Item 1A. Risk Factors 19
Item 1B. Unresolved Staff Comments 45
Item 2. Properties 45
Item 3. Legal Proceedings 45
Item 4. Mine Safety Disclosures 45
PART II
Item 6. Selected Consolidated Financial Data 47
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 64
Item 8. Financial Statements and Supplementary Data 64
Item 9A. Controls and Procedures 65
Item 9B. Other Information 66
PART III
Item 10. Directors, Executive Officers and Corporate Governance 67
Item 11. Executive Compensation 67
Item 14. Principal Accountant Fees and Services 67
PART IV
Item 15. Exhibits and Financial Statements Schedules 67
Signatures 71
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.
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.
1
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 across numerous jurisdictions. In addition, we are continually
seeking 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 and PlaySugarHouse)
or to use our offerings in more than one jurisdiction, for instance when a user lives in New Jersey but works in Pennsylvania. 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 user names. 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 its 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.
2
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
RSI
is a leading online gaming and entertainment company that focuses primarily on online casino and online sports betting in the U.S. and
Latin American markets. Our mission is to provide our customers with the most player-friendly online casino and online sports betting
experience in the industry. In furtherance of this mission, we strive to create an online community for our players where we are transparent
and honest, treat our players fairly, show them that we value their time and loyalty, and listen to feedback. We also endeavor to implement
industry leading responsible gaming practices and provide them with a cutting-edge online gaming platform and exciting, personalized
offerings that will enhance their user experience.
We
provide our customers an array of leading gaming offerings such as real-money online casino, online sports betting, and retail sports
betting (i.e., sports betting services provided to bricks-and-mortar casinos), as well as social gaming, which involves free-to-play
games that use virtual credits that can be earned or purchased. We launched our first social gaming website in 2015 and began accepting
real-money bets in the United States in 2016. Currently, we offer a combination of real-money online casino, online sports betting and
retail sports betting in nine U.S. states as outlined in the table below.
U.S. State Online Casino Online Sports Betting Retail Sports Betting
Colorado ü
Illinois ü ü
Indiana ü ü
Iowa ü
Michigan ü ü ü
Pennsylvania ü ü ü
New Jersey ü ü
New York ü
Virginia ü
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.
Our
real-money online casino and online sports betting offerings are 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 casino
partners primarily under their respective brands. Many of our social gaming offerings are marketed under our partners’ brands, although
we also offer social gaming under our own brands in certain markets as well. Our decision about what brand or brands to use is market-specific
and partner-specific, and is based on brand awareness, market research and marketing efficiency.
Our
proprietary online gaming platform is the foundation of our digital business and reflects a suite of technologies that together provide
a leading management, administrative, reporting and regulatory compliance end-to-end solution that powers our operations with respect
to our online offerings. It incorporates multiple sophisticated technologies and provides a central back-office function to manage player
accounts, payments, risk, a wide range of proprietary bonusing and loyalty programs and features, while ensuring that we can deliver
a seamless experience for both players and gaming operators. Our technology platform is flexible and supports both real-money online
offerings and social gaming on a single code base.
In
2014, we acquired the source code that served as the starting point for our online gaming platform, and since then we have continued
to develop, improve and support it with a talented in-house product development team. We began offering online casino in the United States
using this platform in September 2016. Following the lifting of the federal restrictions on sports betting in May 2018 as a result of
the U.S. Supreme Court’s repeal of the Profession and Amateur Sports Protection Act of 1992 (“PASPA”), we began offering
online sports betting using the same proprietary online gaming platform with the same emphasis on player-friendly features.
Experienced
gaming operators Neil Bluhm, Greg Carlin and Richard Schwartz founded Rush Street Interactive, LP (“RSILP”), which is now
an indirect subsidiary of RSI, with the goal of offering real-money online gaming products in legal and regulated markets with a particular
focus on the emerging U.S. markets. Prior to the Business Combination (as defined below), our founders had invested approximately $50
million into RSILP. This capital was primarily used to fund the development of our proprietary online gaming platform and offerings,
recruit and grow an experienced team, and expand into new geographic and product markets.
3
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:
(iv) dMY changed its name to “Rush Street Interactive, Inc.”
Beginning
on the six month anniversary of the Closing, the Sellers will 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, 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 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,
2020 and 2019, 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. 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.
4
To
attract, engage, retain and/or reactivate customers, we offer a loyalty program that rewards players in exciting, fair and transparent
ways. We recognize and reward player loyalty by, among other things, ensuring that there are exciting benefits at each of the player
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 may only place one bet with the bonus dollars before cashing out any winnings. Based
on research and player feedback, we attempt to address player concerns about the general lack of transparency in the industry around
awarding, redeeming and tracking bonuses by enabling players to easily track their loyalty and bonus progressions and giving players
control over when and how to redeem their rewards.
