Rush Street Interactive, Inc.: Form 10-Q for the period ended Sep 30, 2023

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, our Annual Report on Form 10-K for the year ended December 31, 2022 (our “Annual Report”), and our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this “Report”). In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under the sections of this Report captioned “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.” For a discussion of limitations in measuring certain of our key metrics, see the section of this Report captioned “Limitations of Key Metrics and Other Data.”

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

Unless the context requires otherwise, all references in this Report to the “Company,” “we,” “us,” or “our” refer to Rush Street Interactive, Inc. and its subsidiaries.

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., Canadian and Latin American markets. Our mission is to engage and delight players by delivering friendly, fun and fair betting experiences. In furtherance of this mission, we strive to create an online community for our customers where we are transparent and honest, treat them 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 with 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 at bricks-and-mortar locations), as well as social gaming, which involves free-to-play games using 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 15 U.S. states and the three international markets as outlined in the table below.

*Previously announced that the Company and its partner in Connecticut intend to wind down their online and retail sports betting partnership in Connecticut, which the Company currently believes is likely to occur during the fourth quarter of 2023 or shortly thereafter.

Our real-money online casino and online sports betting offerings are currently provided under our BetRivers and PlaySugarHouse brands in the United States and Canada and under our RushBet brand in Latin America (which includes Mexico). We operate and/or support retail sports betting for our bricks-and-mortar partners. 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/or partner specific, and is based on brand awareness, market research, marketing efficiency, contractual obligations and applicable gaming rules and regulations.

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. 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 only include U.S. and Canada-based users of our online real-money offerings.

MAUs is a key indicator of the scale of our user base and awareness of our brands. We believe that year-over-year MAUs may also generally be 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 nine months ended September 30, 2023 and 2022:

The decrease in MAUs was mainly due to our strategic reduction in advertising, marketing and bonusing efforts in certain markets, primarily consisting of online sportsbook-only markets.

Average Revenue Per Monthly Active User

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

The chart below presents our ARPMAU for the nine months ended September 30, 2023 and 2022:

The year-over-year increase in ARPMAU was mainly due to our continued operations in markets that launched during 2022, where we offer online casino in addition to online sports betting, the impact of our strategic advertising and marketing efforts in other markets where offer online casino and our focus on retaining quality players.

Non-GAAP Information

This Report includes Adjusted EBITDA, which is a non-GAAP performance measure that we use to supplement our results presented in accordance with 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 securities 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 GAAP because certain expenses are either non-cash (i.e., depreciation and amortization, share-based compensation) or are not related to our underlying business performance (i.e., 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, enables comparison of financial results from period-to-period where certain items may vary independent of business performance, and allows for greater transparency with respect to metrics used by our management in operating our business. Management also believes that Adjusted EBITDA 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 most directly comparable GAAP measure, for the periods indicated:

($ in thousands)

Key Components of Revenue and Expenses

Revenue

We currently offer real-money online casino, online sports betting and/or retail sports betting in 15 U.S. states, Colombia, Ontario, Canada and Mexico. We also provide social gaming (where permitted) where users can earn or purchase virtual credits to enjoy free-to-play games.

Our revenue is predominantly generated from our U.S. and Canada operations, with the remaining revenue being generated from our Latin America (including Mexico) operations. We generate revenue primarily through the following offerings:

Online Casino

Online casino offerings typically include the full suite of games available in bricks-and-mortar casinos, such as table games (i.e., blackjack and roulette) and slot machines. For these offerings, similar to bricks-and-mortar casinos, we generate 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 industry 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 permitted jurisdictions. We generally 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, a sports-related activity or a series of the same, 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 positive long-term betting win margin.

In addition to traditional fixed-odds betting, we also offer other fixed-odd 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 betting 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 such partner’s customers, risk management, advertising and promotion, and support for third-party sports betting equipment.

In addition, certain relationships with our 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: build online databases in key markets ahead of and post-legalization and regulation; generate revenues; and increase 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 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 typically correlate with the change in revenue. Revenue share and market access fees consist primarily of amounts paid to local 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, withdrawals 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 related customer acquisition costs. 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, brand ambassadors, proprietary content, 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 product offerings 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 spend as we can quickly redirect our advertising spend 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, benefits and share-based compensation expense for dedicated personnel, professional fees related to legal, compliance, audit and consulting services, rent and insurance costs.

Depreciation and Amortization. Depreciation and amortization expense consists of depreciation of our property and equipment and amortization of intangible assets (including market access licenses, gaming jurisdictional licenses, internally developed software, trademark and developed technology) and finance lease right-of-use assets over their useful lives.

