreement, which generally
provides for the payment by it of 85% of certain net tax benefits,
if any, that we and our consolidated subsidiaries (including the
Special Limited Partner) realize (or in certain cases is deemed to
realize) as a result of these increases in tax basis and tax
benefits related to the transactions contemplated by the Business
Combination Agreement and
the exchange of Retained RSILP Units for Class A Common Stock (or
cash) pursuant to the RSILP A&R LPA and tax benefits related to
entering into the Tax Receivable Agreement, including tax benefits
attributable to payments under the Tax Receivable Agreement. These
payments are the obligation of the Special Limited Partner and not
of RSILP. The actual increase in the Special Limited Partner’s
allocable share of RSILP’s tax basis in its assets, as well as the
amount and timing of any payments under the Tax Receivable
Agreement, will vary depending upon a number of factors, including
the timing of exchanges, the market price of our Class A Common
Stock at the time of the exchange and the amount and timing of the
recognition of our and our consolidated subsidiaries’ (including
the Special Limited Partner’s) income. While many of the factors
that will determine the amount of payments that the Special Limited
Partner will make under the Tax Receivable Agreement are outside of
our control, we expect that the payments the Special Limited
Partner will make under the Tax Receivable Agreement will be
substantial and could have a material adverse effect on our
financial condition.
Any payments made by the Special Limited Partner under the Tax
Receivable Agreement will generally reduce the amount of overall
cash flow that might have otherwise been available to us. To the
extent that the Special Limited Partner is unable to make timely
payments under the Tax Receivable Agreement for any reason, the
unpaid amounts will be deferred and will accrue interest until
paid; however, nonpayment for a specified period and/or under
certain circumstances may constitute a material breach of a
material obligation under the Tax Receivable Agreement and
therefore accelerate payments due under the Tax Receivable
Agreement, as further described below. Furthermore, the Special
Limited Partner’s future obligation to make payments under the Tax
Receivable Agreement could make it a less attractive target for an
acquisition, particularly in the case of an acquirer that cannot
use some or all of the tax benefits that may be deemed realized
under the Tax Receivable Agreement.
In certain cases, payments under the Tax Receivable Agreement may
exceed the actual tax benefits we and our consolidated subsidiaries
(including the Special Limited Partner) realize or be
accelerated.
Payments under the Tax Receivable Agreement are based on the tax
reporting positions that we and our consolidated subsidiaries
(including the Special Limited Partner) determine, and the Internal
Revenue Service (“IRS”) or another taxing authority may challenge
all or part of the tax basis increases, as well as other tax
positions that we and our consolidated subsidiaries (including the
Special Limited Partner) take, and a court may sustain such a
challenge. If any tax benefits initially claimed by us or our
consolidated subsidiaries (including the Special Limited Partner)
are disallowed, the Sellers and the exchanging holders will not be
required to reimburse the Special Limited Partner for any excess
payments that may previously have been made under the Tax
Receivable Agreement, for example, due to adjustments resulting
from examinations by taxing authorities. Rather, excess payments
made to such holders will be applied against and reduce any future
cash payments otherwise required to be made by the Special Limited
Partner, if any, after the determination of such excess. However, a
challenge to any tax benefits initially claimed by us and our
consolidated subsidiaries (including the Special Limited Partner)
may not arise for a number of years following the initial time of
such payment and, even if challenged earlier, such excess cash
payment may be greater than the amount of future cash payments that
we and our consolidated subsidiaries (including the Special Limited
Partner) might otherwise be required to make under the terms of the
Tax Receivable Agreement and, as a result, there might not be
future cash payments against which such excess can be applied. As a
result, in certain circumstances the Special Limited Partner could
make payments under the Tax Receivable Agreement in excess of our
and our consolidated subsidiaries’ (including the Special Limited
Partner’s) actual income or franchise tax savings, which could
materially impair our and our consolidated subsidiaries’ (including
the Special Limited Partner’s) financial condition.
Moreover, the Tax Receivable Agreement provides that, in the event
that (i) the Special Limited Partner exercises its early
termination rights thereunder, (ii) certain changes of control of
us, the Special Limited Partner or RSILP occur (as described in the
RSILP A&R LPA), (iii) the Special Limited Partner in certain
circumstances, fails to make a payment required under the Tax
Receivable Agreement by its final payment date, which non-payment
continues for 30 days following such date or (iv) we or the Special
Limited Partner materially breach any of our material obligations
under the Tax Receivable Agreement other than as described in the
foregoing clause (iii), which breach continues without cure for 30
days following receipt by us and/or the Special Limited Partner of
written notice thereof and written notice of acceleration is
received by us and/or the Special Limited Partner thereafter
(except that in the case that the Tax Receivable Agreement is
rejected in a case commenced under bankruptcy laws, no written
notice of acceleration is required), in the case of clauses (iii)
and (iv), unless certain liquidity exceptions apply, the Special
Limited Partner’s obligations under the Tax Receivable Agreement
will accelerate and the Special Limited Partner will be required to
make a lump-sum cash payment to the Sellers and/or other applicable
parties to the Tax Receivable Agreement equal to the present value
of all forecasted future payments that would have otherwise been
made under the Tax Receivable Agreement, which lump-sum payment
would be based on certain assumptions, including those relating to
our and our consolidated subsidiaries’ (including the Special
Limited Partner’s) future taxable income. The lump-sum payment
could be substantial and could exceed the actual tax
benefits that we and our consolidated subsidiaries (including the
Special Limited Partner) realize subsequent to such payment because
such payment would be calculated assuming, among other things, that
we and our consolidated subsidiaries (including the Special Limited
Partner) would have certain assumed tax benefits available to us
and that we and our consolidated subsidiaries (including the
Special Limited Partner) would be able to use the assumed and
potential tax benefits in future years.
There may be a material negative effect on our liquidity if the
payments under the Tax Receivable Agreement exceed the actual
income or franchise tax savings that we and our consolidated
subsidiaries (including the Special Limited Partner) realize.
Furthermore, the Special Limited Partner’s obligations to make
payments under the Tax Receivable Agreement could also have the
effect of delaying, deferring or preventing certain mergers, asset
sales, other forms of business combinations or other changes of
control.
If the benefits of the Business Combination do not meet the
expectations of investors or securities analysts, the market price
of our securities may decline.
Fluctuations in the price of our securities could contribute to the
loss of all or part of your investment. Prior to the Business
Combination, there was no public market for RSILP’s securities and
trading in shares of our Class A Common Stock was not very active.
Accordingly, the valuation ascribed to the Company in the Business
Combination may not be indicative of the price that will ultimately
prevail in the trading market and, even if an active market for our
securities develops and/or continues, the trading price of our
securities could be volatile and subject to wide fluctuations in
response to various factors, some of which are beyond our control.
Any of the factors listed below could have a material adverse
effect on your investment in our securities and our securities may
trade at prices significantly below the price you paid for them. In
such circumstances, the trading price of our securities may not
recover and may experience a further decline.
Factors affecting the trading price of our securities may
include:
•actual
or anticipated fluctuations in our quarterly financial results or
those of companies perceived to be similar to us;
•changes
in the market’s expectations about our operating
results;
•success
of competitors;
•our
operating results failing to meet the expectation of securities
analysts or investors in a particular period;
•changes
in financial estimates and recommendations by securities analysts
concerning us or the industries in which we operate in
general;
•operating
and stock price performance of other companies that investors deem
comparable to us;
•our
ability to market new and enhanced products on a timely
basis;
•changes
in laws and regulations affecting our business;
•commencement
of, or involvement in, litigation involving us;
•changes
in our capital structure, such as future issuances of securities or
the incurrence of debt;
•the
volume of shares of our Class A Common Stock available for public
sale;
•any
major change in our Board or management;
•sales
of substantial amounts of Class A Common Stock by our directors,
executive officers or significant stockholders or the perception
that such sales could occur; and
•general
economic and political conditions such as recessions, interest
rates, international currency fluctuations, pandemics and acts of
war or terrorism.
Broad market and industry factors may materially harm the market
price of our securities irrespective of our operating performance.
The stock market in general, and the NYSE, have experienced price
and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of the particular
companies affected. The trading prices and valuations of these
stocks, and of our securities, may not be predictable. A loss of
investor confidence in the market for the stocks of other companies
that investors perceive to be similar to us could depress the price
of our securities regardless of our business, prospects, financial
conditions or results of operations. A decline in the market price
of our securities also could adversely affect its ability to issue
additional securities and its ability to obtain additional
financing in the future.
There can be no assurance that we will be able to comply with the
NYSE’s continued listing standards.
Our continued eligibility for listing on the NYSE depends on a
number of factors. If the NYSE delists our Class A Common Stock
from trading on its exchange for failure to meet the listing
standards, we and our stockholders could face significant material
adverse consequences including:
•a
limited availability of market quotations for our
securities;
•a
determination that our Class A Common Stock is a “penny stock,”
which will require brokers trading in our Class A Common Stock to
adhere to more stringent rules, possibly resulting in a reduced
level of trading activity in the secondary trading market for our
Class A Common Stock;
•a
limited amount of analyst coverage; and
•a
decreased ability to issue additional securities or obtain
additional financing in the future.
Our Charter’s exclusive forum provision may have the effect of
discouraging lawsuits against our directors and
officers.
Unless we consent in writing to the selection of an alternative
forum, our Charter requires that (i) any derivative action or
proceeding brought on our behalf, (ii) any action asserting a
breach of a fiduciary duty owed by any director, officer, other
employee or RSI stockholder to us or to our stockholders, (iii) any
action asserting a claim against us, our directors, officers, other
employees or RSI stockholders arising pursuant to any provision of
the Delaware General Corporation Law, our Charter or our bylaws, or
(iv) any action asserting a claim against us, our directors,
officers, other employees or RSI stockholders governed by the
internal affairs doctrine under Delaware law shall be brought, to
the fullest extent permitted by law, solely and exclusively in the
Delaware Court of Chancery;
provided, however,
that, in the event that the Delaware Court of Chancery lacks
subject matter jurisdiction over any such actions, our Charter
provides that the sole and exclusive forum shall be another state
or federal court located within Delaware, in each such case, unless
the Court of Chancery (or such other state or federal court located
within Delaware, as applicable) has dismissed a prior action by the
same plaintiff asserting the same claims because such court lacked
personal jurisdiction over an indispensable party named as a
defendant.
Our Charter also requires, unless we consent in writing to the
selection of an alternative forum, that the U.S. federal district
courts shall, to the fullest extent permitted by law, be the sole
and exclusive forum for resolving any complaint asserting a cause
of action arising under the Securities Act of 1933, as amended.
This provision in our Charter does not address or apply to claims
arising under the Exchange Act; however, Section 27 of the Exchange
Act creates exclusive federal jurisdiction over all suits brought
to enforce any duty or liability created by the Exchange Act or the
rules and regulations thereunder.
Although we believe this provision benefits us by providing
increased consistency in the application of law in the types of
lawsuits to which it applies, a court may determine that this
provision is unenforceable, and to the extent it is enforceable,
the provision may have the effect of discouraging lawsuits against
our directors and officers.
Provisions in our Charter may inhibit a takeover of the Company,
which could limit the price investors might be willing to pay in
the future for securities and could entrench
management.
Our Charter contains provisions that may discourage unsolicited
takeover proposals that stockholders may consider to be in their
best interests. These provisions include a staggered Board, the
controlling provisions of the Investor Rights Agreement, a
supermajority vote required to amend certain provisions of our
Charter and the ability of the Board to designate the terms of, and
issue new series of, preferred stock, which may make more difficult
the removal of
management and may discourage transactions that otherwise could
involve payment of a premium over prevailing market prices for our
securities.