Although
we strive to be a first-mover in most new markets, and we have been a first-mover in many markets, 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
in the state. 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, player-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, player 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 eight states (Colorado,
Illinois, Indiana, Iowa, Michigan, New Jersey, Pennsylvania and Virginia) with an aggregate population of approximately 68.7 million
people. In addition, we have currently secured potential market access to New York, 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 73.0 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, Illinois, Indiana, Michigan and Pennsylvania for
online sports betting and in New York and 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.
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 52-48 female/male split in our active U.S.
online casino-only players during calendar year 2020. 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.
5
Compelling
Unit Economics. Based on our performance to date, including in New Jersey, currently 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 six 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 gross revenue basis within five 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 player 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 President 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 Chairman Neil Bluhm and our CEO Greg Carlin each have a proven track record of developing world-class land-based casinos, and Mr.
Bluhm 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 customer 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 players, helps to acquire new players 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 user experience for our customers, 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 7.4 times
the lifetime revenue per the acquisition cost to acquire those same players 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 players will generate revenue that exceed our internal targets.
6
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 skillset 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 to support the development and advancement 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.
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 22, 2021, we had a global workforce of approximately 264 employees and contractors, with approximately 37% of our people working
in technical roles. Approximately 50% of our people are based in the United States with the remaining 50% being based elsewhere in the
world, including Canada, Colombia, Estonia and Mexico.
Our
Products and Economic Model
Our
Revenue-Generating Product Offerings
We
offer real-money online casino, online sports betting and/or retail sports betting in nine U.S. states and Colombia. We also provide
social gaming, where players are given virtual credits to enjoy free-to-play games.
Our
revenue is predominantly generated from our U.S. operations with the remaining revenue being generated from our Colombian operations.
See Note 2 to our audited 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 players play against the house. Like bricks-and-mortar casinos, there is volatility with online casino, but
as the volume of bets placed increases, the revenue retained from bets placed becomes easier to predict. Our experience has been that
online casino revenue is less volatile than online sports betting revenue.
Our
online casino offering consists of 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 subject to standard revenue-sharing agreements specific to each supplier, where
the supplier generally receives a percentage of the net gaming revenue generated from the casino games played on our platform. In exchange,
we receive a limited license to offer the games on our platform to players in jurisdictions where use is approved by the regulatory authorities.
We pay much lower fees on revenue generated through our self-developed casino games such as our multi-bet blackjack (with side bets:
21+3, Lucky Ladies, Lucky Lucky) and our single-deck blackjack, which primarily relate to hosting/remote gaming server fees and certain
intellectual property license fees.
Online
casino revenue is generated based on total player bets less amounts paid to players for winning bets, less incentives awarded to players,
plus or minus the change in the progressive jackpot reserve.
Online
Sports Betting
Online
sports betting involves a user placing a bet on the outcome of a sporting event, or a series of sporting events, with the chance to win
a pre-determined amount, often referred to as fixed odds. Online sports betting revenue is generated by setting odds such that there
is a built-in theoretical margin in each sports bet offered to its customers. While sporting event outcomes may result in revenue volatility,
we believe that we can achieve a long-term betting win margin. In addition to traditional fixed-odds betting, we also offer other sports
betting products including in-game betting and multi-sport parlay betting. We have also incorporated live streaming of certain sporting
events into our online sports betting offering.
7
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 player bets less amounts paid to players for winning bets, less incentives awarded to players,
plus or minus the change in unsettled sports bets.
Retail
Sports Betting
We
provide retail sports services to land-based casinos in exchange for a monthly commission that is calculated based on the land-based
casino’s retail sportsbook revenue. Services include ongoing management and oversight of the retail sportsbook (i.e., within a
bricks-and-mortar casino), technical support for the casino’s customers, customer support, risk management, advertising and
promotion, and support for third-party sports betting equipment.
In
addition, certain relationships with business partners provide us the ability to operate the retail sportsbook at the land-based partner’s
facility. In this scenario, revenue is generated based on total player bets less amounts paid to players for winning bets, less other
incentives awarded to players.
Social
Gaming
We
provide social gaming where players are given virtual credits to enjoy free-to-play games. Players who exhaust their credits can either
purchase additional virtual credits from the virtual cashier or wait until their virtual credits are replenished for free. Virtual credits
have no 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 casino partner properties. Our social gaming products are
a marketing tool that keeps the applicable brands at the top of our players’ minds and engages with players through another channel
while providing the entertainment value that players seek. We also leverage our social gaming products to cross-sell to our real-money
offerings in jurisdictions where real-money gaming is authorized.
