UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ________ to ________
to
GAN Limited
(Exact name of registrant as specified in its charter)
| Bermuda | Not Applicable | ||||||||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
| 400 Spectrum Center Drive | , Suite 1900 | , Irvine, California | 92618 | ||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(833)
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Ordinary shares, | GAN | The Nasdaq Stock Market LLC | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx ☒ No ☐
No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx ☒ No ☐
No
o
| Large accelerated filer | Accelerated filer | |||||||||||||
| Non-accelerated filer | Smaller reporting company | |||||||||||||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ Noo ☒
No x
At May 3, 2021,8, 2023, there were 42,007,600
GAN LIMITED
FORM 10-Q
INDEX
| Page | ||||||||
| Financial Statements (Unaudited) | 3 | |||||||
Condensed Consolidated Balance Sheets as of March 31, | ||||||||
Condensed Consolidated Statements of Operations for the three months ended March 31, | ||||||||
Condensed Consolidated Statements of | ||||||||
| 7 | ||||||||
| Notes to Condensed Consolidated Financial Statements | ||||||||
| 37 | ||||||||
| 37 | ||||||||
| 40 | ||||||||
| 41 | ||||||||
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GAN LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
| March 31, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash | $ | 52,185 | $ | 152,654 | |||||||
| Accounts receivable, net | 11,945 | 6,818 | |||||||||
| Prepaid expenses | 2,800 | 1,912 | |||||||||
| Other current assets | 3,423 | 2,112 | |||||||||
| Total current assets | 70,353 | 163,496 | |||||||||
| Capitalized software development costs, net | 8,134 | 6,648 | |||||||||
| Goodwill | 152,734 | 0 | |||||||||
| Intangible assets, net | 43,855 | 468 | |||||||||
| Other assets | 3,926 | 2,634 | |||||||||
| Total assets | $ | 279,002 | $ | 173,246 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 4,329 | $ | 4,926 | |||||||
| Accrued compensation and benefits | 6,127 | 4,956 | |||||||||
| Accrued expenses | 4,414 | 3,363 | |||||||||
| Liabilities to users | 6,916 | 0 | |||||||||
| Other current liabilities | 3,944 | 4,067 | |||||||||
| Total current liabilities | 25,730 | 17,312 | |||||||||
| Deferred income taxes | 2,167 | 0 | |||||||||
| Other noncurrent liabilities | 559 | 370 | |||||||||
| Total liabilities | 28,456 | 17,682 | |||||||||
| Stockholders’ equity | |||||||||||
Ordinary shares, $0.01 par value, 100,000,000 shares authorized, 42,004,100 and 36,635,362 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 419 | 365 | |||||||||
| Additional paid-in capital | 312,715 | 203,842 | |||||||||
| Accumulated deficit | (50,230) | (45,766) | |||||||||
| Accumulated other comprehensive loss | (12,358) | (2,877) | |||||||||
| Total stockholders’ equity | 250,546 | 155,564 | |||||||||
| Total liabilities and stockholders’ equity | $ | 279,002 | $ | 173,246 | |||||||
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues | $ | 27,842 | $ | 7,670 | |||||||
| Operating costs and expenses | |||||||||||
Cost of revenues (1) | 8,719 | 1,692 | |||||||||
| Sales and marketing | 4,101 | 863 | |||||||||
| Product and technology | 4,850 | 1,024 | |||||||||
General and administrative (1) | 10,011 | 2,391 | |||||||||
| Depreciation and amortization | 3,963 | 853 | |||||||||
| Total operating costs and expenses | 31,644 | 6,823 | |||||||||
| Operating income (loss) | (3,802) | 847 | |||||||||
| Interest expense, net | 1 | 8 | |||||||||
| Income (loss) before income taxes | (3,803) | 839 | |||||||||
| Income tax provision | 661 | 145 | |||||||||
| Net income (loss) | $ | (4,464) | $ | 694 | |||||||
| Income (loss) per share | |||||||||||
| Basic | $ | (0.11) | $ | 0.03 | |||||||
| Diluted | $ | (0.11) | $ | 0.03 | |||||||
| Weighted average ordinary shares outstanding | |||||||||||
| Basic | 41,986,083 | 21,512,225 | |||||||||
| Diluted | 41,986,083 | 23,040,345 | |||||||||
Excludes depreciation and amortization
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 40,755 | $ | 45,920 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $119 and $250 at March 31, 2023 and December 31, 2022, respectively | 13,873 | 13,808 | ||||||
| Prepaid expenses | 5,333 | 4,861 | ||||||
| Other current assets | 3,111 | 3,041 | ||||||
| Total current assets | 63,072 | 67,630 | ||||||
| Capitalized software development costs, net | 7,756 | 6,749 | ||||||
| Intangible assets, net | 22,167 | 24,955 | ||||||
| Other assets | 3,642 | 3,746 | ||||||
| Total assets | $ | 96,637 | $ | 103,080 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 5,603 | $ | 6,437 | ||||
| Accrued compensation and benefits | 8,864 | 8,750 | ||||||
| Accrued content license fees | 1,748 | 2,214 | ||||||
| Liabilities to users | 9,663 | 10,683 | ||||||
| Other current liabilities | 5,115 | 4,448 | ||||||
| Total current liabilities | 30,993 | 32,532 | ||||||
| Deferred income taxes | 4,107 | 4,218 | ||||||
| Long-term debt | 28,483 | 28,157 | ||||||
| Content licensing liabilities | 6,389 | 15,280 | ||||||
| Other liabilities | 2,058 | 2,125 | ||||||
| Total liabilities | 72,030 | 82,312 | ||||||
| Commitments and contingencies (Note 14) | - | - | ||||||
| Shareholders’ equity | ||||||||
| Ordinary shares, $ par value, shares authorized, and shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | 433 | 429 | ||||||
| Additional paid-in capital | 330,366 | 328,998 | ||||||
| Accumulated deficit | (273,360 | ) | (274,861 | ) | ||||
| Accumulated other comprehensive loss | (32,832 | ) | (33,798 | ) | ||||
| Total shareholders’ equity | 24,607 | 20,768 | ||||||
| Total liabilities and shareholders’ equity | $ | 96,637 | $ | 103,080 | ||||
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net income (loss) | $ | (4,464) | $ | 694 | |||||||
| Other comprehensive loss, net of tax | |||||||||||
| Foreign currency translation adjustments | (9,481) | (1,320) | |||||||||
| Comprehensive loss | $ | (13,945) | $ | (626) | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GAN LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Inin thousands, except share and per share amounts)
| Ordinary Shares | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 36,635,362 | $ | 365 | $ | 203,842 | $ | (45,766) | $ | (2,877) | $ | 155,564 | ||||||||||||||||||||||||
| Net loss | — | — | — | (4,464) | — | (4,464) | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 1,632 | — | — | 1,632 | |||||||||||||||||||||||||||||
| Issuance of ordinary shares upon exercise of stock options | 108,222 | 1 | 314 | — | — | 315 | |||||||||||||||||||||||||||||
| Issuance of ordinary shares as partial consideration in Coolbet acquisition (Note 4) | 5,260,516 | 53 | 106,630 | — | — | 106,683 | |||||||||||||||||||||||||||||
| Fair value of replacement equity awards issued as consideration in Coolbet acquisition (Note 4) | — | — | 297 | — | — | 297 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (9,481) | (9,481) | |||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 42,004,100 | $ | 419 | $ | 312,715 | $ | (50,230) | $ | (12,358) | $ | 250,546 | ||||||||||||||||||||||||
| Ordinary Shares | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | 21,486,059 | $ | 215 | $ | 40,862 | $ | (23,024) | $ | (2,908) | $ | 15,145 | ||||||||||||||||||||||||
| Net income | — | — | — | 694 | — | 694 | |||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | 295 | — | — | 295 | |||||||||||||||||||||||||||||
| Issuance of ordinary shares upon exercise of stock options | 64,908 | 1 | 86 | — | — | 87 | |||||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (1,320) | (1,320) | |||||||||||||||||||||||||||||
| Balance at March 31, 2020 | 21,550,967 | $ | 216 | $ | 41,243 | $ | (22,330) | $ | (4,228) | $ | 14,901 | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | $ | 35,129 | $ | 37,494 | ||||
| Operating costs and expenses | ||||||||
| Cost of revenue (1) | 10,161 | 11,700 | ||||||
| Sales and marketing | 7,184 | 6,098 | ||||||
| Product and technology | 9,578 | 8,954 | ||||||
| General and administrative (1) | 10,006 | 9,392 | ||||||
| Restructuring | — | 1,059 | ||||||
| Depreciation and amortization | 4,201 | 4,413 | ||||||
| Total operating costs and expenses | 41,130 | 41,616 | ||||||
| Operating loss | (6,001 | ) | (4,122 | ) | ||||
| Interest expense (income), net | 1,716 | (9 | ) | |||||
| Other income, net | (9,292 | ) | — | |||||
| Income (loss) before income taxes | 1,575 | (4,113 | ) | |||||
| Income tax expense | 74 | 386 | ||||||
| Net income (loss) | $ | 1,501 | $ | (4,499 | ) | |||
| Earnings (loss) per share, basic and diluted | $ | 0.03 | $ | (0.11 | ) | |||
| Weighted average ordinary shares outstanding | ||||||||
| Basic | 42,982,255 | 42,252,661 | ||||||