General Risk Factors
Economic downturns and political and market conditions beyond our
control, including reduced consumer discretionary spending, could
adversely affect our business, financial condition, results of
operations and prospects.
Our financial performance is subject to global and U.S. economic
conditions and their impact on consumer spending. Economic
recessions have had, and may continue to have, far reaching adverse
consequences across many industries, including the global
entertainment and gaming industries, which may adversely affect our
business, financial condition, results of operations and prospects.
We recently experienced a global recession as a result of the
COVID-19 pandemic, and if recovery is slow or stalls, or we
experience another downturn because of another wave of the COVID-19
pandemic, we may experience a material adverse effect on our
business, financial condition, results of operations or prospects.
The ultimate severity of the COVID-19 outbreak is currently
uncertain and therefore we cannot predict the full impact it may
have on our customers and our operations; however, the effect on
our business, financial condition, results of operations and
prospects could be material and adverse.
Consumer discretionary spending and consumer preferences are driven
by socioeconomic factors beyond our control, and our business is
sensitive to reductions from time to time in consumer discretionary
spending. Demand for entertainment and leisure activities,
including gaming, can be affected by changes in the economy and
consumer tastes, both of which are difficult to predict and beyond
our control. Unfavorable changes in general economic conditions,
including recessions, economic slowdowns, sustained high levels of
unemployment or inflation, and rising prices or the perception of
weak or weakening economic conditions, may reduce our customers’
disposable income or result in fewer individuals engaging in
entertainment and leisure activities, such as online casino and
retail or online sports betting. As a result, we cannot ensure that
demand for our offerings will remain constant. Adverse developments
affecting economies throughout the world, including a general
tightening of availability of credit, decreased liquidity in
certain financial markets, increased interest rates, foreign
exchange fluctuations, increased energy costs, acts of war or
terrorism, transportation disruptions, natural disasters, declining
consumer confidence, sustained high levels of unemployment or
significant declines in stock markets, as well as concerns
regarding pandemics, epidemics and the spread of contagious
diseases such as COVID-19, could lead to a further reduction in
discretionary spending on leisure activities, such as online casino
and retail or online sports betting.
We may be subject to litigation in the operation of our business.
An adverse outcome in one or more proceedings could adversely
affect our business.
As a growing company with expanding operations, we may in the
future increasingly face the risk of claims, lawsuits and other
proceedings involving intellectual property, privacy, consumer
protection, accessibility claims, securities, tax, labor and
employment, regulatory and compliance, competition and antitrust,
commercial disputes, services and other matters. Litigation to
defend us against claims by third parties, or to enforce any rights
that we may have against third parties, may be necessary, which
could result in substantial costs and diversion of our resources,
causing a material adverse effect on our business, financial
condition, results of operations and prospects.
Any litigation to which we are a party may result in an onerous or
unfavorable judgment that may not be reversed on appeal (if any),
or in payments of substantial damages or fines, posting of bonds
requiring significant collateral, letters of credit or similar
instruments, or we may decide to settle lawsuits on unfavorable
terms. These proceedings could also result in criminal sanctions,
reputational harm, consent decrees or orders preventing us from
offering certain products or requiring a change in our business
practices in costly ways or requiring development of non-infringing
or otherwise altered products or technologies. Litigation and other
claims and regulatory proceedings against us could result in
unexpected disciplinary actions, expenses and liabilities, which
could have a material adverse effect on our business, financial
condition, results of operations and prospects.
We could be subject to future governmental investigations and
inquiries, legal proceedings and enforcement actions. Any such
investigation, inquiry, proceeding or action, could adversely
affect our business.
From time to time, we receive formal and informal inquiries from
government authorities and regulators, including gaming regulators,
regarding compliance with laws and other matters, and we may
receive such inquiries in the future, particularly as we grow and
expand. Violation of existing or future regulations, regulatory
orders or consent decrees could
subject us to substantial monetary fines and other penalties that
could adversely affect our business, financial condition, results
of operations and prospects. Further, it is possible that future
orders issued by, or inquiries or enforcement actions initiated by,
government or regulatory authorities could cause us to incur
substantial costs, expose us to unanticipated liability or
penalties, or require us to change our business practices in a
manner materially adverse to our business, financial condition,
results of operations and prospects.
Our insurance may not provide adequate levels of coverage against
claims.
We intend to maintain insurance that we believe is customary for
businesses of our size and type. However, there are types of losses
we may incur that cannot be insured against or that we believe are
not economically reasonable to insure. Moreover, any loss incurred
could exceed policy limits or be below our applicable deductible,
and policy payments made to us may not be made on a timely basis.
Such losses could adversely affect our business, financial
condition, results of operations and prospects.
We may have difficulty accessing the service of banks, credit card
issuers and payment processing providers, which may make it
difficult to provide our offerings.
Although financial institutions and payment processors are
permitted to provide services to us and others in our industry,
banks, credit card issuers and payment processing providers may be
hesitant to offer banking and payment processing services to
real-money gaming businesses. Consequently, the businesses involved
in our industry, including ourselves, may encounter difficulties in
establishing and maintaining banking and payment processing
relationships with a full scope of services and generating market
rate interest, in particular in jurisdictions that are in the
process of becoming regulated or are newly regulated. If we were
unable to maintain our bank accounts or our customers were unable
to use their credit cards, bank accounts or e-wallets to make
deposits and withdrawals from our platform, it would make it
difficult for us to operate our business, increase our operating
costs, and pose additional operational, logistical and security
challenges, which could result in an inability to implement our
business plan.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Chicago, Illinois, where
we lease approximately 6,575 square feet of office space. We use
this leased space primarily for management, marketing, finance,
legal, regulatory compliance, human resources and general
administrative teams. This lease is set to expire on April 30,
2024, subject to our option to extend the term for two successive
terms of two years each. We also lease office space in New Jersey,
Colombia, Estonia, Toronto and Malta.
We anticipate obtaining additional space as we continue to grow
globally and increase headcount. We currently believe that our
facilities are adequate to meet our needs for the immediate future
and that suitable additional space will be available to accommodate
any expansion of our operations as needed.
ITEM 3. LEGAL PROCEEDINGS
From time to time we become involved in legal proceedings
(including as described below) concerning matters arising in
connection with the conduct of our business activities. These
proceedings may be at varying stages, and many of these proceedings
may seek an indeterminate amount of damages. We regularly evaluate
the status of the legal proceedings in which we are involved to
assess whether a loss is probable or there is a reasonable
possibility that a loss or an additional loss may have been
incurred and to determine if accruals are appropriate. If accruals
are not appropriate, we further evaluate each legal proceeding to
assess whether an estimate of the possible loss or range of
possible loss can be made.
For certain matter described below, management is unable to provide
a meaningful estimate of the possible loss or range of possible
loss because, among other reasons: (i) the proceeding is in its
early stages; (ii) damages are unsupported and/or exaggerated;
(iii) there is uncertainty as to the outcome of pending appeals or
motions; (iv) there are significant factual issues to be resolved;
and/or (v) there are novel legal issues or unsettled legal theories
to be presented. For this matter, however, management does not
believe, based on currently available information, that the outcome
of this
proceeding will have a material adverse effect on our financial
condition, though the outcome could be material to our operating
results for any particular period, depending, in part, upon the
operating results for such period.
Todd L. Anderson. vs. Rush Street Gaming, LLC and Rush Street
Interactive, LLC
A complaint in the case
Todd L. Anderson. vs. Rush Street Gaming, LLC and Rush Street
Interactive, LLC,
Case Number # 120CV04794 that was filed in the U.S. District Court
for the Northern District of Illinois, was served on us on August
18, 2020 and was subsequently amended and served on us on September
15, 2020. The amended complaint alleges that Todd Anderson was
offered a 1% equity stake in RSILP in 2012 that was never issued
and asserts claims of breach of contract, promissory estoppel,
constructive fraud, conversion, breach of fiduciary duty and unjust
enrichment. On October 13, 2020, RSILP filed a motion to dismiss
all the alleged claims asserted in the amended complaint. On
September 28, 2021, the court entered an order granting in part and
denying in part RSILP’s motion to dismiss, dismissing
Mr. Anderson’s constructive fraud, breach of fiduciary duty
and unjust enrichment claims, but allowing his remaining claims to
proceed. On October 19, 2021, RSILP filed an answer to the amended
complaint. We believe we have multiple defenses and grounds for
dismissal of the claim and intend to defend against the claim
vigorously.
Other
In addition to the above actions, we are subject to various other
legal proceedings and claims that arise in the ordinary course of
business. In our opinion, the amount of ultimate liability with
respect to any of these actions is unlikely to materially affect
our financial condition, results of operations or liquidity, though
the outcomes could be material to our operating results for any
particular period, depending, in part, upon the operating results
for such period.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information & Stockholders
Our Class A Common Stock is quoted on the NYSE under the symbol
“RSI”. There is no public market for our Class V Voting
Stock.
As of March 1, 2022, there were 71 holders of record of our Class A
Common Stock and 19 holders of record of our Class V Voting Stock.
The number of holders of record does not include a substantially
greater number of “street name” holders or beneficial holders,
whose shares are held of record by banks, brokers and other
financial institutions.
Dividend Policy
We have not paid any cash dividends on our shares of common stock
to date and do not anticipate paying any cash dividends for the
foreseeable future. The payment of cash dividends in the future
will be dependent upon our revenues and earnings, if any, capital
requirements and general financial condition as well as general
business conditions. The payment of any cash dividends will be
within the discretion of the Board at such time.
Recent Sales of Unregistered Securities
In connection with the Company's acquisition of all or
substantially all of the assets of Run It Once, Ltd., a Maltese
limited company (“RIO”), on December 21, 2021, the Company issued
to RIO 158,127 shares of newly issued Class A Common Stock with an
aggregate value of $2.5 million, which were subsequently
distributed by RIO to certain stakeholders thereof. The issuance
was made to RIO, which is an accredited investor, in reliance on
Section 4(a)(2) of the Securities Act and/or Rule 506 of Regulation
D under the Securities Act.
Securities Authorized for Issuance Under Equity Compensation
Plans
See Part III, Item 12 of this Form 10-K and Note 11 to our
consolidated financial statements, included elsewhere in this
Annual Report, for additional information required.
ITEM 6. RESERVED
ITEM 7. 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 consolidated financial
statements and the related notes thereto included elsewhere in this
Annual 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 Annual Report captioned “Cautionary Note Regarding
Forward-Looking Statements” and “Risk Factors.”
This Management’s Discussion and Analysis of Financial Condition
and Results of Operations (this “MD&A”) 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 MD&A 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 MD&A 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 MD&A.
Unless the context requires otherwise, all references in this
MD&A 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 Business Combination and Rush Street
Interactive, Inc. and its subsidiaries after 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 user-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 customers
where we are transparent and honest, treat our customers 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 our customers 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, as well as social gaming, which involves
free-to-play games that use virtual credits that users can earn or
purchase. 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 thirteen U.S. states as outlined in
the table below.
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U.S. State |
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Online Casino |
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Online Sports
Betting |
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Retail Sports
Betting |
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Arizona |
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ü |
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Colorado |
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ü |
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Connecticut |
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ü |
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ü |
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Illinois |
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ü |
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ü |
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Indiana |
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ü |
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ü |
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Iowa |
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ü |
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Louisiana |
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ü |
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Michigan |
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ü |
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ü |
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ü |
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New Jersey |
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ü |
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ü |
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New York |
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ü |
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ü |
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Pennsylvania |
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ü |
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ü |
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ü |
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Virginia |
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ü |
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West Virginia |
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ü |
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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. In addition, we launched our social gaming offering in
Canada during October 2021 and anticipate launching real-money
online casino and sports betting there in 2022. We also expect to
launch online casino and sports betting in Mexico in the second
quarter of 2022.