We
recognize deferred revenue when players purchase virtual credits and revenue when 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 and benefits of dedicated personnel. These costs are variable
in nature and should correlate with the change in revenue. Revenue share and market access fees consist primarily of amounts paid to
local land-based operators 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
player 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 the product via different
channels, promotional activities and the related costs incurred to acquire new customers. These costs include salaries and benefits 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
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 which advertising methods and channels
are working and which ones are not.
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. As part of the certain agreements with key executives, share-based awards in the form of profit interests
were granted. Share-based compensation expense consists of the expenses related to the vesting of these awards in addition to the remeasurement
of liability-classified awards. See Note 8 to our audited consolidated financial statements, included elsewhere in this Annual Report.
8
Depreciation
and Amortization. Depreciation and amortization expense consists of depreciation on our property and equipment over the useful lives
as well as amortization of market access licenses and gaming jurisdictional licenses over the useful lives. See Notes 2, 4 and 5 to our
audited consolidated financial statements, included elsewhere in this Annual Report.
Distribution
We
distribute our 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 we expect to offer some or all of our apps in the Google Play store
in the near future.
B2C
Market Access. 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 or Native American tribes enable us to make our offerings available to players in certain jurisdictions using a B2C operating
model. Currently, we have the following 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:
B2B
Distribution. We also have relationships with the following partners through a B2B operating model:
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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 and flexibility to provide a personalized, data-driven
player journey. The ability to customize the playing experience for each player is a key feature of our online gaming platform. We achieve
player personalization by analyzing player 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 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 player 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 player 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
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• 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, casino games and sports betting, 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, racetracks/racinos/video lottery terminals, gaming content providers,
gaming regulators, gaming technology companies and payment processors.
Recently,
online gaming has seen outsized growth and increased penetration. Per EKG, regulated online gaming grew in Europe, the most mature online
gaming market in the world, at an annual rate of 11% from 2018 to 2019, and according to the European Gaming & Betting Association
(the “EGBA”), Europe’s online gambling revenue is expected to increase by 7% from 2019 to 2020, 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:
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 U.K., Denmark, France, Spain, Italy, Ireland, Denmark, Poland, Sweden and Switzerland have legalized and regulated online
casino and online sports betting. In addition, several U.S. states, Mexico, certain jurisdictions in Argentina and Colombia have introduced
regulated sports betting in recent years. Canada has also introduced legislation to allow single-game sports betting where to date, sports
betting has been limited to parlay cards. 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 U.K.’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 U.K. 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 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 U.K., 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 six states:
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 for U.S. land-based commercial
and tribal casinos of approximately $78.2 billion based on data from the National Indian Gaming Commission in Washington D.C. and the
American Gaming Association.
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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 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 2020, online casino revenue continued to increase to $931.6 million while revenues from land-based casinos decreased to
$1.51 billion. We believe this trend in online and land-based casino revenues for New Jersey from 2019 to 2020 is not indicative of the
expected longer-term trend of continued online and land-based casino revenue growth because of the impacts of COVID-19 in 2020, which
likely resulted in decreased revenue for land-based casinos and increased revenue for online casinos because of, among other things,
stay-at-home orders and shutdowns of brick-and-mortar casinos.
We
believe that more states have and will consider authorizing online casino for the following reasons, among others:
Both
Pennsylvania and New Jersey were experiencing online casino taxable revenue growth prior to COVID-19; however, that growth accelerated
in March 2020 into Q4 2020. The charts below highlight the growth of online slot and table games taxable revenue in New Jersey and Pennsylvania
since Q4 2019:
Pennsylvania
Online Slot and Table Taxable Revenue ($ in millions)
Source:
Pennsylvania Gaming Control Board
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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 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, 22 states and the District of Columbia
have legalized sports betting. Of those 23 jurisdictions, 15 states have authorized statewide online sports betting while eight remain
retail-only at casinos or retail locations.
According
to EKG, the United States generated approximately $1.15 billion in online sports betting revenue in 2020, despite the impacts of COVID-19
and the cancellations, postponement, shortening or rescheduling of sporting events and seasons. While the overall industry is still nascent,
growth to date has been strong. For example, December 2020 online sports betting revenue in New Jersey, the first state to regulate sports
betting after PASPA was struck down, and Pennsylvania grew 130% and 292% 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 March 2021
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We
believe the U.S. sports betting market still has significant opportunity for growth. Only 35% 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 80% of New Jersey sports betting revenue in February 2020, the last month not significantly impacted by the effects of COVID-19
(such as mandatory stay-in-place and closure orders), came via online betting. Populous states such as California, Florida, New York
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 2020)
Source:
EKG United States Sports Betting Market Monitor – Released February 2021
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