| Diluted | 47,200,182 | 42,252,661 | ||||||
| (1) | Excludes depreciation and amortization expense |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GAN LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Inin thousands)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash Flows From Operating Activities | |||||||||||
| Net income (loss) | $ | (4,464) | $ | 694 | |||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | |||||||||||
| Amortization of software and intangible assets | 3,724 | 792 | |||||||||
| Depreciation on property and equipment and finance lease right-of-use assets | 239 | 61 | |||||||||
| Share-based compensation expense | 1,632 | 295 | |||||||||
| Other | 99 | 31 | |||||||||
| Changes in operating assets and liabilities, net of acquisition: | |||||||||||
| Accounts receivable | (5,109) | (3,047) | |||||||||
| Prepaid expenses and other current assets | (919) | (386) | |||||||||
| Other assets | 97 | 1,055 | |||||||||
| Accounts payable | (2,093) | (567) | |||||||||
| Accrued compensation and benefits | (43) | 598 | |||||||||
| Accrued expenses | 1,528 | (64) | |||||||||
| Liabilities to users | 1,808 | 0 | |||||||||
| Other liabilities | (644) | (901) | |||||||||
| Net cash used in operating activities | (4,145) | (1,439) | |||||||||
| Cash Flows From Investing Activities | |||||||||||
| Cash paid for acquisition, net of cash acquired | (92,404) | 0 | |||||||||
| Expenditures for capitalized software development costs | (2,153) | (534) | |||||||||
| Purchases of gaming licenses | (34) | 0 | |||||||||
| Purchases of property and equipment | (426) | (437) | |||||||||
| Net cash used in investing activities | (95,017) | (971) | |||||||||
| Cash Flows From Financing Activities | |||||||||||
| Payments of offering costs | (604) | (909) | |||||||||
| Proceeds from exercise of stock options | 315 | 87 | |||||||||
| Principal payments on finance leases | 0 | (44) | |||||||||
| Net cash used in financing activities | (289) | (866) | |||||||||
| Effect of foreign exchange rates on cash | (1,018) | (850) | |||||||||
| Net decrease in cash | (100,469) | (4,126) | |||||||||
| Cash, beginning of period | 152,654 | 10,279 | |||||||||
| Cash, end of period | $ | 52,185 | $ | 6,153 | |||||||
| Supplemental Disclosure of Noncash Investing and Financing Activities: | |||||||||||
| Ordinary shares issued as partial consideration to acquire all the outstanding shares of Coolbet (Note 4) | $ | 106,683 | $ | 0 | |||||||
| Issuance of unvested stock options in exchange for unvested stock options of Coolbet (Note 4) | 297 | 0 | |||||||||
| Right-of-use asset obtained in exchange for new operating lease liabilities | 188 | 0 | |||||||||
| 2023 | 2022 | |||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Net income (loss) | $ | 1,501 | $ | (4,499 | ) | |||
| Other comprehensive income (loss), net of tax | ||||||||
| Foreign currency translation adjustments | 966 | (4,264 | ) | |||||
| Comprehensive income (loss) | $ | 2,467 | $ | (8,763 | ) | |||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GAN LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
| Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Ordinary Shares | Paid-in | Accumulated | Comprehensive | Shareholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
| Balance at January 1, 2023 | 42,894,211 | $ | 429 | $ | 328,998 | $ | (274,861 | ) | $ | (33,798 | ) | $ | 20,768 | |||||||||||
| Balance | 42,894,211 | $ | 429 | $ | 328,998 | $ | (274,861 | ) | $ | (33,798 | ) | $ | 20,768 | |||||||||||
| Net income | — | — | — | 1,501 | — | 1,501 | ||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | 966 | 966 | ||||||||||||||||||
| Share-based compensation | — | — | 1,382 | — | — | 1,382 | ||||||||||||||||||
| Restricted share activity | 377,944 | 4 | — | — | — | 4 | ||||||||||||||||||
| Repurchase of restricted shares to pay tax liability (Note 7) | (49,157 | ) | (1 | ) | (78 | ) | — | — | (79 | ) | ||||||||||||||
| Issuance of ordinary shares upon ESPP purchases | 57,960 | 1 | 64 | — | — | 65 | ||||||||||||||||||
| Balance at March 31, 2023 | 43,280,958 | $ | 433 | $ | 330,366 | $ | (273,360 | ) | $ | (32,832 | ) | $ | 24,607 | |||||||||||
| Balance | 43,280,958 | $ | 433 | $ | 330,366 | $ | (273,360 | ) | $ | (32,832 | ) | $ | 24,607 | |||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Ordinary Shares | Paid-in | Accumulated | Comprehensive | Shareholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | Equity | |||||||||||||||||||
| Balance at January 1, 2022 | 42,250,743 | $ | 422 | $ | 319,551 | $ | (76,360 | ) | $ | (19,576 | ) | $ | 224,037 | |||||||||||
| Balance | 42,250,743 | $ | 422 | $ | 319,551 | $ | (76,360 | ) | $ | (19,576 | ) | $ | 224,037 | |||||||||||
| Net loss | — | — | — | (4,499 | ) | — | (4,499 | ) | ||||||||||||||||
| Net income (loss) | — | — | — | (4,499 | ) | — | (4,499 | ) | ||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | (4,264 | ) | (4,264 | ) | ||||||||||||||||
| Share-based compensation | — | — | 1,316 | — | — | 1,316 | ||||||||||||||||||
| Accrued liability settled through issuance of shares | — | — | 444 | — | — | 444 | ||||||||||||||||||
| Restricted share activity | 2,365 | — | — | — | — | — | ||||||||||||||||||
| Balance at March 31, 2022 | 42,253,108 | $ | 422 | $ | 321,311 | $ | (80,859 | ) | $ | (23,840 | ) | $ | 217,034 | |||||||||||
| Balance | 42,253,108 | $ | 422 | $ | 321,311 | $ | (80,859 | ) | $ | (23,840 | ) | $ | 217,034 | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
GAN LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net income (loss) | $ | 1,501 | $ | (4,499 | ) | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Amortization of software and intangible assets | 3,835 | 4,082 | ||||||
| Depreciation on property and equipment and finance lease right-of-use assets | 365 | 331 | ||||||
| Amortization of debt discount and debt issuance costs | 326 | — | ||||||
| Share-based compensation expense | 1,362 | 1,222 | ||||||
| Gain on extinguishment of content liability | (9,292 | ) | — | |||||
| Deferred income tax | (194 | ) | — | |||||
| Other | (181 | ) | — | |||||
| Changes in operating assets and liabilities, net of acquisition: | ||||||||
| Accounts receivable | 143 | 237 | ||||||
| Prepaid expenses | (404 | ) | (670 | ) | ||||
| Other current assets | (32 | ) | (267 | ) | ||||
| Other assets | 39 | 238 | ||||||
| Accounts payable | (916 | ) | 591 | |||||
| Accrued compensation and benefits | (7 | ) | (2,885 | ) | ||||
| Accrued content license fees | (498 | ) | — | |||||
| Liabilities to users | (1,213 | ) | 22 | |||||
| Other current liabilities | 660 | (183 | ) | |||||
| Other liabilities | 331 | (243 | ) | |||||
| Net cash used in operating activities | (4,175 | ) | (2,024 | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Expenditures for capitalized software development costs | (1,343 | ) | (3,543 | ) | ||||
| Purchases of gaming licenses | (165 | ) | (16 | ) | ||||
| Purchases of property and equipment | (254 | ) | (429 | ) | ||||
| Net cash used in investing activities | (1,762 | ) | (3,988 | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from issuance of ordinary shares upon ESPP purchase | 65 | — | ||||||
| Repurchase of restricted shares to pay tax liability | (112 | ) | — | |||||
| Net cash used in financing activities | (47 | ) | — | |||||
| Effect of foreign exchange rates on cash | 819 | 118 | ||||||
| Net decrease in cash | (5,165 | ) | (5,894 | ) | ||||
| Cash, beginning of period | 45,920 | 39,477 | ||||||
| Cash, end of period | $ | 40,755 | $ | 33,583 | ||||
| Supplemental Cash Flow Information | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | 1,068 | $ | 2,444 | ||||
| Income taxes | 36 | 728 | ||||||
| Intangible assets acquired in business acquisition included in current and long-term liabilities | — | 24,876 | ||||||
| Accrued liability settled through issuance of shares | — | 913 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
NOTE 1 — NATURE OF OPERATIONS
GAN Limited (the “Parent,” and with its subsidiaries, collectively the “Company”) is an exempted company limited by shares, incorporated and registered in Bermuda. GAN plc, the previous parent, began its operations in the United Kingdom (“U.K.”) in 2002 and listed its ordinary shares on the AIM, the London Stock Exchange’s market for smaller companies, in 2013. In May 2020, pursuant to a statutory Scheme of Arrangement under Part 26 of U.K Companies Act of 2006 (“Scheme of Arrangement”) approved by the shareholders of GAN plc, the shareholders of GAN plc exchanged their shares in GAN plc for shares in the Parent, thereby migrating the Company's jurisdiction of organization from the U.K. to Bermuda. Thereafter, GAN Limited became the parent company of GAN plc. GAN plc was renamed GAN (UK) Limited (“GAN UK”).