Our real-money online casino and online sports betting offerings
are currently provided under our BetRivers.com and
PlaySugarHouse.com brands in the United States and under our
RushBet.co brand in Colombia. We operate and/or support retail
sports betting for our bricks-and-mortar 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- and partner-specific, and is based on
brand awareness, market research, marketing efficiency and
applicable gaming rules and regulations.
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. Starting in 2020 and continuing
through the date hereof, 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 ordered or requested to stay
home and restrict their traveling or otherwise voluntarily choosing
to stay at home or restrict travel. During the periods affected by
government-imposed stay-at-home orders, our business volume
significantly increased and has since 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. Beginning in early 2020 and continuing into the
third quarter of 2020, many sports seasons and sporting events,
including the NBA regular season and playoffs, the NCAA college
basketball tournament, the MLB regular season, the Masters golf
tournament, the NHL regular season and playoffs and domestic soccer
leagues and European cup competitions, were suspended, postponed,
modified or cancelled. While most major professional sports leagues
have since resumed their activities primarily starting in the
second half of 2020, the third quarter of 2021 was still 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 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, COVID-19 protocols or
local COVID-19 vaccine requirements.
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
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 cancellation of events, throughout fiscal year 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, 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 revenue varies based on sports seasons and sporting events,
among other factors, 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 significant uptick in 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 implemented business continuity
programs to help ensure that our personnel were safe and our
business continued to function with minimal disruptions to normal
work operations while personnel worked remotely. We will continue
to monitor developments relating to disruptions and uncertainties
caused by COVID-19.
Our Business Model
We enter new markets by leveraging our proprietary online gaming
platform and our ability to provide either a full-suite service
model or a customized solution to fit a specific situation. Our
business model is designed to be nimble, innovative and
customer-centric. By leveraging our dynamic proprietary online
gaming platform, we aspire to be “first to market” where real-money
online gaming has been newly legalized and where our management
determines that it is desirable to enter such market.
Our principal offerings are our real-money online casino and online
sports betting products. These products can be launched under one
of our existing brands or customized to be incorporated into a
local or third-party brand. We also provide a variety of retail
sports betting solutions to service land-based casino and other
partners and leverage our social gaming offerings to increase
customer engagement and build online databases in key markets both
before and after legalization and regulation.
We currently generate revenue through two operating models: (i) B2C
and (ii) B2B. Through our B2C operations, we offer online casino,
online sports betting, retail sports betting and social gaming
directly to the end customer through our websites, apps or physical
retail locations. B2C is our primary operating model, contributing
more than 99% of our total revenue for the years ended December 31,
2021 and 2020, and we expect that it will continue to be our
primary operating model into the future. We believe this is a
flexible operating model that permits us to customize our operating
structure based on applicable gaming regulations, market demands
and, as applicable, our land-based partner’s operations. Through
our B2B operations, we offer retail sports betting services to
land-based businesses, such as bricks-and-mortar casinos, in
exchange for a monthly commission.
Often in advance of markets legalizing online gaming, we build
relationships with local bricks-and-mortar casino operators and
other potential land-based partners who are looking for online
gaming and sports betting partners. In most U.S. jurisdictions, the
applicable gaming regulations require online gaming operators that
offer real-money offerings to operate under the gaming license of,
or partner with, a land-based operator such as a bricks-and-mortar
casino or other type of local partner such as a professional sports
team. Consequently, we leverage our relationships with
bricks-and-mortar casinos and vendors in the gaming industry to
find high-quality and reliable partners for online gaming
collaboration. Upon securing a partner for access to a specific
market (if required or desirable) and before we launch operations
in that market, we customize our online gaming platform to the laws
and regulations of the jurisdiction. Then, upon entering a new
market, we employ a number of marketing strategies to obtain new
customers as well as leverage our partner’s database when
applicable. We continuously refine our offerings and marketing
strategies based on data collected from each market. To attract,
engage, retain and/or reactivate customers, we offer a loyalty
program that rewards customers in exciting, fair
and transparent ways. We recognize and reward customer loyalty by,
among other things, ensuring there are exciting benefits at each of
the customer loyalty levels we currently offer.
The Business Combination
On December 29, 2020, we completed the Business Combination. As a
result of the Business Combination, we are organized in an Up-C
structure, in which substantially all the assets of the combined
company are held by RSILP and its subsidiaries, and the Company’s
only assets are its equity interests in RSILP (which are held
indirectly through wholly owned subsidiaries of the Company – the
Special Limited Partner and RSI GP, LLC (“RSI GP”)). As of the
Closing, the Company owned, indirectly through the Special Limited
Partner, approximately 21.9% of the RSILP Units (which includes
100% of the earnout interests that were earned in January 2021) and
controls RSILP through RSI GP, and the Sellers owned approximately
78.1% of the RSILP Units (which includes 100% of the earnout
interests that were earned in January 2021) and control the Company
through the ownership of the Class V Voting Stock. The Company has
also entered into certain customary agreements in connection with
the Business Combination, including the Tax Receivable Agreement,
which provides for the sharing of certain tax benefits as realized
by the Company. See “Business
— Business Combination”
for a more comprehensive description of the Business Combination
and the agreements entered into in connection
therewith.
Trends in Key Metrics
Monthly Active Users
MAUs is the number of unique users 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 users who have made a deposit but have not yet placed a
real-money bet on at least one of our online offerings. We also
exclude users who have placed a real-money bet but only with
promotional incentives. The numbers of unique users included in
calculating MAUs include U.S.-based users 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 years ended 2021
and 2020:
The year-over-year increase in MAUs was mainly due to our continued
growth and strong customer retention rates in existing markets such
as Pennsylvania, New Jersey, Illinois, Indiana, Colorado and
Colombia, as well as our expansion into new markets such as
Arizona, Connecticut, Michigan, Virginia and West Virginia.
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.
The chart below presents our ARPMAU for the years ended 2021 and
2020:
The year-over-year increase in ARPMAU was mainly due to a favorable
mix of online casino MAUs, as casino customers generally generate
more revenue per user than sports betting customers. Additionally,
as our product offerings continue to be available in more mature
markets, customer bonusing volumes have decreased, thus resulting
in higher ARPMAUs. This year-over-year increase in ARPMAUs was
partially offset by increased promotional spend related to new
market launches in jurisdictions such as Michigan, Virginia, West
Virginia, Arizona and Connecticut.
Non-GAAP Information
This MD&A 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
expense, 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 distribution 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.
The table below presents our Adjusted EBITDA reconciled from our
Net loss, the closest U.S. GAAP measure, for the periods
indicated:
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Years Ended December 31, |
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($ in thousands) |
2021 |
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2020 |
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Net loss |
$ |
(71,092) |
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$ |
(131,645) |
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Depreciation and amortization |
4,245 |
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|
2,082 |
|
|
Interest expense, net |
187 |
|
|
135 |
|
|
Income tax expense |
4,688 |
|
|
2,919 |
|
|
One-time payment from Affiliated casino |
— |
|
|
(9,000) |
|
|
Change in fair value of earnout interests liability |
13,740 |
|
|
2,338 |
|
|
Change in fair value of warrant liabilities |
(41,802) |
|
|
(7,166) |
|
|
Share-based compensation |
24,912 |
|
|
144,733 |
|
|
Adjusted EBITDA |
$ |
(65,122) |
|
|
$ |
4,396 |
|
Key Factors Affecting Our Results
Our financial position and results of operations depend to a
significant extent on the following factors:
Industry Opportunity and Competitive Landscape
We operate within the global gaming and entertainment industry,
which is comprised of diverse products and offerings that compete
for consumers’ time and disposable income. As we prepare to enter
new jurisdictions, we expect to face significant competition from
other established industry players, some of which may have more
experience in online casino, and online and/or retail sports
betting, and have access to more resources. We believe that our
proprietary online gaming platform, our experience operating in
domestic and foreign jurisdictions, our brand and marketing
strategies, which appeal to both male and female customers, and our
many unique product offerings and bonusing features will enable us
to compete with such established industry players.
Our performance may vary from one jurisdiction to the next as a
result of the level of competition in each
jurisdiction.
Legalization, Regulation and Taxation
Our financial growth prospects depend on legalization of online
casino and sports betting across more regulated jurisdictions, with
particular emphasis on the United States, a trend that we believe
is still in its early stage. Online casino may expand further due
to many factors, including that many U.S. states are seeking ways
to increase revenues. Online sports betting’s prospects were made
possible after the U.S. Supreme Court struck down PASPA in May
2018. Our strategy is to enter new jurisdictions that we believe
are financially prudent for us to enter as they are legalized.
Online casino is currently authorized only in seven states:
Connecticut, Delaware, Michigan, New Jersey, Pennsylvania, West
Virginia and Nevada (although regulators have not authorized online
casino outside of physical casinos in Nevada). As of the date
hereof, 32 states and the District of Columbia have authorized
sports betting. Of those 33 jurisdictions, 22 states have
authorized statewide online sports betting while 11 remain
authorized for retail-only at casinos or retail
locations.
The process of securing the necessary licenses or partnerships to
operate in a given jurisdiction may take longer than we anticipate.
In addition, legislative or regulatory restrictions and gaming
taxes may make it less attractive or more difficult for us to do
business in a particular jurisdiction. Further, certain
jurisdictions require us to have a relationship with a
bricks-and-mortar casino or other land-based partner for online
sports betting access, which tends to increase our costs of
revenue. Jurisdictions that have established state or
government-run monopolies may limit opportunities for private
operators such as us.
States and some local governments impose tax rates on online casino
and sports betting, which may vary substantially between states. We
are also subject to a federal excise tax of 0.25% on the amount of
each sports bet placed. We believe the jurisdictions that will
create the most compelling levels of profitability for us are
jurisdictions with both online casino and sports betting at
favorable tax rates.
Ability to Acquire, Retain and Monetize Customers
Our ability to effectively market is critical to operational
success. Using experience, dynamic learnings and analytics, we
leverage marketing to acquire, convert, retain and/or 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.
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 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 which advertising methods and channels are working and
which ones are not.
These investments and personalized promotions are intended to
increase consumer awareness and drive engagement. While we have
some data points, particularly in New Jersey, of the effectiveness
of our marketing and promotion activities, our limited operating
history and the relative novelty of the U.S. online casino and
sports betting industries make it difficult for us to predict when
we will achieve our longer-term profitability
objectives.
Managing Wagering Risk
The online casino and retail and online sports betting businesses
are characterized by an element of chance. Accordingly, we employ
theoretical win rates to estimate what a certain type of online
casino wager or retail or online sports bet, on average, will win
or lose in the long run. Revenue is impacted by variations in the
hold percentage (the ratio of winnings to total amount bet) with
respect to the online casino and retail and online sports betting
we offer to our customers. We use the hold percentage as an
indicator of an online casino game or retail or online sports bet’s
performance against its expected outcome. Although each online
casino wager or retail or online sports bet generally performs
within a defined statistical range of outcomes in the long run,
actual outcomes may vary for any given period, particularly in the
short term. In the short term, for online casino and retail and
online sports betting, the element of chance may affect win rates
(hold percentages); these win rates, particularly for retail and
online sports betting, may also be affected in the short term by
factors that are largely beyond our control, such as unanticipated
event outcomes, a customer’s skill, experience and behavior, the
mix of games played or bets placed, the financial resources of
customers, the volume of bets placed and the amount of time spent
betting. For online casino games, it is possible a random number
generator outcome or game will malfunction and award errant prizes.