Results of Operations

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

Comparison of the Three Months Ended September 30, 2023 and 2022

($ in thousands)

Revenue. Revenue increased by $21.9 million, or 15%, to $169.9 million for the three months ended September 30, 2023 as compared to $148.0 million for the same period in 2022. The increase was mainly due to and directly correlated with our continued growth across existing markets and expansion into new markets that launched after September 2022. The increase reflects higher period-over-period online casino and sports betting revenue of $21.6 million and retail sports betting revenue of $0.3 million.

Costs of Revenue. Costs of revenue increased by $12.8 million, or 12%, to $116.2 million for the three months ended September 30, 2023 as compared to $103.3 million for the same period in 2022. The increase was mainly due to and directly correlated with our expansion and continued growth as noted above. Gaming taxes, operating expenses, payment processing costs, and market access costs contributed $8.0 million, $2.2 million, $1.6 million, and $0.5 million, respectively, to the period-over-period increase in costs of revenue. Personnel costs contributed to the remainder of the period-over-period increase. Costs of revenue as a percentage of revenue decreased to 68% for the three months ended September 30, 2023 as compared to 70% for the same period in 2022.

Advertising and Promotions. Advertising and promotions expense decreased by $10.6 million, or 23%, to $34.6 million for the three months ended September 30, 2023 as compared to $45.2 million for the same period in 2022. The decrease was mainly due to management’s continued strategy of rationalizing marketing spend as the North American and Latin American online gaming industries continue to mature. Advertising and promotions expense as a percentage of revenue decreased to 20% for the three months ended September 30, 2023 as compared to 31% for the same period in 2022.

General Administration and Other. General administration and other expense increased by $6.4 million, or 40%, to $22.4 million for the three months ended September 30, 2023 as compared to $16.0 million for the same period in 2022. The increase was primarily due to higher personnel and other administrative costs, which is consistent with the ongoing growth of our business. General administration and other expense as a percentage of revenue was 13% for the three months ended September 30, 2023 as compared to 11% for the same period in 2022.

Depreciation and Amortization. Depreciation and amortization expense increased by $4.4 million to $8.4 million for the three months ended September 30, 2023 as compared to $4.0 million for the same period in 2022. The increase was mainly due to additional costs to acquire property and equipment and other definite-lived intangible assets such as gaming licenses and internally developed software. Depreciation and amortization expense as a percentage of revenue increased to 5% for the three months ended September 30, 2023 as compared to 3% for the same period in 2022.

Interest Income (Expense), Net. Interest income, net was $0.8 million for the three months ended September 30, 2023 as compared to Interest expense, net of $0.2 million for the same period in 2022. The increase in interest income was mainly attributed to higher interest rates on cash and cash equivalents as compared to the same period in 2022.

Income Tax Expense. Income tax expense increased by $0.6 million, or 32%, to $2.4 million for the three months ended September 30, 2023 as compared to $1.8 million for the same period in 2022. Income tax expense for the three months ended September 30, 2023 related to profitability of our foreign operations for which both current and deferred taxes are recorded. Income tax expense as a percentage of revenue remained flat at 1% for the three months ended September 30, 2023 and 2022.

Comparison of the Nine Months Ended September 30, 2023 and 2022

($ in thousands)

Revenue. Revenue increased by $70.7 million, or 17%, to $497.3 million for the nine months ended September 30, 2023 as compared to $426.6 million for the same period in 2022. The increase was mainly due to and directly correlated with our continued growth across existing markets and expansion into new markets that launched during 2022. The increase reflects higher period-over-period online casino and sports betting revenue of $67.2 million, retail sports betting revenue of $3.2 million and social gaming revenue of $0.3 million.

Costs of Revenue. Costs of revenue increased by $25.1 million, or 8%, to $333.2 million for the nine months ended September 30, 2023 as compared to $308.1 million for the same period in 2022. The increase was mainly due to and directly correlated with, our expansion and continued growth in existing and new markets as noted above. Gaming taxes, payment processing costs, personnel costs and operating costs contributed $19.0 million, $5.4 million, $2.4 million and $1.8 million, respectively, which were partially offset by a decrease in market access costs of $3.5 million. Costs of revenue as a percentage of revenue decreased to 67% for the nine months ended September 30, 2023 as compared to 72% for the same period in 2022.

Advertising and Promotions. Advertising and promotions expense decreased by $31.3 million, or 20%, to $125.5 million for the nine months ended September 30, 2023 as compared to $156.8 million for the same period in 2022. The decrease was mainly due to management’s strategy of rationalizing marketing spend as the North American and Latin American online gaming industries continue to mature. Advertising and promotions expense as a percentage of revenue decreased to 25% for the nine months ended September 30, 2023 as compared to 37% for the same period in 2022.