NOTE 2 — BASISSUMMARY OF PRESENTATION
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the rules and regulationsresults of the SecuritiesParent and Exchange Commission for interim reporting.its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, in the opinion of management, of a normal recurring nature that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The financial data and other financial information disclosed in these notes to the condensed consolidated financial statements related to these periods are also unaudited. The results of operations for the three months ended March 31, 20212023 are not necessarily indicative of the results that may be expected for the year ended December 31, 20212023 or for any future annual or interim period. The condensed consolidated balance sheet as of December 31, 20202022 included herein was derived from the audited consolidated financial statements as of that date. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.2022.
| 8 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and Reorganization
Liquidity
The accompanying condensed consolidated financial statements have been prepared as if GAN Limitedon a going concern basis. As of March 31, 2023, the Company had beenan accumulated deficit of $273.4 million, with cash of $40.8 million and liabilities to users of $9,663. The Company had historically operated with net losses and has not generated positive cash flows. Additionally, the parent entity forCompany’s current financial condition, liquidity resources, and planned near-term cash flows from operations are sensitive to changes in macro-economic conditions and the periods presented. All share and per share amounts priorsubstantial variability inherent in the Company’s wager-based revenues streams. These factors indicate uncertainty related to the dateability of the share exchangeCompany to meet its current obligations as they come due.
In the fourth quarter of 2022, the Company initiated plans to address its liquidity needs and reorganizationimprove its operations and cash position primarily by (i) reducing and deferring personnel and operational costs for non-strategic initiatives, (ii) amending the Credit Facility to reduce cash interest obligations and amend financial covenants, (iii) identifying sources of additional capital, (iv) continuing investment in these condensedthe growth areas of the Company’s consolidated financial statements have been retroactively adjusted to give effect to the Share Exchange.
On April 13, 2023, a subsidiary of the Company has added significant accounting policies duringexecuted agreements to amend its existing credit facility to waive all events of default, amend certain financial covenants, assign the three months ended March 31, 2021 below.
To the extent that the Company’s current resources, including its ability to generate operating cash flows, are insufficient to satisfy its cash requirements, the Company may seek additional equity or debt financing. The Company’s ability to do so depends on prevailing economic conditions and other factors, many of which are beyond management’s control. The Company does not currently have any such credit facilities or similar debt arrangements in place, outside of the Amended Credit Facility as described above, and cannot provide any assurance as to the availability or terms of any future financing that it may require to support its operations. If the needed financing is not available, or if the terms of financing are less desirable than expected, the Company may be forced to decrease its level of investment in new products and technologies, discontinue further expansion of the business, scale back its existing operations, or divest of assets, any of which could have an adverse impact on the Company and its financial prospects.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP")GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Due to the inherent uncertainties involved in making estimates, actual results could differ from the original estimates, and may require significant adjustments to these reported balances in the future periods.
The Company’s reporting currency is the U.S. Dollar while the Company’s foreign subsidiaries use their local currencies as their functional currencies. The assets and liabilities of foreign subsidiaries are translated to U.S. Dollars based on the current exchange rate prevailing at each reporting period. Revenue and expenses are translated into U.S. Dollars using the average exchange rates prevailing for each period presented. Translation adjustments that arise from translating a foreign subsidiary’s financial statements from their functional currency to U.S. Dollars are reported as a separate component of accumulated other comprehensive loss in stockholders’shareholders’ equity.
Gains and losses arising from transactions denominated in a currency other than the functional currency are included in general and administrative expense in the condensed consolidated statements of operations as incurred. Foreign currency transaction and remeasurement gains and losses were a net loss of $9,481$624 and $1,320$867 for the three months ended March 31, 20212023 and 2020,2022, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of its cash and Uncertainties – COVID-19
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
Risks and Uncertainties
Macroeconomic conditions can materially adversely affect the Company’s business, results of operations and financial condition. Recent adverse macroeconomic conditions, including inflation, higher interest rates, slower growth or recession, the strengthening of the U.S. dollar, and corresponding currency fluctuations can have an adverse material impact on the Company’s future results of operations, cash flows, and financial condition, particularly with respect to foreign currency adjustments relating to our international operations. Such conditions may also affect consumers’ willingness to make discretionary purchases, and therefore the Company, along with its liquiditycasino operator customers, may experience a decline in wagering. A downturn in the economic environment can also lead to date as a result of COVID-19. COVID-19 may impactincreased credit and collectibility risk on the Company’s trade receivables, limitations on the Company’s ability to access capital to the extent it effects the U.S capital markets. The Company has assessed the extent to which the COVID-19 has impacted events after the reporting dateissue new debt, and has not identified additional items to disclose as a result.
Revenue Recognition
The Company’s platform and content revenuesrevenue from its B2B operations are generated primarily from its Internet gamblinginternet gaming Software-as-a-Service ("SaaS"platform (“SaaS”) platform,, GameSTACK, that its customers use to provide real money and simulated InternetRMiG, online sports gaming and online sports betting.SIM services to its end users. The Company enters into service agreementscontracts with its customers that generally range from three to five years and includesinclude renewal provisions, under which itprovisions. These contracts generally include provision of the internet gaming platform, content consisting of proprietary and third-party games, development services and support and marketing services. In certain cases, the contract may include computer hardware to be procured on behalf of the customer. The customers cannot take possession of the hosted GameSTACK software and the Company does not sell or license the GameSTACK software.
The Company charges fees as consideration for use of its internet gaming system, game content, support and marketing services based on a fixed percentage of the casino operator’s net gaming revenue or net sportssportsbook win, at the time of settlement of an event for real money gamingRMiG contracts, considered usage-based fees, or at the time of purchase for in-game virtual credit for simulated gaming. Further,SIM contracts. The determination of the fee charged to its customers is negotiated and varies significantly. Certain of these RMiG contracts provide the Company generates revenues from the licensing of proprietary and third-party branded games (collectively “content licensing services”) hosted on the platform.
The Company’s promise to provide the RMiG SaaS platform and content licensing services on the hosted software is a single performance obligation. This performance obligation is recognized over time, as the Company provides services to its customercustomers in its delivery of services to the player end user. The Company’s customers simultaneously receive and consume the benefits provided by the Company as it delivers services to its customers. Usage based fees are considered variable consideration as the service is to provide unlimited continuous access to its hosted application and usage of the hosted system is primarily controlled by the player end user. The transaction price is consideredincludes fixed and variable consideration and is billed monthly with the amount due generally due thirty days from the date of the invoice.