For retail and online sports betting, it is possible that our
platform erroneously posts odds or is otherwise misprogrammed to
pay out odds that are highly favorable to bettors, and bettors
place bets before the odds are corrected. Additionally, odds
compilers and risk managers are capable of human error, so even if
our betting products are subject to a capped payout, significant
volatility can occur. As a result of the variability in these
factors, the actual win rates on our online casino games and retail
and online sports bets may differ from the theoretical win rates we
have estimated and could result in the winnings of our online
casino or sports betting customers exceeding those anticipated. The
variability of win rates (hold rates) also has the potential to
adversely affect our business, financial condition, results of
operations, prospects and cash flows.
Mix of Revenue Based on Time Period in Markets
Our profitability generally depends on how long we have been
operating in each jurisdiction. Generally, but not always, our
profitability levels will increase in a jurisdiction as we have
operated there for longer.
Mix of Revenue From Our Different Operating Models
Because we operate using two different operating models, each of
which has its own unique range of profitability, the relative
proportion of revenue that is derived from each operating model in
a given time period could impact our overall level of
profitability.
Key Components of Revenue and Expenses
Revenue
We offer real-money online casino, online sports betting and/or
retail sports betting in thirteen U.S. states and Colombia. We also
provide social gaming (where permitted, including Ontario, Canada),
where users 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. See Note 4 to our consolidated financial statements,
included elsewhere in this Annual Report. 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 customers 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 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 usually subject to
standard revenue-sharing agreements specific to each supplier,
where the supplier generally receives a percentage of the net
gaming revenue generated from its casino games played on our
platform. In exchange, we receive a limited license to offer the
games on our platform to customers 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, Lucky Ladies,
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 customer bets
less amounts paid to customers for winning bets, less incentives
awarded to customers, 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 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 and same-game parlay
betting. We have also incorporated live streaming of certain
sporting events into our online sports betting
offering.
Online sports revenue is generated based on total customer bets
less amounts paid to customers for winning bets, less incentives
awarded to customers, plus or minus the change in unsettled sports
bets.
Retail Sports Betting
We provide retail sports services to certain land-based partners in
exchange for a monthly commission that is calculated based on the
land-based retail sportsbook revenue. Services generally include
ongoing management and oversight of the retail sportsbook (i.e.,
within a bricks-and-mortar location), technical support for the
partner’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 customer bets less amounts paid to
customers for winning bets, less other incentives awarded to
customers, plus or minus the change in unsettled retail sports
bets.
Social Gaming
We provide social gaming (where permitted) where users are given
virtual credits to enjoy free-to-play games. Users 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 users and engages
with users through another channel while providing the
entertainment value that users 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 users 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,
(iv) payment processing fees and chargebacks and (v) salaries,
bonuses, benefits and share-based compensation for dedicated
personnel. These costs are primarily variable in nature and should,
in large part, correlate with the change in revenue. Revenue share
and market access fees consist primarily of amounts paid to local
land-based partners that hold the applicable gaming license,
providing us the ability to offer our real-money online offerings
in the respective jurisdictions. Our platform and content fees are
primarily driven by costs associated with third-party casino
content, sports betting trading services and certain elements of
our platform technology, such as geolocation and
know-your-customer. Gaming taxes primarily relate to state taxes
and are determined on a jurisdiction-by-jurisdiction basis. We
incur payment processing costs on customer deposits and
occasionally chargebacks (i.e., when a payment processor
contractually disallows customer deposits in the normal course of
business).
Advertising and Promotions Costs.
Advertising and promotion costs consist primarily of costs
associated with marketing our offerings via different channels,
promotional activities and the related costs incurred to acquire
new customers. These costs also include salaries, bonuses, 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 and services 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.
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 assets over their useful
lives. See Notes 2, 5 and 6 to our consolidated financial
statements, included elsewhere in this Annual Report.
Results of Operations
The following table sets forth a summary of our consolidated
results of operations for the years indicated, and the changes
between periods. We have derived this data from our consolidated
financial statements included elsewhere in this Annual Report. This
information should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this
Annual Report. The results of historical periods are not
necessarily indicative of the results of operations for any future
period.
Comparison of the Years Ended December 31, 2021 and
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
Change |
|
($ in thousands) |
2021 |
|
2020 |
|
$ |
|
% |
|
Revenue |
$ |
488,105 |
|
|
$ |
278,500 |
|
|
$ |
209,605 |
|
|
75 |
% |
|
Costs of revenue |
332,145 |
|
|
190,873 |
|
|
141,272 |
|
|
74 |
% |
|
Advertising and promotions |
190,476 |
|
|
56,517 |
|
|
133,959 |
|
|
237 |
% |
|
General administration and other |
55,518 |
|
|
162,447 |
|
|
(106,929) |
|
|
(66) |
% |
|
Depreciation and amortization |
4,245 |
|
|
2,082 |
|
|
2,163 |
|
|
104 |
% |
|
Loss from operations |
(94,279) |
|
|
(133,419) |
|
|
39,140 |
|
|
(29) |
% |
|
Interest expense, net |
(187) |
|
|
(135) |
|
|
(52) |
|
|
39 |
% |
|
Change in fair value of earnout interests liability |
(13,740) |
|
|
(2,338) |
|
|
(11,402) |
|
|
488 |
% |
|
Change in fair value of warrant liabilities |
41,802 |
|
|
7,166 |
|
|
34,636 |
|
|
483 |
% |
|
Loss before income taxes |
(66,404) |
|
|
(128,726) |
|
|
62,322 |
|
|
(48) |
% |
|
Income tax expense |
4,688 |
|
|
2,919 |
|
|
1,769 |
|
|
61 |
% |
|
Net loss |
$ |
(71,092) |
|
|
$ |
(131,645) |
|
|
$ |
60,553 |
|
|
(46) |
% |
Revenue.
Revenue increased by $209.6 million, or 75%, to $488.1 million in
2021 as compared to $278.5 million in 2020. The increase was mainly
due to and directly correlated with our continued growth in the
majority of our existing markets, as well as our expansion into new
markets such as Michigan, West Virginia, and Connecticut. The
increase reflects higher period-over-period online casino and
sports betting revenue of $206.3 million, retail sports betting
revenue of $2.6 million, and social gaming revenue of $0.7
million.
Costs of Revenue.
Costs of revenue increased by $141.3 million, or 74%, to $332.2
million in 2021 as compared to $190.9 million 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 $21.8 million, $26.5 million, $70.2 million, and $18.5
million, respectively, to the year-over-year increase in costs of
revenue, with personnel costs contributing to the remaining $4.3
million of the year-over-year increase. Costs of revenue as a
percentage of revenue decreased to 68% in 2021 as compared to 69%
in 2020.
Advertising and Promotions.
Advertising and promotions expense increased by $134.0 million, or
237%, to $190.5 million in 2021 as compared to $56.5 million 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 acquisition of our offerings, such
as executing strategic marketing or sponsorship arrangements with
the three-time NBA champion Detroit Pistons, hall of famer Jerome
Bettis, legendary NBA coach George Karl, nine-time First
Division/Premier League champions, Everton Football Club, the
Chicago Bears, Mike Ditka, Field of 68 Media Network, Field of 12
Media Network, Mark Schlereth and podcast organizations.
Advertising and promotions expense as a percentage of revenue
increased to 39% in 2021 as compared to 20% in 2020.
General Administration and Other.
General administration and other expense decreased by $106.9
million, or 66%, to $55.5 million in 2021 as compared to $162.4
million in 2020. The year-over-year decrease was mainly due to a
reduction in share-based compensation expense of $119.8 million,
which was partially offset by an increase in other general
and
administrative expense of $12.9 million. General administration and
other expense as a percentage of revenue decreased to 11% for 2021
as compared to 58% in 2020.
Depreciation and Amortization.
Depreciation and amortization expense increased by $2.2 million, or
104%, to $4.3 million in 2021 as compared to $2.1 million in 2020.
The increase was mainly due to purchases of property and equipment
and the related depreciation expense, and additional acquisition of
gaming licenses, amounts paid for internally developed software,
and capitalization of certain leases and the related amortization
expense. Depreciation and amortization expense as a percentage of
revenue remained flat at 1% in 2021 and 2020.
Interest expense, net.
Interest expense, net increased by $0.1 million, or 39%, to $0.2
million in 2021 as compared to $0.1 million in 2020. The increase
was mainly attributable to the recognition of additional imputed
interest associated with the recognition of deferred royalties and
the commencement of additional leases as we continue to expand into
new jurisdictions.
Change in fair value of earnout interests
liability.
Change in fair value of earnout interests liability was $13.7
million in 2021 and $2.3 million in 2020. Gains and losses are
attributable to the remeasurement of the liability at fair value
and were primarily a result of changes in the underlying share
price of our Class A Common Stock. The liability was fully settled
during the year ended December 31, 2021.
Change in fair value of warrant liabilities.
Change in fair value of warrant liability was $41.8 million in 2021
and $7.2 million in 2020. Gains and losses are attributable to the
remeasurement of the liability at fair value and were primarily a
result of changes in the underlying share price of our Class A
Common Stock. The liability was fully settled during the year ended
December 31, 2021.
Income tax expense.
Income tax expense increased by $1.8 million, or 61%, to $4.7
million in 2021 as compared to $2.9 million in 2020. The increase
in income tax expense is attributable to the profitability of
certain of our subsidiaries. Income tax as a percentage of revenue
remained flat at 1% in 2021 and 2020.
Comparison of the Years Ended December 31, 2020 and
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
Change |
|
($ in thousands) |
2020 |
|
2019 |
|
$ |
|
% |
|
Revenue |
$ |
278,500 |
|
|
$ |
63,667 |
|
|
$ |
214,833 |
|
|
337 |
% |
|
Costs of revenue |
190,873 |
|
|
32,893 |
|
|
157,980 |
|
|
480 |
% |
|
Advertising and promotions |
56,517 |
|
|
28,313 |
|
|
28,204 |
|
|
100 |
% |
|
General administration and other |
162,447 |
|
|
23,649 |
|
|
138,798 |
|
|
587 |
% |
|
Depreciation and amortization |
2,082 |
|
|
1,139 |
|
|
943 |
|
|
83 |
% |
|
Loss from operations |
(133,419) |
|
|
(22,327) |
|
|
(111,092) |
|
|
498 |
% |
|
Interest expense, net |
(135) |
|
|
(123) |
|
|
(12) |
|
|
10 |
% |
|
Change in fair value of earnout interests liability |
(2,338) |
|
|
— |
|
|
(2,338) |
|
|
100 |
% |
|
Change in fair value of warrant liabilities |
7,166 |
|
|
— |
|
|
7,166 |
|
|
100 |
% |
|
Loss before income taxes |
(128,726) |
|
|
(22,450) |
|
|
(106,276) |
|
|
473 |
% |
|
Income tax expense |
2,919 |
|
|
— |
|
|
2,919 |
|
|
100 |
% |
|
Net loss |
$ |
(131,645) |
|
|
$ |
(22,450) |
|
|
$ |
(109,195) |
|
|
486 |
% |
Revenue.
Revenue increased by $214.8 million, or 337%, to $278.5 million in
2020 as compared to $63.7 million in 2019. The increase was mainly
due to, and directly correlated with, our expansion into new
markets (specifically Illinois, Colorado and Iowa), our continued
growth in markets that we entered in 2019 such as Pennsylvania and
our accelerated adoption of online casino during the COVID-19
pandemic and to a lesser extent, online sports betting once sports
seasons and events resumed toward the end of the third quarter of
2020. The increase reflects higher period-over-period online casino
and sports betting revenue of $212.5 million, social gaming revenue
of $2.2 million and retail sports betting revenue of $0.1
million.
Costs of Revenue.