General Administration and Other. General administration and other expense increased by $16.4 million, or 34%, to $64.6 million for the nine months ended September 30, 2023 as compared to $48.2 million for the same period in 2022. The increase was primarily due to higher personnel and other administrative costs, which is consistent with the ongoing growth of our business. General administration and other expense as a percentage of revenue increased to 13% for the nine months ended September 30, 2023 as compared to 11% for the same period in 2022.

Depreciation and Amortization. Depreciation and amortization expense increased by $12.1 million, or 120%, to $22.1 million for the nine months ended September 30, 2023 as compared to $10.1 million for the same period in 2022. The increase was mainly due to additional costs to acquire property and equipment and other definite-lived intangible assets such as gaming licenses and internally developed software. Depreciation and amortization expense as a percentage of revenue was 4% for the nine months ended September 30, 2023 as compared to 2% for the same period in 2022.

Interest Income (Expense), Net. Interest income, net was $1.4 million for the nine months ended September 30, 2023 as compared to Interest expense, net of $0.7 million for the same period in 2022. The increase in interest income was mainly attributed to higher interest rates on cash and cash equivalents as compared to the same period in 2022.

Income Tax Expense. Income tax expense increased by $1.8 million, or 29%, to $7.9 million for the nine months ended September 30, 2023 as compared to $6.2 million for the same period in 2022. Income tax expense for the nine months ended September 30, 2023 and 2022 related to the profitability of our foreign operations for which both current and deferred taxes are recorded. Income tax expense as a percentage of revenue was 2% for the nine months ended September 30, 2023 as compared to 1% for the same period in 2022.

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, foreign currency exchange rates 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 and customer support services, the number, timing, and type of sporting events, the length of professional sports seasons, our offerings and marketing efforts and those of our competitors (including those not just in the online gaming industry but also in the entertainment industry more broadly), climate and weather conditions, public sentiment, an economic downturn or other economic factors such as inflation, economic uncertainty or macroeconomic conditions. 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 wins and 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. 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.

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. With respect to our online sports betting and retail sports betting operations, customer activity tends to increase, and we may experience increased volatility, in connection with major sporting events such as the NFL super bowl, the NBA finals and NCAA basketball March Madness.

From a legislative perspective, we are continuing to see momentum to legalize and regulate online sports betting in new jurisdictions in the Americas. As expected, in many cases these new 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 momentum for online casino in several jurisdictions in the Americas 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, existing assets such as brands or databases, or experience. Customer demands for new and innovative offerings and features require us to continue to invest in new technologies, features 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. We are starting to see some other online gaming operators rationalize their marketing spend in North American jurisdictions, although their marketing spend may vary by quarter depending on, among other things, sports calendars, new market launches and prior commitments.

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 personnel’s compensation and benefits.

We had $171.2 million in cash and cash equivalents as of September 30, 2023 (excluding legally restricted customer cash deposits, which we segregate from our operating cash balances on behalf of our real-money customers for all jurisdictions and products). We intend for the foreseeable future to continue to finance our operations without third-party debt and entirely from operating cash flows.

In connection with the business combination that we completed on December 29, 2020 (the “Business Combination”), we executed a Tax Receivable Agreement, dated as of December 29, 2020 (the “TRA”), by and among RSI ASLP, Inc. (the “Special Limited Partner”), Rush Street Interactive, LP (“RSILP”), the sellers in the Business Combination (the “Sellers”) and the Sellers’ representative, which generally provides that the Special Limited Partner pay 85% of certain net tax benefits, if any, that the Company and its consolidated subsidiaries, including the Special Limited Partner, realize (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 agreement governing the Business Combination and the exchange of certain common units in RSILP retained by the Sellers 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 material 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 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. It is possible that we may need additional cash resources due to changed business conditions or other developments, including unanticipated regulatory developments, significant acquisitions, partnerships or marketing initiatives, deteriorating macroeconomic conditions 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 North America, Latin America and worldwide, which will require significant investment in our online gaming platform and personnel, in particular in product development, engineering and operations roles. We also expect certain costs such as marketing, market access and license fees to increase as we continue to explore expansion opportunities into new jurisdictions. In particular, we are party to several non-cancelable contracts with vendors and licensors for marketing and other strategic partnerships, pursuant to which 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.

We expect our material cash requirements during the upcoming 12-month period to include $13.6 million of non-cancellable purchase obligations with marketing vendors, $3.1 million of license and market access fees, and $1.4 million of lease payments. In addition, we will continue to strategically pursue expansion into new markets, which is expected to require significant capital investments. We have $51.6 million of additional non-cancellable purchase obligations including obligations with marketing vendors, for license and market access fees and for lease payments subsequent to the upcoming 12-month period. See note 12 to our unaudited condensed consolidated financial statements included elsewhere in this Report. Management believes our current cash holdings and, if necessary or desirable, various avenues available to pursue funding in the capital markets, will suffice to fund these obligations.