Purchases of virtual credits within a transaction period on the SIM platform, generally a monthly convention, are earned over time, and are typically billed monthly upon the close of the respective period as the credit has no monetary value, cannot be redeemed, exchanged, transferred or withdrawn, represents solely a device for both proprietarytracking game play during the month, does not obligate the Company to provide future services and the arrangements with the customer and player end user have no substantive termination penalty. In certain service agreements with its SIM customers, the fees collected by the Company from third-party licensed gaming content.payment processors for the purchases of in-game virtual credits made by end-users include the SIM customer’s portion. The Company records the SIM customer’s portion as a liability as cash is collected and remits payment to the SIM customer for their share of the SIM revenues monthly. At March 31, 2023 and December 31, 2022, the Company has recorded a liability due to its customers for their share of the fees of $1,582 and $1,628 , respectively, within other current liabilities in this case the casino operator, generally controls the determinationcondensed consolidated balance sheets.
| 10 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
The Company uses third-party content providers in supplying game content in its performance of which gamingproviding game content will be offered in their online casinos.
The Company operates the B2C gaming site www.Coolbet.com outside of the United States, which is built on proprietary software and includes the following product offerings: sportsbook, poker, casino, live casino and virtual sports.
Other services include the resale of a third-party computer hardware, such as computing servers and other technicalrelated hardware devices, upon which the GameSTACK software platform is installed for its customers. These products are not required to be purchased in order to access the GameSTACK platform but are sold as a convenience to the customer. The Company procures the computer hardware on the customer’s behalf for a fee determined based on cost of the computer hardware plus a markup. The Company charges a hardware deployment fee which is a one-time fee for installation, testing and certification of the computer hardware at the gaming hosting facility. Revenue is recognized at the point in time when control of the hardware transfers to the customer. Control is transferred after the hardware has been procured, delivered, installed at the client’scustomer’s premises and configured to allow for remote access.
The Company has determined that it is acting as the principal in these transactionsproviding computer hardware and related services as it takesassumes responsibility for procuring, delivering, installing and configuring the hardware at the customer’s location and takes control of the hardware, prior to transfer. Revenue is presented at the gross amount of consideration to which it is entitled from the customer in exchange for the hardware.
The Company generates revenue from time to time from the licensing of its U.S. patent, which governs the linkage of on-property reward cards to their counterpart Internet gamblinginternet gaming accounts together with bilateral transmission of reward points between the Internet gamblinginternet gaming technology system and the land-based casino management system present in all U.SU.S. casino properties. The nature of the promise in transferring the license is to provide a right to use the patent as it exists. The Company does not have to undertake activities to change the functionality of the patent during the license period and the license has significant stand-alone functionality. Therefore, the Company recognizes the revenue from the license of the patent at the point in time when control of the license is transferred to the customer. Control is determined to transfer at the point in time the customer is able to use and benefit from the license.
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
Contracts with Multiple Performance Obligations
For customer contracts that have more than one performance obligation, the transaction price is allocated to the performance obligations in an amount that depicts the relative stand-alone selling prices of each performance obligation. Judgment is required in determining the stand-alone selling price for each performance obligation. In determining the allocation of the transaction price, an entity is required to maximize the use of observable inputs. When the stand-alone selling price of a good or service is not directly observable, an entity is required to estimate the stand-alone selling price. When a customer contract, includesContracts with its customers may include platform and licensing of game content services, andas well as development services theand computer hardware services. The variable consideration forgenerated from the platform and content servicesthe licensing of the transaction pricegame content is allocated entirely to the performance obligationobligations for platform and licensing of game content services.
Revenue from Gaming Operations
The Company operates the B2C gaming site www.coolbet.com outside of the U.S., which contains proprietary software and includes the following product offerings: sportsbook, poker, casino, live casino and virtual sports.
The Company manages an online sportsbook allowing users to place various types of wagers on the outcome of sporting events conducted around the world. The Company operates as the bookmaker and offers fixed odds wagering on such events. When a user’s wager wins, the Company pays the user a pre-determined amount known as fixed odds. Revenue from online sportsbook is reported net after deduction of player winnings and bonuses. Revenue from wagers is recognized when the outcome of the event is known.
The Company offers live casino through its digital online casino offering in select markets, allowing users to place a wager and play games virtually at retail casinos. The Company offers users a catalog of over 4,700 third-party iGaming products such as digital slot machines and table games such as blackjack and roulette. Revenue from casino games is reported net after deduction of winnings, jackpot contribution and customer bonuses.
Peer-to-peer poker offerings allow users to play poker against one another on the Company’s online poker platform for prize money. Revenue is recognized as a percentage of the reported rake. Additionally, the Company offers tournament poker which allows users to buy-in for a fixed price for prize money. For tournament play, revenue is recognized for the difference between the entry fees collected and the amounts paid out to users as prizes and winnings.
In each of the online gaming products, a single performance obligation exists at the time a wager is made to operate the games and award prizes or payouts to users based on a particular outcome. Revenue is recognized at the conclusion of each contest, wager, or wagering game hand. Additionally, certain incentives given to users, for example, that allow the user to make an additional wager at a reduced price, may provide the user with a material right which gives rise to a separate performance obligation.
The Company allocates a portion of the user’s wager to incentives that create material rights that are redeemed or expired in the future. The allocated revenue for gaming wagers is primarily recognized when the wagers occur because all such wagers settle immediately.
The Company applies a practical expedient by accounting for revenue from gaming on a portfolio basis because such wagers have similar characteristics, and the Company reasonably expects the effects on the financial statements of applying the revenue recognition guidance to the portfolio to not differ materially from that which would result if applying the guidance to an individual wagering contract.
| 12 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Cost of Revenue
Cost of revenue consists primarily of variable costs. These include mainly (i) content license fees, (ii) payment processing fees and chargebacks, (iii) platform technology, software, and connectivity costs directly associated with revenue generating activities, (iv) gaming duties, and (v) sportsbook feed / provider services. The Company incurs payment processing fees on B2C user deposits, withdrawals, and deposit reversals from payment processors. Cost of revenue excludes depreciation of the servers on which the Company’s gaming platforms reside as well as amortization of intangible assets including internally developed software.
Sales and Marketing
Sales and marketing expense primarily consists of general marketing and advertising costs, B2C user acquisition expenses and personnel costs within our sales and marketing functions. Sales and marketing costs are expensed as incurred.
Product and Technology
Product and technology expenses consist primarily of personnel costs associated with development and maintenance activities that are not capitalized. These costs primarily represent employee expenses (including but not limited to, salaries, bonus, employee benefits, employer tax expenses, and share-based compensation) for personnel and contractors involved in the design, development, and project management of our proprietary technologies as well as developed and licensed content.
General and Administrative
General and administrative expenses consist of costs, including gaming operations costs, not related to sales and marketing, product and technology or revenue. General and administrative costs include professional services (including legal, regulatory and compliance, audit, and consulting expenses), rent contingencies, insurance, allowance for credit losses, foreign currency transaction gains and losses, and costs related to the compensation of executive and non-executive personnel, including share-based compensation.
Content Licensing Fees
Content licensing fees are paid to third parties for gaming content which are expensed as incurred. Content licensing fees are calculated as a percentage of net gaming revenues in respect of the third-party games, as stipulated in the third-party agreements.
Share-based compensation expense is recognized for share options and restricted shares issued to employees and non-employee members of the Company’s Board of Directors. The Company’s issued share options and restricted shares, which are primarily considered equity awards and include only service conditions, are valued based on the fair value of these awards on the date of grant. The fair value of the share options is estimated using a Black-Scholes option pricing model and the fair value of the restricted shares (restricted share awards and restricted share units) is based on the market price of the Company’s shares on the date of grant.
Certain restricted share units awards issued to non-employee members of the Company’s Board of Directors permit shares upon vesting to be withheld, as a means of meeting the non-employee director’s tax withholding requirements, and paid in cash to the non-employee director. The Company additionally incurs share-based compensation expense under compensation arrangements with certain of its employees under which the Company will settle bonuses for a fixed dollar amount by issuing a variable number of shares based on the Company’s share price on the settlement date. These awards are classified as liability-based awards which are measured based on the fair value of the award at the end of each reporting period until settled. Related compensation expense is recognized based on changes to the fair value over the applicable service period.
Share-based compensation is recorded over the requisite service period, generally defined as the vesting period. For awards with graded vesting and only service conditions, compensation cost is recorded on a straight-line basis over the requisite service period of the entire award. Forfeitures are recorded in the period in which they occur.
Basic earnings per share is calculated by dividing earnings by the weighted average number of ordinary shares outstanding during the year. In periods of loss, basic and diluted per share information are the same.
Cash
Cash is comprised of cash held at the bank and third-party service providers. The Company is required to maintain minimumcompensating cash balances to satisfy its liabilities to users. Such balances are included within cash onin the condensed consolidated balance sheets and are not subject to creditor claims.