Costs of revenue increased by $158.0 million, or 480%, to $190.9
million in 2020 as compared to $32.9 million in 2019. The increase
was mainly due to and directly correlated with, our expansion and
continued growth in
existing and new markets (specifically Illinois, Colorado and
Iowa). Market access costs, operating expenses and gaming taxes
contributed $129.4 million, $18.1 million and $5.0 million,
respectively, to the year-over-year increase in costs of revenue,
with payments processing costs, personnel costs and other costs of
revenue contributing to the remaining $5.5 million of the
year-over-year increase. Costs of revenue as a percentage of
revenue increased to 69% in 2020 as compared to 52% in
2019.
Advertising and Promotions.
Advertising and promotions expense increased by $28.2 million, or
100%, to $56.5 million in 2020 as compared to $28.3 million in
2019. The increase was mainly due to new and increased marketing
efforts and strategies in newly entered and existing markets to
increase customer awareness and acquisition for our offerings, such
as executing strategic marketing or sponsorship arrangements with
the three-time NBA champion Detroit Pistons, hall of famer Jerome
Bettis, legendary NBA coach George Karl and nine-time First
Division/Premier League champions, Everton Football Club.
Advertising and promotions expense as a percentage of revenue
decreased to 20% in 2020 as compared to 44% in 2019.
General Administration and Other.
General administration and other expense increased by $138.8
million, or 587%, to $162.4 million in 2020 as compared to $23.6
million in 2019. The year-over-year increase was mainly due to
$131.3 million of additional non-cash share-based compensation
expense in 2020, related to partnership interests and profits
interests in RSILP that were issued before the Business
Combination. The remainder of the increase was due to increased
personnel costs resulting from headcount growth between December
31, 2019 and 2020 as well as customary merit increases. General
administration and other expense as a percentage of revenue
increased to 58% for 2020 as compared to 37% in 2019.
Depreciation and Amortization.
Depreciation and amortization expense increased by $1.0 million, or
83%, to $2.1 million in 2020 as compared to $1.1 million in 2019.
The increase was mainly due to purchases and subsequent
amortization of license fees as we continue to expand into new
states, such as Illinois and Colorado. Depreciation and
amortization expense as a percentage of revenue decreased to 1% in
2020 as compared to 2% in 2019.
Interest expense, net.
Interest expense, net was $0.1 million in 2020 and
2019.
Change in fair value of earnout interests
liability.
Change in fair value of earnout interests liability was $2.3
million in 2020 and zero in 2019. The change in fair value was
primarily a result of changes in the underlying share price of our
Class A Common Stock.
Change in fair value of warrant liabilities.
We classify the Warrants issued in connection with our February
2020 IPO and the closing of the Business Combination as derivative
liabilities with subsequent changes in their respective fair values
recognized in our consolidated statement of operations and
comprehensive income (loss). Change in fair value of warrant
liabilities was $7.2 million in 2020 and zero in 2019. The change
in fair value of warrant liabilities was due to the increase in the
estimated fair value of the Warrants, which was primarily a result
of changes in the underlying share price of our Class A Common
Stock, offset by warrant issuance costs. Subsequent to the Business
Combination, we had 11,500,000 Public Warrants, 6,600,000 Private
Placement Warrants and 75,000 Working Capital Warrants outstanding
as of December 31, 2020.
Income tax expense.
Income tax expense was $2.9 million in 2020 and zero in
2019.
Seasonality and Other Trends Impacting Our Business
Our results of operations can and generally do fluctuate due to
seasonal trends and other factors such as level of customer
engagement, online casino and sports betting results and other
factors that are outside of our control or that we cannot
reasonably predict. Our quarterly financial performance depends on
our ability to attract and retain customers. Customer engagement in
our online offerings may vary due to, among other things, customer
satisfaction with our platform, the number and timing of sporting
events, the length of professional sports seasons, our offerings
and those of our competitors, our marketing efforts, climate and
weather conditions, public sentiment or an economic downturn. As
customer engagement varies, so may our quarterly financial
performance.
Our quarterly financial results may also be impacted by the number
and amount of betting losses and jackpot payouts we experience.
Although our losses are limited per stake to a maximum payout in
our online casino offering, when looking at bets across a period of
time, these losses can be significant. As part of our online casino
offering, we offer progressive jackpot games. Each time a customer
plays a progressive jackpot game, we contribute a portion of the
amount bet to the
jackpot for that game or group of games. When a progressive jackpot
is won, the jackpot is paid out and is reset to a predetermined
base amount. As winning the jackpot is determined by a random
mechanism, we cannot foresee when a jackpot will be won and we do
not insure against jackpot payouts. Paying the progressive jackpot
decreases our cash position and depending upon the size of the
jackpot it may have a significant negative affect on our cash flow
and financial condition.
Our online sports betting and retail sports betting operations
experience seasonality based on the relative popularity and
frequency of certain sporting events. Although sporting events
occur throughout the year, our online sports betting customers are
most active during the American football season as well as during
the NBA and NCAA basketball seasons. In addition, the suspension,
postponement or cancellation of major sports seasons and sporting
events, due to COVID-19, may adversely impact our quarterly
results. See “—
Impact of COVID-19.”
From a legislative perspective, we are continuing to see strong
momentum to legalize and regulate online sports betting in new U.S.
jurisdictions. As expected, in many cases these new U.S.
jurisdictions are first trying to legalize and regulate online
sports betting before considering whether to legalize and regulate
online casino. However, given the tax generation success of online
casino in markets where it has been legalized, we are also
continuing to see strong momentum for online casino in several U.S.
jurisdictions that are looking for additional revenue sources to
fund expanding budgets.
We operate within the global gaming and entertainment industry,
which is comprised of diverse products and offerings that compete
for consumers’ time and disposable income. We face and expect to
continue to face significant competition from other industry
players both within existing and new markets including from
competitors with access to more resources or experience. Customer
demands for new and innovative offerings and features require us to
continue to invest in new technologies and content to improve the
customer experience. Many jurisdictions in which we operate or
intend to operate in the future have unique regulatory and/or
technological requirements, which require us to have robust,
scalable networks and infrastructure, and agile engineering and
software development capabilities. The global gaming and
entertainment industry has seen significant consolidation,
regulatory change and technological development over the last few
years, and we expect this trend to continue into the foreseeable
future, which may create opportunities for us but may also create
competitive and margin pressures.
Liquidity and Capital Resources
We measure liquidity in terms of our ability to fund the cash
requirements of our business operations, including working capital
and capital expenditure needs, contractual obligations and other
commitments, with cash flows from operations. Our current working
capital needs relate mainly to supporting our existing businesses,
the growth of these businesses in their existing markets and their
expansion into other geographic regions, as well as our employees’
compensation and benefits.
We had $281.0 million in cash and cash equivalents as of
December 31, 2021 (excluding customer cash deposits, which we
segregate from our operating cash balances on behalf of our
real-money customers for all jurisdictions and products). On
February 22, 2021, we announced the redemption (the “Redemption”)
of all the Company’s warrants to purchase Class A common stock that
were issued to third parties in connection with dMY Technology
Group, Inc.’s initial public offering (the “Public Warrants”),
which were exercisable for an aggregate of approximately 11.5
million shares of Class A Common Stock at a price of $11.50 per
share. During the year ended December 31, 2021, 11,442,389 Public
Warrants were exercised at a price of $11.50 per share, resulting
in cash proceeds of approximately $131.6 million. We intend for the
foreseeable future to continue to finance our operations without
third-party debt and entirely from operating cash flows and
proceeds from the Redemption.
In connection with the Business Combination, we executed the TRA,
by and among the Special Limited Partner, RSILP, the Sellers and
the Sellers’ representative, which generally provides for the
payment by the Special Limited Partner of 85% of certain net tax
benefits, if any, that RSI and its consolidated subsidiaries,
including the Special Limited Partner, realizes (or in certain
cases is deemed to realize) as a result of the increases in tax
basis and tax benefits related to the transactions contemplated
under the Business Combination Agreement and the exchange of
Retained RSILP Units for Class A Common Stock (or cash) and tax
benefits related to entering into the TRA, including tax benefits
attributable to payments under the TRA. Although the actual timing
and amount of any payments made under the TRA will vary, such
payments may be significant. Any payments made under the TRA will
generally reduce the amount of overall cash flow that might have
otherwise been available to us and, to the extent that payments
required under the TRA are unable to be made for any reason, the
unpaid amounts generally will be deferred and will accrue interest
until paid. To date, no material payments under the TRA have been
made, and no payments or accrued payments thereunder are expected
in the near future
as payments under the TRA are not owed until the tax benefits
generated thereunder are more-likely-than-not to be
realized.
We expect our existing cash and cash equivalents, proceeds from the
Redemption and cash flows from operations to be sufficient to fund
our operating activities and capital expenditure requirements for
at least the next 12 months and thereafter for the foreseeable
future. We may, however, need additional cash resources due to
changed business conditions or other developments, including
unanticipated regulatory developments, significant acquisitions and
competitive pressures. We expect our capital expenditures and
working capital requirements to continue to increase in the
immediate future to support our growth as we seek to expand our
offerings across more of the United States and worldwide, which
will require significant investment in our online gaming platform
and our personnel, in particular in product development,
engineering and operations roles. See Note 16 of our consolidated
financial statements, included elsewhere in this Annual Report for
a summary of our commitments as of December 31, 2021. We also
expect to increase our marketing, advertising and promotional spend
in existing and new markets, as well as market access fees and
license costs as we continuing to enter into new market access
arrangements with local partners in new jurisdictions. In
particular, we are party to several non-cancelable contracts with
vendors and licensors for marketing and other strategic
partnerships where we are obligated to make future minimum payments
under the non-cancelable terms of these contracts. To the extent
that our current resources are insufficient to satisfy our cash
requirements, we may need to seek additional equity or debt
financing. If the needed financing is not available, or if the
terms of financing are less desirable than we expect, we may be
forced to decrease our level of investment in new product or
service launches and related marketing initiatives or to scale back
our existing operations, which could have an adverse impact on our
business and financial prospects. See Note 1 to our consolidated
financial statements, included elsewhere in this Annual
Report.
We expect our material cash requirements during the upcoming
12-month period to include $0.8 million of lease payments,
$10.0 million of license and market access fees, and
$18.4 million of non-cancellable purchase obligations with
marketing vendors. In addition, we will continue to pursue
expansion into new markets, which is expected to require
significant capital investments. We have $56.5 million of
additional non-cancellable purchase obligations subsequent to the
upcoming 12-month period. Management believes our current cash
holdings and various avenues available to pursue funding in capital
market will suffice to fund these obligations.
As of December 31, 2021, we had no off-balance sheet
arrangements.
Debt
As of December 31, 2021, we had no debt outstanding. We have an
outstanding letter of credit for $1.0 million in connection
with our operations in Colombia, for which no amounts have been
drawn as of December 31, 2021.
Cash Flows
The following table shows our cash flows from operating activities,
investing activities and financing activities for the stated
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
($ in thousands) |
2021 |
|
2020 |
|
2019 |
|
Net cash provided by (used in) operating activities |
$ |
(48,186) |
|
|
$ |
16,179 |
|
|
$ |
(2,459) |
|
|
Net cash used in investing activities |
(37,002) |
|
|
(6,243) |
|
|
(5,770) |
|
|
Net cash provided by financing activities |
125,584 |
|
|
241,071 |
|
|
15,545 |
|
|
Effect of exchange rate changes on cash, cash equivalents and
restricted cash |
(2,132) |
|
|
515 |
|
|
(6) |
|
|
Net change in cash, cash equivalents and restricted
cash |
$ |
38,264 |
|
|
$ |
251,522 |
|
|
$ |
7,310 |
|
Operating activities.