Surety Bonds

As of September 30, 2023, we have been issued $28.0 million in surety bonds that are used to satisfy regulatory requirements related to securing cash held on behalf of customers and $4.6 million in surety bonds to satisfy regulatory requirements necessary to operate in certain jurisdictions.

As of December 31, 2022, we have been issued $3.6 million in surety bonds to satisfy regulatory requirements necessary to operate in certain jurisdictions.

There have been no claims against any of our surety bonds and the likelihood of future claims is remote.

Debt

As of September 30, 2023, we had no debt outstanding. We have an outstanding letter of credit for $2.0 million in connection with our operations in Colombia, for which no amounts have been drawn as of September 30, 2023.

We do not maintain any other off-balance sheet arrangements, transactions and obligations that would be expected to have a material current or future effect on our consolidated financial statements.

Cash Flows

The following table shows our cash flows from operating activities, investing activities and financing activities for the nine months ended September 30, 2023 and 2022:

($ in thousands)

Operating activities. Net cash used in operating activities for the nine months ended September 30, 2023 decreased by $45.9 million to $6.8 million, as compared to $52.6 million during the same period in 2022. The decrease reflects a lower period-over-period net loss totaling $48.7 million and increased non-cash expenses of $23.6 million, which was partially offset by an increase in working capital totaling $24.8 million. The increase in non-cash expenses was driven primarily by additional depreciation and amortization totaling $12.1 million, share-based compensation expense totaling $10.7 million and write-offs of long-lived assets totaling $0.7 million.

Investing activities. Net cash used in investing activities for the nine months ended September 30, 2023 increased by $6.0 million to $26.1 million, as compared to $20.1 million during the same period in 2022. The increase reflects higher period-over-period cash paid for internally developed software costs totaling $5.2 million, an increase in cash paid for the acquisition of gaming licenses totaling $3.7 million, an increase in cash paid for the development of media content totaling $0.6 million and an increase in investment in equity of $0.5 million, which was partially offset by a reduction of property and equipment purchases totaling $1.8 million, cash paid for assets acquisitions totaling $1.5 million and investment in long-term deposits totaling $0.7 million.

Financing activities. Net cash used in financing activities for the nine months ended September 30, 2023 decreased by $0.1 million to $0.4 million, as compared to $0.5 million during the same period in 2022. The period-over-period difference reflects lower principal payments of finance lease liabilities.

Effect of exchange rate changes on cash, cash equivalents and restricted cash. The net effect of exchange rate changes on cash, cash equivalents and restricted cash, when expressed in U.S. Dollar terms, was an increase of $3.3 million for the nine months ended September 30, 2023 as compared to a decrease of $1.8 million for same period in 2022. These changes were due to fluctuations in foreign currency exchange rates from period to period.

Critical Accounting Policies and Estimates

We have prepared our unaudited condensed 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. Management has discussed the development, selection and disclosure of these estimates and assumptions with the Audit Committee of the Board.

There were no material changes during the quarter ended September 30, 2023, to the critical accounting policies and estimates discussed in our Annual Report. For a more complete discussion of our critical accounting policies and estimates, refer to our 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. We are an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, and have elected to take advantage of the benefits of this extended transition period. This may make it difficult or impossible to compare our 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.

We operate primarily in United States, Canada 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 inflation 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 September 30, 2023, we had cash, cash equivalents and restricted cash of $176.2 million, which consisted primarily of bank deposits, certificates of deposit and money market funds. Such interest-earning instruments carry a degree of interest rate risk; however, due to the relatively short-term nature of these instruments, 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 interest rates of these interest-earning instruments would not have a material effect on our unaudited condensed consolidated financial statements for the nine months ended September 30, 2023.

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 reporting and functional currency for a majority of our operations. 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, the Canadian Dollar and the Mexican Peso. Markets with a functional currency other than the U.S. Dollar accounted for less than 20% and 10% of our revenue for the nine months ended September 30, 2023 and 2022, respectively. A 10% increase or decrease in the value of these currencies compared to the U.S. Dollar would not have a material effect on our unaudited condensed consolidated financial statements for the nine months ended September 30, 2023.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations as of and for the nine months ended September 30, 2023. If our costs become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and operating results. In addition, our customers may experience inflationary pressures and rising costs. This could result in our customers having less disposable income, and thus they may reduce their spending on discretionary entertainment activities such as our products and services. Such a reduction in spending by our customers could harm our business, financial condition, revenues and operating results.

Management’s Evaluation of 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 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 September 30, 2023.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2023 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.

There have been no material changes to the risk factors disclosed under the heading “Risk Factors” in our Annual Report.