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Capitalized Software Development Costs, net
The Company capitalizes certain development costs related to its internet gaming platforms during the excessapplication development stage. Costs associated with preliminary project activities, training, maintenance and all other post implementation stage activities are expensed as incurred. Software development costs are capitalized when application development begins, it is probable that the project will be completed, and the software will be used as intended. The Company capitalizes certain costs related to specific upgrades and enhancements when it is probable that expenditures will result in additional functionality of the fair valueplatform to its customers. The capitalization policy provides for the capitalization of certain payroll and payroll related costs for employees who spent time directly associated with development and enhancements of the consideration transferredplatform.
Capitalized software development costs are amortized on a straight-line basis over their estimated useful lives, which generally ranges from three to five years, and are included within depreciation and amortization expense in the estimated fair valuescondensed consolidated statements of the identifiable assets acquired and liabilities assumed on the acquisition date. As disclosed in Note 4, the Company has recorded goodwill in connection with the acquisition of Coolbet on January 1, 2021. Goodwill is not amortized, but rather is reviewed for impairment annually or more frequently if facts or circumstances indicate that the carrying value may not be recoverable.
and when events or circumstances change between annual impairment tests that may indicate that it is more likely than not the fair value of a reporting unit may be below its carrying amount.
Long-lived assets, except goodwill, consist of property and equipment, and finite lived acquired intangible assets, such as developed software, gaming licenses, trademarks, trade names and customer relationships. Intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company considers the period of expected cash flows and underlying data used to measure the fair value of the intangible assets when selecting the estimated useful lives.
Gaming licenses include license applications fees and market access payments in connection with agreements that the Company enters into with strategic partners. The market access arrangements authorize the Company to offer online gaming and online sports betting in certain regulated markets. These costs are capitalized and amortized on a straight-line basis over their estimated useful lives, beginning with the commencement of operations.
The fair value of the acquired intangible assets is primarily determined using the income approach. In performing these valuations, the Company’s key underlying assumptions used in the discounted cash flows were projected revenue, gross margin
The Company records liabilities for user account balances. User account balances consist of user deposits, promotional awards and user winnings less user withdrawals and user losses.
On a quarterly basis, the Company assesses potential losses in relation to pending or threatened legal matters. If a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense is recognized for equity-settled stock optionsthe estimated loss. Estimates of any such loss are subjective in nature and restricted stock issuedrequire the evaluation of numerous facts and assumptions as to employees and non-employee membersfuture events, including the application of legal precedent which may be conflicting. To the extent these estimates are more or less than the actual liability resulting from the resolution of these matters, the Company’s Board of Directors based on the fair value of these awards on the date of grant. The fair value of the stock options is estimated using a Black-Scholes option pricing model and the fair value of the restricted stock awards (restricted stock and restricted stock units) is based on the market price of the Company’s stock on the date of grant.
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
Debt
Debt issuance costs incurred in connection with the issuance of Prior Period Amounts
Fair Value of Financial Instruments
The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures, which provides a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. Fair value represents the exchange price that would be received for an asset or paid to take advantage of Coolbet’s user interface and proprietary technical platform, to quickly integrate and offertransfer a proprietary sportsbook offering to land-based casino operatorsliability in the United States.principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company intends to continue to operateuses the following hierarchy in the United States solely as a B2B provider to casinos and other operators. The addition of a proprietary sports betting engine will give the Company the ability to offer a “one-stop” solution to U.S. retail casino operators, while at the same time preserving the flexibility to incorporate third-party solutions when specified. The Company expects that its technology platform and expansive library of proprietary and third-party gaming content should enable it to add additional casino gaming content and platform support for the Company’s B2C offering in Europe and Latin America. The following table summarizes the consideration transferred and the recognized amounts of identifiable assets acquired and liabilities assumed at the acquisition date:
| ● | Level 1 Quoted prices in active markets for identical assets or liabilities. | |
| ● | Level 2 Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active for identical or similar assets and liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| ● | Level 3 Valuations are based on the inputs that are unobservable and significant to the overall fair value measurement of the assets or liabilities. Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
Valuation techniques used to post-combination service is recorded separately frommeasure the business combination and recognized as compensation cost in the post-acquisition period over the remaining service period. The fair value must maximize the use of observable inputs and minimize the replacement awards was estimated using the Black-Scholes option pricing model utilizing various assumptions. use of unobservable inputs.
The vesting terms and conditions of the unvested options were replaced with terms identical to those of the original awards.Company does not hold any significant Level 2 or Level 3 financial instruments.
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
Income Taxes
| |||||
| Estimated useful life (in years) | Fair Value | ||||||||||
| Trade names and trademarks | 10.0 | $ | 5,800 | ||||||||
| Developed technology | 3.0 | 28,100 | |||||||||
| In-process developed technology | — | 8,400 | |||||||||
| Customer relationships | 3.0 | 5,600 | |||||||||
| Licenses | various | 470 | |||||||||
| $ | 48,370 | ||||||||||
The Company recognizes tax benefits from uncertain tax positions only if management believes that it is more likely than not that the goodwill couldtax position will be impaired. Goodwill recognizedsustained on examination by the taxing authorities based on the technical merits of the position. Although the Company believes that it has adequately provided for uncertain tax positions, no assurance can be given that the final tax outcome of these matters would not be materially different. Adjustments are made when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences would affect the provision for income taxes in the acquisitionperiod in which such determination is not deductiblemade and could have a material impact on the Company’s financial condition and operating results. The Company recognizes penalties and interest related to income tax matters in income tax expense.
Segments
The Company operates in two operating segments, B2B and B2C. Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess the Company’s performance. The Company’s CODM is the Chief Executive Officer. The CODM allocates resources and assesses performance based upon discrete financial information at the operating segment level.
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for tax purposes. Goodwill arisingContract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires an acquirer to measure and recognize contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers, rather than using fair value on the acquisition has been preliminary assigned as ofdate. This amendment is effective for fiscal years beginning after December 15, 2022, including interim periods within those annual periods, and should be applied prospectively to business combinations occurring on or after the acquisition date to the Company’s B2C and B2B segments in the amounts of $92,138 and $67,547, respectively, since they are expected to benefit from the synergies of the combination. The B2C and B2B segments are also the reporting units.
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
NOTE 3 — PROPERTY AND EQUIPMENT, NET
Property and equipment, net is recorded in other assets in the condensed consolidated financial statements, beginning on January 1, 2021. The following unaudited pro forma information presents consolidated financial information as ifbalance sheets at March 31, 2023 and December 31, 2022 and consisted of the Coolbet acquisition had occurred on January 1, 2020. The unaudited pro forma results reflect certain adjustmentsfollowing:
SCHEDULE OF PROPERTY AND EQUIPMENT
| Life (in years) | 2023 | 2022 | ||||||||
| Estimated Useful | March 31, | December 31, | ||||||||
| Life (in years) | 2023 | 2022 | ||||||||
| Fixtures, fittings and equipment | 3 - 5 | $ | 4,460 | $ | 4,136 | |||||
| Platform hardware | 5 | 2,333 | 2,313 | |||||||
| Total property and equipment, cost | 6,793 | 6,449 | ||||||||
| Less: accumulated depreciation | (4,012 | ) | (3,599 | ) | ||||||
| Total | $ | 2,781 | $ | 2,850 | ||||||
Depreciation expense related to property and equipment was $365 and $310 for the acquisition, such as amortization expense resulting from the intangible assets acquired, share-based compensation related to unvested replacement awardsthree months ended March 31, 2023 and an adjustment to reflect the Company’s income tax rate. Acquisition costs of $1,309 are also included as a nonrecurring charge. Such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made as of January 1, 2020 or of the results that may occur in the future.
March 31, 2020 | |||||
Capitalized software development costs, net at March 31, 20212023 and December 31, 20202022 consisted of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||
| Capitalized software development costs | $ | 28,314 | $ | 26,507 | |||||||
| Development in progress | 3,318 | 2,641 | |||||||||
| Total capitalized software development costs | 31,632 | 29,148 | |||||||||
| Less: accumulated amortization | (23,498) | (22,500) | |||||||||
| Total | $ | 8,134 | $ | 6,648 | |||||||
SCHEDULE OF CAPITALIZED COMPUTER SOFTWARE COSTS, NET
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Capitalized software development costs | $ | 8,588 | $ | 6,857 | ||||
| Development in progress | 514 | 732 | ||||||
| Total capitalized software development, cost | 9,102 | 7,589 | ||||||
| Less: accumulated amortization | (1,346 | ) | (840 | ) | ||||
| Total | $ | 7,756 | $ | 6,749 | ||||
At March 31, 2021,2023, development in progress primarily represents costs associated with new contentGAN Sports, costs associated with its newer GameSTACK technology, and enhancements to the Company’s proprietary B2C software platform, as well as integration of Coolbet's sportsbook into the B2B platform, which are expected to be fully placed in service by the end of 2021.