Net cash used in operating activities was $48.2 million for the
year ended December 31, 2021 as compared to $16.2 million
provided by operating activities for the year ended
December 31, 2020. The increased use of cash reflects a lower
period-over-period net loss totaling $60.6 million, which was more
than offset by lower non-cash expenses totaling $140.7 million and
a decline in working capital changes of $15.8 million. The increase
in non-cash expenses totaling $140.7 million was driven primarily
by an decrease in share-based compensation expense of $119.8
million and the change in fair value of warrant liabilities of
$34.6 million, partially offset by the change in fair value of
earnout interests liability of $11.4 million.
Net cash provided by operating activities was $16.2 million for the
year ended December 31, 2020 as compared to $2.5 million used in
operating activities for the year ended December 31, 2019. The
increase reflects a higher period-over-period net loss totaling
$109.2 million, which was more than offset by higher non-cash
expenses totaling $127.6 million and improvement in working capital
of $0.2 million. The increase in non-cash expenses totaling $127.6
million was driven primarily by an increase in share-based
compensation expense of $131.3 million and the change in fair value
of earnout interests liability of $2.3 million, partially offset by
the change in fair value of warrant liabilities of $7.2
million.
Investing activities.
Net cash used in investing activities during 2021 increased by
$30.8 million to $37.0 million, as compared to $6.2 million during
2020. The increase reflects higher period-over-period costs
including increased gaming license acquisition purchases of $19.2
million, cash paid for internally developed software costs of $4.1
million, acquisition of developed technology intangible assets of
$3.3 million, property and equipment costs of $2.0 million,
investment in equity of $1.5 million, and investments in long-term
time deposits of $0.7 million.
Net cash used in investing activities during 2020 increased by $0.4
million to $6.2 million, as compared to $5.8 million during 2019.
The increase reflects higher period-over-period purchases of
property and equipment of $1.4 million, partially offset by lower
period-over-period acquisitions of gaming licenses of $1.0 million
such as Illinois and Colorado.
Financing activities.
Net cash provided by financing activities during 2021 decreased by
$115.5 million to $125.6 million, as compared to $241.1 million
during 2020. The decrease primarily reflects the net proceeds from
the exercise of warrants of $131.6 million, which was more than
offset by the Business Combination and PIPE financing of $239.8
million received during 2020, increased costs to repurchase common
stock of $3.5 million, and increased principal payments of finance
lease liabilities of $2.1 million.
Net cash provided by financing activities during 2020 increased by
$225.6 million to $241.1 million, as compared to $15.5 million
during 2019. The increase reflects the net proceeds from the
Business Combination and PIPE financing of $239.8 million during
2020, partially offset by lower period-over period member capital
contributions net of member distributions of $14.2
million.
Critical Accounting Policies
We have prepared our consolidated financial statements in
accordance with GAAP. In doing so, management is required to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses during the reporting
period. Management bases estimates on historical experience and
other assumptions it believes to be reasonable under the
circumstances and evaluates these estimates on an on-going basis.
Actual results may differ from these estimates. A discussion of our
more significant estimates follows. Management has discussed the
development, selection and disclosure of these estimates and
assumptions with the Audit Committee of the Board. See Note 2 to
our consolidated financial statements, included elsewhere in this
Annual Report for further information on our critical and other
significant accounting policies.
Share-based Compensation (subsequent to the Business
Combination)
We have issued stock-based awards with service-based conditions or
market-based conditions. Our historical and outstanding share-based
compensation awards are described in Note 11 to our consolidated
financial statements, included elsewhere in this Annual
Report.
Share-based compensation expense is measured based on the
grant-date fair value of the stock-based awards and is recognized
over the requisite service period of the awards. Following the
Business Combination, the fair value of our Class A Common Stock is
now determined based on the quoted market price. To estimate the
fair value of stock option awards, we used the Black-Scholes model,
and we used a Monte Carlo simulation to determine the fair value of
grants with market-based conditions. Both the Black-Scholes model
and the Monte Carlo simulation require management to make a number
of key assumptions, including expected volatility, expected term,
risk-free interest rate and expected dividends. The risk-free
interest rate is estimated using the rate of return on U.S.
treasury notes with a life that approximates the expected term. The
expected term assumption used in the Black-Scholes model represents
the period of time that the options are expected to be outstanding
and is estimated using the midpoint between the requisite service
period and the contractual term of the option.
The assumptions underlying these valuations represent management’s
best estimates, which involve inherent uncertainties and the
application of management judgment. As a result, if factors or
expected outcomes change and our management uses significantly
different assumptions or estimates, our share-based compensation
expense for future
periods could be materially different, including as a result of
adjustments to share-based compensation expense recorded for prior
periods.
Share-based Compensation (prior to the Business
Combination)
Our historical share-based compensation awards, including the
issuances of equity awards and liability awards, are described in
Note 11 to our consolidated financial statements, included
elsewhere in this Annual Report. Share-based compensation expense
recognized for the years ended December 31, 2020 and 2019 relates
entirely to partnership interests in RSILP that were issued before
the Business Combination.
Share-based awards expected to be satisfied in cash are treated as
liability awards and remeasured at fair value at the end of each
reporting period, recognizing a proportionate amount of the expense
for each period over the vesting period of the award. Share-based
awards expected to be satisfied in Company common stock are treated
as equity awards and recorded based on an estimated grant date fair
value and on a straight-line basis over the vesting period of the
award. We account for forfeitures as they occur. Determination of
the fair value of the awards requires judgments and estimates
regarding, among other things, the appropriate methodologies to
follow in valuing the awards and the related inputs required by
those valuation methodologies.
Prior to the Business Combination, we obtained a third-party
valuation at the grant date for equity awards and at each
remeasurement date for liability awards based upon assumptions
regarding risk-free rates of return, expected volatilities, the
expected term of the award and dividend yield, as applicable. The
risk-free rate was based on an extrapolated 5-year U.S. Treasury
bond rate in effect at the time of grant given the expected time to
liquidity. The expected term represented the period that our awards
were expected to be outstanding and was calculated using a
permitted simplified method, which was based on the vesting period
and contractual term for each tranche of awards. The expected
volatility was based on the historical share volatility of several
comparable publicly traded companies over a period of time equal to
the expected term of the awards, as we did not have any trading
history of RSILP common units prior to the Business Combination.
The comparable companies were chosen based on their size, stage in
life cycle and area of specialty. The dividend yield used was zero
because we have not paid dividends on RSILP common units nor did we
expect to pay dividends in the foreseeable future.
Prior to the Business Combination, we determined the estimated fair
value of the RSILP common units (which include preferred units,
Common A-1 units, Common A-2 units and Common B-1 units) based on
third party valuation reports that were prepared in accordance with
the guidance outlined in the American Institute of Certified Public
Accountants Technical Practice Aid,
Valuation of Privately-Held-Company Equity Securities Issued as
Compensation.
For the year ended December 31, 2019, we determined the estimated
fair value of the RSILP common units using the Option Pricing Model
(“OPM”), an allocation method that considers the current value of
equity and then allocates that equity value to each equity class
based on its corresponding rights and preferences. The OPM treated
the common units and preferred units as call options on our total
equity value, with exercise prices based on the liquidation
preferences of the preferred units. The OPM utilized the
Black-Scholes model to price the call options and considered the
various terms of the unitholder agreements that would affect the
distributions to each class of equity upon a liquidity event,
including the level of seniority among the classes of equity,
dividend policy, conversion ratios and cash allocations. We applied
a Market Approach (using the Market Value of Invested Capital) to
determine our total equity value. The Market Value of Invested
Capital was determined based on the performance of a set of
guideline comparable companies, known as the Guideline
Publicly-Traded Companies Method, or GPTCM, and a set of guideline
comparable recent market transactions, known as the Guideline
Company Transactions Method, or GTM. Under the GPTCM and GTM,
valuation multiples were calculated from the market data and
operating metrics of the guideline companies/transactions. The
selected multiples were evaluated and adjusted based on our
strengths and weaknesses relative to the companies/transactions
being analyzed. The selected multiples were ultimately applied to
our operating metrics to calculate indications of value. A discount
for lack of marketability was also then applied.
Beginning in June 2020, we determined the estimated fair value of
the RSILP common units using the Hybrid Method, which incorporated
the OPM and the Probability Weighted Expected Return Method (PWERM)
Scenario-Based Method, estimating the probability-weighted value
across multiple scenarios by using the OPM to estimate the
allocation of value within one or more of those scenarios. The
Hybrid Method was utilized given there was transparency into one or
more near-term potential exits but there existed uncertainty
regarding what would occur if the near-term exit plans did not
materialize. Under the PWERM, the values of the various equity
interests were estimated based upon an analysis of future values
for RSILP, assuming various potential future outcomes. Share value
was based upon the probability-weighted
present value of expected future investment returns, considering
each of the possible future outcomes available to us, as well as
the rights of each share class. The future outcomes modeled
included (1) an acquisition and (2) continued operations as a
private company until a later exit date. To estimate the total
equity value for the acquisition model, we utilized a Post-Money
Value derived from the Business Combination Agreement, and to
estimate the total equity value for the continued operations as a
private company model, we utilized an average of the values from
the GPTCM and GTM analyses.
After deriving the indicated values of equity under each scenario,
the common unit per share equity allocations were calculated based
on a cash exit distribution allocation method for the acquisition
model and an OPM for the continued operations as a private company
model. After calculating the per share values in each model, we
applied discounts for the time until exit and lack of
marketability, and then applied a probability estimate to each
scenario (acquisition versus continued operations as a private
company), representing the likelihood of each scenario occurring.
The fair value of common units was ultimately determined by
calculating the probability weighted average of both
scenarios.
For the period ended December 29, 2020, we continued to determine
the estimated fair value of the RSILP common units using the OPM
and PWERM Scenario-Based Method. However, because the analysis was
performed on December 29, 2020 (i.e., the effective date of the
Business Combination), we only considered the acquisition model and
not the continued operations as a private company model. We
utilized a Post-Money Value derived from the Business Combination
Agreement to estimate the total equity value and calculated the
common unit per share equity allocations based on a cash exit
distribution allocation method. We did not apply any discount for
time until exit, lack of marketability or probability of executing
the merger.
Our management and Board considered various objective and
subjective factors to determine the fair value of RSILP’s equity
price per unit of each grant date, including the value determined
by a third-party valuation firm. The factors considered by the
third-party valuation firm and our Board included the
following:
•our
financial performance, capital structure and stage of
development;
•our
management team and business strategy;
•external
market conditions affecting our industry, including competition and
regulatory landscape;
•our
financial position and forecasted operating results;
•the
lack of an active public or private market for our equity
units;
•the
likelihood of achieving a liquidity event, such as a sale of Rush
Street Interactive, LP or an initial public offering of our equity
units; and
•market
performance analyses, including with respect to unit price
valuation, of similar companies in our industry.
Application of these approaches involves the use of estimates,
judgment and assumptions that are highly complex and subjective,
such as those regarding our expected future revenue, expenses and
future cash flows, discount rates, market multiples, the selection
of comparable companies and the probability of possible future
events. Changes in any or all of these estimates and assumptions or
the relationships between the assumptions impact our valuations as
of each valuation date and may have a material impact on the
valuation of these common units.
In contemplation of the Business Combination, the RSILP common
units that existed prior to the Business Combination, including the
profits interests described above, were converted into Class A
Common Units of RSILP on December 29, 2020. See Note 3 to our
consolidated financial statements, included elsewhere in this
Annual Report.
Fair value measurements
Fair value measurements are based on the premise that fair value is
an exit price representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on
assumptions that market participants would use
in pricing an asset or liability. As a basis for considering such
assumptions, the following three-tier fair value hierarchy has been
used in determining the inputs used in measuring fair
value:
•Level
1 – Quoted prices in active markets for identical assets or
liabilities on the reporting date.
•Level
2 – Pricing inputs are based on quoted prices for similar
instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active and model-based
valuation techniques for which all significant assumptions are
observable in the market or can be corroborated by observable
market data for substantially the full term of the assets or
liabilities.