Amortization expense related to capitalized software development costs was $729$486 and $756$1,162 for the three months ended March 31, 20212023 and 2020,2022, respectively.
| 17 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
NOTE 6 5 — GOODWILL AND INTANGIBLE ASSETS
Definite-lived intangible assets, net consisted of the following:
SCHEDULE OF FINITE -LIVED INTANGIBLE ASSETS
| Period (in years) | Amount | Amortization | Amount | |||||||||||||
| Weighted | March 31, 2023 | |||||||||||||||
| Average | Gross | |||||||||||||||
| Amortization | Carrying | Accumulated | Net Carrying | |||||||||||||
| Period (in years) | Amount | Amortization | Amount | |||||||||||||
| Developed technology | 4.0 | $ | 34,103 | $ | (20,498 | ) | $ | 13,605 | ||||||||
| Customer relationships | 3.1 | 6,890 | (4,057 | ) | 2,833 | |||||||||||
| Trade names and trademarks | 10.0 | 5,455 | (1,469 | ) | 3,986 | |||||||||||
| Gaming licenses | 6.6 | 3,361 | (1,618 | ) | 1,743 | |||||||||||
| $ | 49,809 | $ | (27,642 | ) | $ | 22,167 | ||||||||||
| Period (in years) | Amount | Amortization | Amount | |||||||||||||
| Weighted | December 31, 2022 | |||||||||||||||
| Average | Gross | |||||||||||||||
| Amortization | Carrying | Accumulated | Net Carrying | |||||||||||||
| Period (in years) | Amount | Amortization | Amount | |||||||||||||
| Developed technology | 3.9 | $ | 33,443 | $ | (17,570 | ) | $ | 15,873 | ||||||||
| Customer relationships | 3.1 | 6,788 | (3,426 | ) | 3,362 | |||||||||||
| Trade names and trademarks | 10.0 | 5,347 | (1,312 | ) | 4,035 | |||||||||||
| Gaming licenses | 6.7 | 3,149 | (1,464 | ) | 1,685 | |||||||||||
| $ | 48,727 | $ | (23,772 | ) | $ | 24,955 | ||||||||||
Acquired in-process technology consisted of a proprietary technical platform which was under development at the time of acquisition until its completion in September 2022. Following its completion and the carrying amountlaunch of goodwill, by segment,GAN Sports, the developed technology was placed in service and is currently being amortized over an estimated useful life of 5 years.
Amortization expense related to intangible assets was $3,349 and $2,920 for the three months ended March 31, 2021 were as follows:
| B2B | B2C | Total | |||||||||||||||||||||
| Balance at December 31, 2020 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||||
| Goodwill acquired in Coolbet acquisition | 67,547 | 92,138 | 159,685 | ||||||||||||||||||||
| Effect of foreign currency translation | (2,941) | (4,010) | (6,951) | ||||||||||||||||||||
| Balance at March 31, 2021 | $ | 64,606 | $ | 88,128 | $ | 152,734 | |||||||||||||||||
| March 31, 2021 | |||||||||||||||||||||||
| Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| Developed technology | 3.0 years | $ | 26,877 | $ | (2,240) | $ | 24,637 | ||||||||||||||||
| In-process technology | — | 8,034 | 0 | 8,034 | |||||||||||||||||||
| Customer relationships | 3.0 years | 5,356 | (446) | 4,910 | |||||||||||||||||||
| Trade names and trademarks | 10.0 years | 5,898 | (486) | 5,412 | |||||||||||||||||||
| Licenses | 6.7 years | 1,860 | (998) | 862 | |||||||||||||||||||
| $ | 48,025 | $ | (4,170) | $ | 43,855 | ||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| Trade names and trademarks | 3.0 years | $ | 343 | $ | (343) | $ | 0 | ||||||||||||||||
| Licenses | 5.3 years | 1,366 | (898) | 468 | |||||||||||||||||||
| $ | 1,709 | $ | (1,241) | $ | 468 | ||||||||||||||||||
Estimated amortization expense for the next five years is as follows: $8,636 for 2021; $11,500 for 2022; $11,481 for 2023; $639 for 2024; $625 for 2025.
SCHEDULE OF FINITE -LIVED INTANGIBLE ASSETS, AMORTIZATION EXPENSE
| Amount | ||||
| Remainder of 2023 | $ | 10,351 | ||
| 2024 | 3,072 | |||
| 2025 | 2,921 | |||
| 2026 | 2,490 | |||
| 2027 | 1,709 | |||
| Thereafter | 1,624 | |||
| March 31, 2021 | December 31, 2020 | ||||||||||
| Content licensing fees | $ | 2,103 | $ | 1,984 | |||||||
| Sales taxes | 929 | 756 | |||||||||
| Income taxes | 890 | 17 | |||||||||
| Other | 492 | 606 | |||||||||
| Total | $ | 4,414 | $ | 3,363 | |||||||
| March 31, 2021 | December 31, 2020 | ||||||||||
| Revenue share due to SIM customers | $ | 2,486 | $ | 2,520 | |||||||
| Contract liabilities | 891 | 1,083 | |||||||||
| Operating lease liabilities | 465 | 262 | |||||||||
| Other | 102 | 202 | |||||||||
| Total | $ | 3,944 | $ | 4,067 | |||||||
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
NOTE 6 — DEBT
On April 26, 2022, a subsidiary of the SIM revenues generatedCompany entered into a fixed term credit facility (the “Credit Facility”) which provides for $30.0 million in aggregate principal amount of secured term loans with a floating interest rate of 3-month SOFR (subject to a 1% floor) + 9.5%. The Credit Facility matures on October 26, 2026 and is fully guaranteed by the Company. There are no scheduled principal payments due under the Credit Facility until maturity. Interest payments are payable in arrears on the last business day of each calendar quarter and at the maturity date.
The Company incurred $2.4 million in debt issuance costs during the three year ended December 31, 2022 in connection with the Credit Facility, which have been recorded as a direct reduction against the debt and amortized over the life of the associated debt as a component of interest expense using the effective interest method. The net funds received from the Credit Facility, after deducting debt issuance costs, was $27.6 million.
Debt Covenants
The Credit Facility contained affirmative and negative covenants, including certain financial covenants associated with the Company’s platform.financial results. The negative covenants included restrictions regarding the incurrence of liens and indebtedness, certain merger and acquisition transactions, asset sales and other dispositions, other investments, dividends, share purchases and payments affecting subsidiaries, changes in nature of business, fiscal year or organizational documents, transactions with affiliates, and other matters.
The Credit Facility contained customary events of default, including, among others: non-payments of principal and interest; breach of representations and warranties; covenant defaults; the existence of bankruptcy or insolvency proceedings; certain events under ERISA; gaming license revocations in material jurisdictions; material judgments; and a change of control. If an event of default occurred and was not cured within any applicable grace period or was not waived, the administrative agent and the lender were entitled to take various actions, including, without limitation, the acceleration of all amounts due and the termination of commitments under the Credit Facility. As of March 31, 2023, the Company was in compliance with or obtained waivers for all covenants related to the Credit Facility.
Subsequent Amendment
On April 13, 2023, a subsidiary of the Company executed agreements to amend the Credit Facility to waive all events of default, amend certain financial covenants, assign the rights to the Credit Facility from its existing lender to a third party, and increase the principal balance from $30.0 million to $42.0 million with accrued paid in-kind (“PIK”) interest of 8.0% per year (together, forming the “Amended Credit Facility”). The Amended Credit Facility became effective upon cash settlement of payments initiated on April 13, 2023, which occur on April 14, 2023, and represented a cure of any events of default under the Credit Facility and thereby prevent any amounts from becoming due and payable under the Credit Facility’s subjective acceleration clause. Refer to Note 15 – Subsequent Events for further detail of the Amended Credit Facility.