•Level
3 – Pricing inputs are generally unobservable and include
situations where there is little, if any, market activity for the
investment. The inputs into the determination of fair value require
management’s judgment or estimation of assumptions that market
participants would use in pricing the assets or liabilities. The
fair values are therefore determined using factors that involve
considerable judgment and interpretations, including but not
limited to private and public comparables, third-party appraisals,
discounted cash flow models, and fund manager
estimates.
Financial instruments measured at fair value are classified in
their entirety based on the lowest level of input that is
significant to the fair value measurement. Management’s assessment
of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors
specific to the asset or liability. The use of different
assumptions and/or estimation methodologies may have a material
effect on estimated fair values. Accordingly, the fair value
estimates disclosed or initial amounts recorded may not be
indicative of the amount that the Company or holders of the
instruments could realize in a current market exchange. Financial
liabilities subject to fair value measurements on a recurring basis
include the Earnout Interests Liability and Warrant
Liabilities.
Earnout Interests Liabilities
The earnout interests, as described in Note 9 to our consolidated
financial statements, included elsewhere in this Annual Report, are
subject to certain restrictions on transfer and voting and
potential forfeiture pending the achievement (if any) of certain
earnout targets. The earnout targets include (a) a change of
control within three years of the Closing, (b) achieving certain
revenue targets for the year ended December 31, 2021, and (c)
achieving certain volume weighted average share prices (“VWAPs”)
within three years of the Closing. With respect to the revenue
targets for the 2021 year, the percentage of Earnout Interests no
longer subject to the restrictions, starting at 25% and ending at
100%, is dependent on achieving revenue equal to $270 million up to
$300 million, respectively. With respect to the earnout targets
related to VWAPs, the share price must be equal to or exceed the
target price for 10 trading days of any 20 consecutive trading day
period. Pursuant to the Business Combination Agreement, a VWAP of
$12.00 and $14.00 would result in 50% and 100%, respectively, of
the Earnout Interests being no longer subject to the restrictions.
Certain of those earnout targets were achieved in January 2021 and,
as a result, 100% of the shares and units subject to these
restrictions were deemed earned and thus were no longer subject to
the restrictions.
We obtained a third-party valuation at December 29, 2020 (i.e., the
Business Combination date) and at December 31, 2020 based upon
assumptions regarding share price, maturity, volatility and
risk-free rate. The share price represents the trading price as of
the valuation date. The maturity assumption represents the time to
maturity or expiration of the earnout interest, which was three
years. The volatility in the analysis was determined using the
Guideline Public Companies’ daily trading activity. Daily
volatilities were calculated based on the daily trading activity
using a historical lookback period commensurate with the maturity.
The selected volatility was the average of the Guideline Public
Companies’ volatility for the period, which was calculated to be
54.58%. The risk-free rate utilizes the three-year U.S. Treasury
bond rate in effect at the time of the grant.
The fair value was determined using a Monte Carlo simulation of
500,000 trials to value the earnout interests as of the valuation
date. Within each trial, the Geometric Brownian Motion formula is
used to simulate the underlying security price through the life of
the earnout interests. In each trial, the 10th largest simulated
trading price within any 20-day trading period was observed to
determine if and when the earnout interests met either of the
threshold values ($12.00 and $14.00) defined in the Trigger Events.
Each future value is discounted to the appropriate valuation date
at the risk-free rate to determine the value conclusion within each
trial. The average of all 500,000 trials yields the overall
valuation conclusion.
As of December 31, 2021, none of the earnout interests
remained outstanding.
Warrant Liabilities
As described in Note 8 to our consolidated financial statements,
included elsewhere in this Annual Report, we evaluated the Public
Warrants, Private Placement Warrants and Working Capital Warrants
under ASC 815-40, and concluded that they do not meet the criteria
to be classified in stockholders’ equity. Specifically, the
exercise of these warrants may be settled in cash upon the
occurrence of a tender offer or exchange that involves 50% or more
of our stockholders holding Class A Common Stock. Because not all
of the stockholders need to participate in such tender offer or
exchange to trigger the potential cash settlement and we do not
control the occurrence of such an event, we concluded that the
Public Warrants, Private Placement Warrants and Working Capital
Warrants do not meet the conditions to be classified in equity.
Because the Public Warrants, Private Placement Warrants and Working
Capital Warrants meet the definition of a derivative under ASC
815-40, we recorded these warrants as liabilities on our
consolidated balance sheet at fair value as of each reporting date,
with subsequent changes in their respective fair values recognized
in our consolidated statement of operations and comprehensive
income (loss).
We determined the fair value of our Public Warrants based on the
publicly listed trading price of such warrants on the valuation
date. We determined the fair value of the Private Placement
Warrants and Working Capital Warrants using Level 3 inputs within a
Black-Scholes model. The Private Placement Warrants and Working
Capital Warrants were valued as of December 29, 2020 (i.e., the
Business Combination closing date) and December 31, 2020. The
significant inputs and assumptions in this method are the stock
price, exercise price, volatility, risk-free rate, and term or
maturity. The underlying stock price input is the closing stock
price as of each valuation date and the exercise price is the price
as stated in the warrant agreement. The volatility input was
determined using the historical volatility of comparable publicly
traded companies which operate in a similar industry or are our
direct competitors. Volatility for each comparable is calculated as
the annualized standard deviation of daily continuously compounded
returns. The Black-Scholes analysis is performed in a risk-neutral
framework, which requires a risk-free rate assumption based upon
constant-maturity treasury yields, which are interpolated based on
the remaining term of the Private Placement Warrants and Working
Capital Warrants as of each valuation date. The term/maturity is
the duration between each valuation date and the maturity date,
which is five years following the date the Business Combination
closed, or December 29, 2025.
As of December 31, 2021, none of the warrants remained
outstanding.
Income Taxes
We account for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are calculated by applying
existing tax laws and the rates expected to apply to taxable income
in the years in which those temporary differences are expected to
be recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in the year of
the enacted rate change.
We regularly review our deferred tax assets, including net
operating loss carryovers, for recoverability, and a valuation
allowance is provided when it is more likely than not that some
portion or all of a deferred tax asset may not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which the
temporary differences are deductible. In assessing the need for a
valuation allowance, we make estimates and assumptions regarding
projected future taxable income, our ability to carry back
operating losses to prior periods, the reversal of deferred tax
liabilities and the implementation of tax planning strategies.
Based on our cumulative earnings history and forecasted future
sources of taxable income, we have determined we are not
more-likely-than-not to realize existing deferred tax assets and
thus have recorded a valuation allowance. As we reassesses these
assumptions in the future, changes in forecasted taxable income may
alter this expectation and may result in an increase to the
valuation allowance and an increase in the effective tax
rate.
We account for uncertainty in income taxes using a recognition and
measurement threshold for tax positions taken or expected to be
taken in a tax return, which are subject to examination by federal
and state taxing authorities. The tax benefit from an uncertain tax
position is recognized when it is more likely than not that the
position will be sustained upon examination by taxing authorities
based on technical merits of the position. The amount of the tax
benefit recognized is the largest amount of the benefit that has a
greater than 50% likelihood of being realized upon ultimate
settlement. The effective tax rate and the tax basis of assets and
liabilities reflect management’s estimates of the ultimate outcome
of various tax uncertainties. We recognize penalties and interest
related to uncertain tax positions within the provision (benefit)
for income taxes line in the accompanying consolidated statements
of operations.
Tax Receivable Agreement
Pursuant to the Tax Receivable Agreement, the Special Limited
Partner is required to pay to the Sellers and/or the exchanging
holders of RSILP Units, as applicable, 85% of the net income tax
savings that we and our consolidated subsidiaries (including the
Special Limited Partner) realize as a result of increases in tax
basis in RSILP’s assets related to the transactions contemplated
under the Business Combination Agreement and the future exchange of
the Retained RSILP Units (for shares of Class A Common Stock (or
cash) pursuant to the RSILP A&R LPA and tax benefits related to
entering into the Tax Receivable Agreement, including tax benefits
attributable to payments under the Tax Receivable Agreement, and
those payments may be substantial.
We evaluate the realizability of the deferred tax assets resulting
from the exchange of RSILP Units for Class A Common Stock. If the
deferred tax assets are determined to be realizable, we then assess
whether payment of amounts under the TRA have become probable. If
so, we record a TRA liability equal to 85% of such deferred tax
assets. In subsequent periods, we assess the realizability of all
our deferred tax assets subject to the TRA. Should it be determined
that a deferred tax asset with a valuation allowance is realizable
in a subsequent period, the related valuation allowance will be
released and consideration of a corresponding TRA liability will be
assessed. The realizability of deferred tax assets, including those
subject to the TRA, is dependent upon the generation of future
taxable income during the periods in which those deferred tax
assets become deductible and consideration of prudent and feasible
tax-planning strategies.
The measurement of the TRA liability is accounted for as a
contingent liability. Therefore, once we determine that a payment
becomes probable and can be estimated, the estimate of the payment
will be accrued.
Recently Adopted and Issued Accounting Pronouncements
Recently issued and adopted accounting pronouncements are described
in Note 2 to our consolidated financial statements included
elsewhere in this Annual Report.
Emerging Growth Company Accounting Election
Section 102(b)(1) of the Jumpstart Our Business Startups Act of
2012 (“JOBS Act”) exempts emerging growth companies from being
required to comply with new or revised financial accounting
standards until private companies are required to comply with the
new or revised financial accounting standards. The JOBS Act
provides that a company can choose not to take advantage of the
extended transition period and comply with the requirements that
apply to non-emerging growth companies, and any such election to
not take advantage of the extended transition period is
irrevocable. RSI is an “emerging growth company” as defined in
Section 2(a) of the Securities Act of 1933, as amended, and has
elected to take advantage of the benefits of this extended
transition period. The Company remains an emerging growth company
and is expected to continue to take advantage of the benefits of
the extended transition period. This may make it difficult or
impossible to compare the Company financial results with the
financial results of another public company that is either not an
emerging growth company or is an emerging growth company that has
chosen not to take advantage of the extended transition period
exemptions for emerging growth companies because of the potential
differences in accounting standards used.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We operate primarily in the United States and Latin America. As
such, we have been exposed in the past and may in the future be
exposed to certain market risks, including interest rate, foreign
currency exchange and financial instrument risks, in the ordinary
course of our business. Currently, these risks are not material to
our financial condition or results of operations, but they may be
in the future.
Interest Rate Risk
As of December 31, 2021, we had cash, cash equivalents and
restricted cash of $300.3 million, which consisted primarily
of bank deposits and money market funds. Such interest-earning
instruments carry a degree of interest rate risk; however,
historical fluctuations of interest income have not been
significant. The primary objective of our investment activities are
to preserve principal and provide liquidity without significantly
increasing risk. A 10% increase or decrease in the interests rates
of these interest-earning instruments would not have a material
effect on our consolidated financial statements for the year ended
December 31, 2021.
Foreign Currency Exchange Rate Risk
We have been exposed to foreign currency exchange risk related to
our transactions in currencies other than the U.S. Dollar, which is
our functional and reporting currency. We seek to naturally hedge
our foreign exchange transaction exposure by matching the
transaction currencies for our cash inflows and outflows.
Currently, we do not otherwise hedge our foreign exchange exposure
but may consider doing so in the future. Our foreign currency
exposure is primarily with respect to the Colombian Peso (which
accounted for 7% and less than 5% of our revenue for the fiscal
years ended December 31, 2021 and 2020, respectively). A 10%
increase or decrease in the value of these currencies to the U.S.
Dollar would not have a material effect on our consolidated
financial statements for the year ended December 31,
2021.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See financial statements included in Item 15 “Exhibits,
Financial Statement Schedules”
of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), under the supervision and
with the participation of management, including our Chief Executive
Officer and our Chief Financial Officer, we have carried out an
evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act) as of the end of the period covered by this
Annual Report. Our disclosure controls and procedures are designed
to provide reasonable assurance that information we are required to
disclose in reports that are filed or submitted under the Exchange
Act is accumulated and communicated to our management, including
our Chief Executive Officer and our Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure
and is recorded, processed, summarized and reported within the time
periods specified by the SEC. Our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2021.
Management’s Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act as a process designed by, or under
the supervision of, the Company’s principal executive and principal
financial officers and effected by the Company’s board of
directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that:
•pertain
to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets
of the Company;
•provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company;
and
•provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s
assets that could have a material effect on the financial
statements.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in
Internal Control - Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013
Framework). Based on our evaluation, our management concluded that
our internal
control over financial reporting was effective as of December 31,
2021.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect all misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
This Annual Report does not include an attestation report of our
registered accounting firm due to a transition period established
by the rules of the SEC for “emerging growth
companies.”
Changes in Internal Control Over Financial Reporting
During the most recently completed fiscal quarter, there has been
no change in the Company’s internal control over financial
reporting that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
Limitations on Effectiveness of Controls and
Procedures
Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, as specified
above. Our management recognizes that any control system, no matter
how well designed and operated, is based upon certain judgments and
assumptions and cannot provide absolute assurance that its
objectives will be met.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT
INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The information required by this item will be included in our 2022
Proxy Statement, which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in our 2022
Proxy Statement, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item will be included in our 2022
Proxy Statement, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information required by this item will be included in our 2022
Proxy Statement, which is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be included in our 2022
Proxy Statement, which is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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(a) Documents filed as part of this report |
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(a)1. Financial Statements |
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Consolidated Financial Statements of Rush Street Interactive, Inc.
for the years ended December 31, 2021 and December 31,
2020.
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Financial statement schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission have been omitted because they are not required under
the related instructions, not applicable or included in the
consolidated financial statements or the notes thereto. |
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(3) Exhibits: The exhibits to this report are listed in the exhibit
index below |
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(3)(b) Description of Exhibits |
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REPORT OF INDEPENDENT PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Rush Street Interactive, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
Rush Street Interactive, Inc. (the “Company”) as of December 31,
2021 and 2020, the related consolidated statements of operations
and comprehensive loss, changes in equity (deficit), and cash flows
for the years then ended and the related notes (collectively
referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of
December 31, 2021 and 2020, and the results of its operations and
its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and
are required to be independent with respect to the Company in
accordance with U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ WithumSmith+Brown, PC
We have served as the Company’s auditor since 2020.
Whippany, New Jersey
March 7, 2022
PCAOB ID Number 100
RUSH STREET INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except for share and per share
amounts)
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December 31, |
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2021 |
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2020 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
$ |
281,030 |
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$ |
255,622 |
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Restricted cash |
19,299 |
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6,443 |
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Players' receivables |
5,829 |
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|
779 |
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Due from affiliates |
28,159 |
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|
28,764 |
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Prepaid expenses and other current assets |
7,433 |
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|
2,871 |
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Total current assets |
341,750 |
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|
294,479 |
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Intangible assets, net |
53,380 |
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9,750 |
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Property and equipment, net |
7,232 |
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2,016 |
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Operating lease right-of-use asset, net |
1,562 |
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|
1,100 |
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Other assets |
4,807 |
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|
1,215 |
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Total assets |
$ |
408,731 |
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$ |
308,560 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
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Current liabilities |
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Accounts payable |
$ |
6,501 |
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$ |
11,994 |
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Accrued expenses |
48,287 |
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|
27,042 |
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Players' liabilities |
24,160 |
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|
8,500 |
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Deferred royalty, short-term |
1,415 |
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|
195 |
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Operating lease liabilities, short-term |
509 |
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226 |
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Earnout interests liability |
— |
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351,048 |
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Other current liabilities |
3,062 |
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1,983 |
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Total current liabilities |
83,934 |
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400,988 |
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Deferred royalty, long-term |
15,633 |
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3,813 |
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Operating lease liabilities, long-term |
1,148 |
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979 |
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Warrant liabilities |
— |
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170,109 |
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Other long-term liabilities |
315 |
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— |
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Total liabilities |
101,030 |
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575,889 |
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Commitments and contingencies |
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Stockholders’ equity (deficit) |
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Class A common stock, $0.0001 par value, 750,000,000 shares
authorized as of December 31, 2021 and 2020; 61,118,406 and
44,792,517 shares issued and outstanding as of December 31,
2021 and 2020, respectively
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6 |
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4 |
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Class V common stock, $0.0001 par value, 200,000,000 shares
authorized as of December 31, 2021 and 2020; 158,702,329 and
160,000,000 shares issued and outstanding as of December 31,
2021 and 2020, respectively
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16 |
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16 |
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Additional paid-in capital |
167,270 |
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— |
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Accumulated other comprehensive income (loss) |
(475) |
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93 |
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Accumulated deficit |
(81,381) |
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(61,892) |
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Total stockholders’ equity (deficit) attributable to Rush Street
Interactive, Inc. |
85,436 |
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(61,779) |
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Non-controlling interests |
222,265 |
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(205,550) |
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Total stockholders’ equity (deficit) |
307,701 |
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(267,329) |
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Total liabilities and stockholders’ equity (deficit) |
$ |
408,731 |
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$ |
308,560 |
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See
accompanying notes to consolidated financial
statements.
RUSH STREET INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
(Amounts in thousands except for share and per share
amounts)
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December 31, |
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2021 |
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2020 |
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Revenue |
$ |
488,105 |
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$ |
278,500 |
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Operating costs and expenses |
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Costs of revenue |
332,145 |
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190,873 |
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Advertising and promotions |
190,476 |
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56,517 |
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General administration and other |
55,518 |
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162,447 |
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Depreciation and amortization |
4,245 |
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2,082 |
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Total operating costs and expenses |
582,384 |
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411,919 |
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Loss from operations |
(94,279) |
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(133,419) |
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Other income (expenses) |
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Interest expense, net |
(187) |
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(135) |
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Change in fair value of warrant liability |
41,802 |
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7,166 |
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Change in fair value of earnout interests liability |
(13,740) |
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(2,338) |
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Total other income |
27,875 |
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4,693 |
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Loss before income taxes |
(66,404) |
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(128,726) |
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Income tax expense |
4,688 |
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2,919 |
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Net loss |
$ |
(71,092) |
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$ |
(131,645) |
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Net loss attributable to non-controlling interests |
(51,603) |
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(132,726) |
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Net income (loss) attributable to Rush Street
Interactive, Inc. |
$ |
(19,489) |
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$ |
1,081 |
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Net loss per common share attributable to Rush Street
Interactive, Inc. – basic |
$ |
(0.35) |
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$ |
0.02 |
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Weighted average common shares outstanding – basic |
56,265,541 |
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43,579,704 |
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Net loss per common share attributable to Rush Street
Interactive, Inc. – diluted |
$ |
(0.51) |
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$ |
(0.01) |
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Weighted average common shares outstanding – diluted |
57,426,885 |
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52,242,606 |
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December 31, |
|
2021 |
|
2020 |
|
Net loss |
$ |
(71,092) |
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|
$ |
(131,645) |
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|
|
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Other comprehensive income (loss) |
|
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Foreign currency translation adjustment |
(2,111) |
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|
524 |
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Comprehensive loss |
$ |
(73,203) |
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$ |
(131,121) |
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Comprehensive loss attributable to non-controlling
interests |
(53,168) |
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|
(132,202) |
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Comprehensive income (loss) attributable to Rush Street
Interactive, Inc. |
$ |
(20,035) |
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|
$ |
1,081 |
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See accompanying notes to consolidated financial
statements.
RUSH STREET INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
(Amounts in thousands except for share amounts)
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Class A Common Stock |
|
Class V Common Stock |
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Treasury Stock |
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Additional
Paid-in
Capital |
|
Accumulated
Other
Comprehensive
Income |
|
Accumulated
Deficit |
|
Total
Stockholders’
Equity (Deficit) |
|
Non-
Controlling
Interests |
|
Total
Equity (Deficit) |
|
Shares |
|
Amount |
Shares |
|
Amount |
Shares |
|
Amount |
|
|
Balance at December 31, 2020 |
44,792,517 |
|
|
$ |
4 |
|
|
160,000,000 |
|
|
$ |
16 |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
93 |
|
|
$ |
(61,892) |
|
|
$ |
(61,779) |
|
|
$ |
(205,550) |
|
|
$ |
(267,329) |
|
|
Share-based compensation |
855,894 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
6,196 |
|
|
— |
|
|
— |
|
|
6,196 |
|
|
18,716 |
|
|
24,912 |
|
|
Foreign currency translation adjustment |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(546) |
|
|
— |
|
|
(546) |
|
|
(1,565) |
|
|
(2,111) |
|
|
Issuance of Class A Common Stock upon exercise of
Warrants |
14,014,197 |
|
|
2 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
70,144 |
|
|
— |
|
|
— |
|
|
70,146 |
|
|
189,749 |
|
|
259,895 |
|
|
Repurchase of Class A Common Stock |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
218,589 |
|
|
(850) |
|
|
— |
|
|
— |
|
|
— |
|
|
(850) |
|
|
(2,615) |
|
|
(3,465) |
|
|
Reissuance of treasury stock |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(218,589) |
|
|
850 |
|
|
(850) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Settlement of earnout interests liability |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
79,779 |
|
|
— |
|
|
— |
|
|
79,779 |
|
|
285,009 |
|
|
364,788 |
|
|
Acquisition of developed technology intangible assets |
158,127 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
691 |
|
|
— |
|
|
— |
|
|
691 |
|
|
1,809 |
|
|
2,500 |
|
|
Distributions paid to non-controlling interest holders |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(397) |
|
|
(397) |
|
|
RSILP Unit Exchange |
1,297,671 |
|
|
— |
|
|
(1,297,671) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Net loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(19,489) |
|
|
(19,489) |
|
|
(51,603) |
|
|
(71,092) |
|
|
Allocation of equity and non-controlling interests upon changes in
RSILP ownership |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
11,310 |
|
|
(22) |
|
|
— |
|
|
11,288 |
|
|
(11,288) |
|
|
— |
|
|
Balance at December 31, 2021 |
61,118,406 |
|
|
$ |
6 |
|
|
158,702,329 |
|
|
$ |
16 |
|
|
— |
|
|
$ |
— |
|
|
$ |
167,270 |
|
|
$ |
(475) |
|
|
$ |
(81,381) |
|
|
$ |
85,436 |
|
|
$ |
222,265 |
|
|
$ |
307,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock |
|
Class V Common Stock |
|
Additional
Paid-in
Capital |
|
Accumulated
Other
Comprehensive
Income |
|
Accumulated
Deficit |
|
Total
Stockholders’
Equity (Deficit) |
|
Non-
Controlling
Interests |
|
Members’
Equity (Deficit) |
|
Total
Equity (Deficit) |
|
Shares |
|
Amount |
Shares |
|
Amount |
|
Balance at December 31, 2019(1)
|
— |
|
|
$ |
— |
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(3,368) |
|
|
$ |
(3,368) |
|
|
Member's contribution |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
6,500 |
|
|
6,500 |
|
|
Share-based compensation |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,692 |
|
|
1,692 |
|
|
Distribution to members |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(5,192) |
|
|
(5,192) |
|
|
Settlement of share-based liability in exchange for RSILP
Units |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
150,382 |
|
|
150,382 |
|
|
Foreign currency translation adjustment |
— |
|
|
— |
|
|