The carrying values of the Company’s long-term debt consist of the following:
SCHEDULE OF LONG TERM DEBT
| Effective Interest Rate | As of March 31, 2023 | |||||||
| Credit Facility | ||||||||
| Principal | 15.46 | % | $ | 30,000 | ||||
| Less unamortized debt issuance costs | (1,517 | ) | ||||||
| Long-term debt, net | $ | 28,483 | ||||||
During the three months ended March 31, 2023, the Company incurred $1,394 in interest expense, of which $326 relates to the amortization of debt issuance costs.
| 19 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
In April 2020, the Board of Directors established the GAN Limited 2020 Equity Incentive Plan (“2020 Plan”) which has been approved by the Company’s shareholders. The 2020 Plan initially provides for grants of up to ordinary shares, which then increases through 2029, by the lesser of 4%% of the previous year’s total outstanding ordinary shares on December 31st31st or as determined by the Board of Directors, for ordinary shares, incentive stockshare options, nonqualified stockshare options, stockshare appreciation rights, restricted stockshare grants, stockshare units, and other equity awards for issuance to employees, consultantconsultants or non-employee directors. The share-based awards are issued at no less than fair market value of an ordinary share on the date of grant. At March 31, 2021,2023, the 2020 Plan provided for grants of up to ordinary shares and there were 726,581 ordinary shares remaining available for future issuance under the 2020 Plan.
Share Options
SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTION ACTIVITY
| Weighted | Weighted | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Number of | Exercise | Contractual | Intrinsic | |||||||||||||
| Shares | Price | Term | Value | |||||||||||||
| Outstanding at December 31, 2022 | 3,447,155 | $ | 9.12 | 6.59 | $ | 1,139 | ||||||||||
| Granted | 367,870 | 0.01 | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Forfeited/expired or cancelled | (245,151 | ) | 14.31 | |||||||||||||
| Outstanding at March 31, 2023 | 3,569,874 | $ | 7.83 | $ | 1,356 | |||||||||||
| Options exercisable at March 31, 2023 | 2,402,269 | $ | 7.87 | $ | 436 | |||||||||||
The Company recorded share-based compensation expense related to share options of grant. Stock$and $for the three months ended March 31, 2023 and 2022, respectively. At March 31, 2023, there was total unrecognized compensation cost of $related to nonvested share options. The unrecognized compensation cost is expected to be recognized over a weighted-average period of years.
Share option awards generally vest 25% %
| Number of Shares | Weighted Average Exercise Price | Weighted Average Contractual Term | Aggregate Intrinsic Value | ||||||||||||||||||||
| Outstanding at December 31, 2020 | 3,061,859 | $ | 8.06 | 8.5 | $ | 37,410 | |||||||||||||||||
| Granted | 1,216,140 | 24.35 | |||||||||||||||||||||
| Exercised | (108,222) | 2.40 | |||||||||||||||||||||
| Forfeited/expired or cancelled | (3,080) | 18.53 | |||||||||||||||||||||
| Outstanding at March 31, 2021 | 4,166,697 | $ | 12.96 | 9.2 | $ | 21,840 | |||||||||||||||||
| Options exercisable at March 31, 2021 | 1,820,667 | $ | 3.08 | 7.7 | $ | 27,524 | |||||||||||||||||
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Expected stock price volatility | 61.50 % | 67.60 | % | ||||||||
| Expected term (in years) | 4.95 | 5.00 | |||||||||
| Risk-free interest rate | 0.72 % | 0.44 | % | ||||||||
| Dividend yield | 0 % | 0 | % | ||||||||
| 2022 | ||||
| Three Months Ended | ||||
| March 31, 2022 | ||||
| Expected share price volatility | 61.20 | % | ||
| Expected term (in years) | ||||
| Risk-free interest rate | 1.74 | % | ||
| Dividend yield | 0 | % | ||
For options granted during the three months ended March 31, 2023, the fair value of each stockshare option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted above. Estimating the grant date fair values for employee stockshare options requires management to make assumptions regarding expected volatility of the value of those underlying shares, the risk-free rate of the expected life of the stockshare options and the date on which share-based compensation willis expected to be settled.
Expected volatility is determined by reference to volatility of certain identified peer group share trading information and stockshare prices on the Nasdaq.Nasdaq stock exchange. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
Restricted Share Units
Restricted share units are issued to non-employee directors and employees. For equity-classified restricted share units, the fair value of restricted share units is valued based on fair market value of the Company’s ordinary shares on the date of grant and is amortized on a straight-line basis over the vesting period.
| 20 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
In addition, in 2020, the Company recorded a liability for social taxes and income taxes related to certain unexercised legacy U.K. Enterprise Management Incentive regime options. The Company is accounting for the required cash payment as a cash-settled share-based compensation transaction. The company recorded a decrease of $93 in the liability related to these options during the three months ended March 31, 2021.
The Company withholds a portion of the restricted share units granted to its officers and non-employee directors upon vesting per quarter.in order to remit a cash payment to the officers and directors equal to their tax expense. The liabilities are recorded in accrued compensation and benefits in the condensed consolidated balance sheets. During the three months ended March 31, 2023, restricted share units held by the Company’s officers and non-employee directors vested and the Company repurchased of the shares to cover the tax expense incurred by the officers and non-employee directors.
The Company recorded share-based compensation expense related to restricted share units of $and $for the three months ended March 31, 2023 and 2022, respectively. Such share-based compensation expense was recorded net of capitalized software development costs of $for the three months ended March 31, 2023. At March 31, 2023, there was total unrecognized compensation cost of $related to non-vested restricted share units. The unrecognized compensation cost is expected to be recognized over a weighted-average period of years.
SCHEDULE OF SHARE BASED COMPENSATION, RESTRICTED STOCK UNIT ACTIVITY
| Weighted | ||||||||
| Average | ||||||||
| Number of | Grant Date | |||||||
| Shares | Fair Value | |||||||
| Outstanding at December 31, 2022 | 1,171,371 | $ | 5.43 | |||||
| Granted | 1,009,086 | 1.50 | ||||||
| Vested | (328,787 | ) | 4.72 | |||||
| Forfeited/expired or cancelled | (21,962 | ) | 5.47 | |||||
| Outstanding at March 31, 2023 | 1,829,708 | $ | 3.51 | |||||
Restricted Share Awards
Restricted share awards are issued to non-employee directors and certain key employees. The value of a restricted stock unitsaward is based on the market value of the Company’s ordinary shares at the date of the grant. The restricted stock units were issued with a grant date fair value of $25.10 per share.
The Company recorded share-based compensation expense related to the restricted stock unitsshare awards of $25$ for the three months ended March 31, 2021.2023. At March 31, 2021,2023, there was $365 of total unrecognized compensation cost of $related to the nonvested restricted stock units.shares granted. The remaining cost is expected to be recognized over a weighted average period of years. There were no restricted share awards that vested during the next twelve months.
2020 Employee Stock Awards
The Board of Directors established the 2020 Employee Stock Purchase Plan, or the ESPP, which was approved by the Company’s shareholders in July 2021. The ESPP is intended to qualify under Section 423 of the U.S. Internal Revenue Service Code of 1986, as amended. The ESPP provides initially for ordinary shares to be sold and increases on February 1, 2022 and on each subsequent February 1 through and including February 1, 2030, equal to the lesser of (i) 0.25 percent of the number of ordinary shares issued and outstanding on the immediately preceding December 31, or (ii) 100,000 ordinary shares, or (iii) such number of ordinary shares as determined by the Board of Directors approvedDirectors.
| 21 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
The ESPP is designed to allow eligible employees to purchase ordinary shares, at quarterly intervals, with their accumulated payroll deductions. The participants are offered the issuanceoption to purchase ordinary shares at a discount during a series of 93,680 restricted stock awards tosuccessive offering periods. The option purchase price may be the chief executive officer and non-employee directors. The restricted stock awards vest one year fromlower of 85% of the date of grant. The value of restricted stock is based on the market valueclosing trading price per share of the Company’s ordinary shares aton the first trading date of grant.an offering period in which a participant is enrolled or 85% of the closing trading price per share on the purchase date, which will occur on the last trading day of each offering period. An offering period is defined as a three-month duration commencing on or about March, June, September and December of each year, and one purchase period is included within each offering period. The restricted stock awards were issued with a grant date fair value of $18.19 per share.Company’s first offering period commenced on June 1, 2022. The Company recordedissued shares under the ESPP during the three months ended March 31, 2023. During the three months ended March 31, 2023 the Company recognized share-based compensation expense of $related to the restricted stock awardsESPP.
Content Provider Issuance
On March 29, 2023, the Company amended and restated its commercial agreement with a content provider. In conjunction with this agreement, the Company entered into a Subscription Agreement with the content provider, under which the content provider has subscribed to of $420the Company’s ordinary shares. Refer to Note 14 – Commitment and Contingencies for further details.
NOTE 8 — DEFINED CONTRIBUTION PLANS
U.S. employees and non-U.S. employees are eligible to participate in defined contribution plans by contributing a portion of their compensation, which provides for certain matching contributions by the Company. Matching contributions for the U.S. defined contribution plan are 50% of up to 4% of an employee’s salary contribution. Most often, non-U.S. matching contributions are statutory amounts required by law. The Company’s contributions to the retirement plans were $178 and $173 for the three months ended March 31, 2021. At March 31, 2021, there was $350 of total unrecognized compensation cost related to nonvested restricted stock awards. The remaining cost is expected to be recognized in 2021.
Earnings per ordinary share is computed by dividing net income (loss)earnings by the weighted average number of ordinary shares outstanding during the period. Diluted income per ordinary share further includes any ordinary shares available to be issued upon the exercise of outstanding stock option and restricted stock awards if such inclusions would be dilutive. The Company determines the potentially dilutive ordinary shares using the treasury stock method. The following table sets forth the computation of basicBasic and diluted income (loss)earnings per share for the three months ended March 31, 2021 and 2020:
| 2023 | 2022 | |||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Numerator–basic and diluted: | ||||||||
| Net income (loss) | $ | 1,501 | $ | (4,499 | ) | |||
| Denominator | ||||||||
| Basic weighted average ordinary shares outstanding | 42,982,255 | 42,252,661 | ||||||
| Effect of dilutive securities (1) | ||||||||
| Share options outstanding(1) | 1,121,001 | — | ||||||
| Ordinary shares issued in connection with Content Provider Agreement(1) | 1,250,000 | — | ||||||
| Restricted shares(1) | 1,829,708 | — | ||||||
| Restricted share units(1) | 17,218 | — | ||||||
| Diluted weighted average ordinary shares | 47,200,182 | 42,252,661 | ||||||
| Basic earnings (loss) per share | $ | 0.03 | $ | (0.11 | ) | |||
| Diluted earnings (loss) per share | $ | 0.03 | $ | (0.11 | ) | |||
| (1) | ||||||||
| For the three months ended March 31, 2023, share options with an exercise prices greater than the market price of the Company’s ordinary shares were excluded from the computation of diluted weighted average ordinary shares outstanding. Additionally, for the three months ended March 31, 2022, potentially dilutive securities consisting of certain share options, nonvested restricted shares and restricted share units totaling shares were excluded from the computation of diluted weighted average ordinary shares outstanding as inclusion would be anti-dilutive due to the Company incurring a net loss during the three months ended March 31, 2022. | ||||||||
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Numerator: | |||||||||||
| Net income (loss) | $ | (4,464) | $ | 694 | |||||||
| Denominator: | |||||||||||
| Weighted average ordinary shares outstanding, basic | 41,986,083 | 21,512,225 | |||||||||
| Weighted average effect of potentially dilutive ordinary shares: | |||||||||||
| Stock options | 0 | 1,528,120 | |||||||||
| Restricted stock awards | 0 | 0 | |||||||||
| Restricted stock units | 0 | 0 | |||||||||
| Weighted average ordinary shares outstanding, diluted | 41,986,083 | 23,040,345 | |||||||||
| Income (loss) per share: | |||||||||||
| Basic | $ | (0.11) | $ | 0.03 | |||||||
| Diluted | $ | (0.11) | $ | 0.03 | |||||||
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Stock options | 4,166,697 | 0 | |||||||||
| Restricted stock awards | 93,680 | 0 | |||||||||
| Restricted stock units | 15,537 | 0 | |||||||||
| Total | 4,275,914 | 0 | |||||||||
The following table reflects revenuesrevenue recognized for the three months ended March 31, 20212023 and 20202022 in line with the timing of transfer of services:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Revenues recognized at a point in time | $ | 17,737 | $ | 0 | |||||||
| Revenues from services delivered over time | 10,105 | 7,670 | |||||||||
| Total | $ | 27,842 | $ | 7,670 | |||||||
| 2023 | 2022 | |||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue from services delivered at a point in time | $ | 23,895 | $ | 24,424 | ||||
| Revenue from services delivered over time | 11,234 | 13,070 | ||||||
| Total | $ | 35,129 | $ | 37,494 | ||||
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Balance at the beginning of the period | $ | 353 | $ | 86 | |||||||
| Capitalized expenditures for the period | 52 | 0 | |||||||||
| Amortization | (22) | (2) | |||||||||
| Effect of foreign currency translation | 2 | (6) | |||||||||
| Balance at the end of the period | $ | 385 | $ | 78 | |||||||
The Company has four types of liabilities related to contracts with customers: (i) cash consideration received in advance from customers related to development services not yet performed or hardware deliveries not yet completed, (ii) incentive program obligations, which represents the deferred allocation of revenue relating to incentives in the online gaming operations, (iii) user balances, which are funds deposited by customers before gaming play occurs and (iv) unpaid winnings and wagers contributionscontributed to jackpot. Thesejackpots. Contract related liabilities are expected to be recognized as revenue within one year of being purchased, earned or deposited. Such liabilities are recorded in Liabilitiesliabilities to Usersusers and Other Current Liabilities onother current liabilities in the condensed consolidated balance sheets.
| 22 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
The following table reflects contract and contract-related liabilities arising from cash consideration received in advance from customers for the periods presented were as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Contract and contract-related liabilities, beginning of the period | $ | 1,083 | $ | 3,023 | |||||||
| Contract and contract-related liabilities, end of the period | 7,807 | 2,095 | |||||||||
| Revenue recognized from amounts included in contract and contract-related liabilities at the beginning of the period | 227 | 777 | |||||||||
| 2023 | 2022 | |||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Contract liabilities from advance customer payments, beginning of the period | $ | 2,117 | $ | 1,874 | ||||
| Contract liabilities from advance customer payments, end of the period (1) | 2,655 | 2,095 | ||||||
| Revenue recognized from amounts included in contract liabilities from advance customer payments at the beginning of the period | 223 | 296 | ||||||
| (1) | Contract liabilities from advance customer payments, end of period consisted of $1,599 and $720 recorded in other current liabilities in the condensed consolidated balance sheets at March 31, 2023 and 2022, respectively and $1,056 and $1,375 recorded in other liabilities in the condensed consolidated balance sheet at March 31, 2023 and 2022, respectively. |
NOTE 12 11 — SEGMENT REPORTING
The Company’s reportable segments are B2B and B2C. The B2B segment develops, markets and sells instances of GameSTACK, GAN Sports, and iSight Back Office technology that incorporates comprehensive player registration, account funding and back-office accounting and management tools that enable the casino operators to January 1, 2021,efficiently, confidently and effectively extend their presence online in places that have permitted online real money gaming. The B2C segment, which includes the Company operated its business and reported its results through 2 segments - RMiG and SIM. With the acquisitionoperations of Coolbet, on January 1, 2021, the Company changed the way itdevelops and operates a B2C online sports betting and casino platform that is accessible through its businesswebsite in markets across Northern Europe, Latin America and now reports its results through 2 segments: B2C and B2B. The financial information for the three months ended March 31, 2020 has been recast to conform to the new segment presentation.
Information reported to the Company’s chief executive officer,Chief Executive Officer, the chief operating decision maker ("CODM"),CODM, for the purpose of resource allocation and assessment of the Company’s segmental performance is primarily focused on the origination of the revenue streams. The CODM evaluates performance and allocates resources based on the segment'ssegment’s revenue and gross profit.contribution. Segment gross profitcontribution represents the gross profitamounts earned by each segment without allocation of each segment’s share of depreciation and amortization expense, sales and marketing expense, product and technology expense, general and administrative expense, interest costs and income taxes. A description of each reportable segment is as follows:
Summarized financial information by reportable segments for the three months ended March 31, 20212023 and 20202022 is as follows:
SCHEDULE OF FINANCIAL INFORMATION FOR REPORTABLE SEGMENTS
| B2B | B2C | Total | B2B | B2C | Total | |||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| B2B | B2C | Total | B2B | B2C | Total | |||||||||||||||||||
| Revenue | $ | 11,279 | $ | 23,850 | $ | 35,129 | $ | 13,070 | $ | 24,424 | $ | 37,494 | ||||||||||||
| Cost of revenue (1) | 1,995 | 8,166 | 10,161 | 3,903 | 7,797 | 11,700 | ||||||||||||||||||
| Segment contribution | $ | 9,284 | $ | 15,684 | $ | 24,968 | $ | 9,167 | $ | 16,627 | $ | 25,794 | ||||||||||||
| (1) | Excludes depreciation and amortization expense |
During the three months ended March 31, 2023 and 2022, one customer in the B2B segment individually accounted for 16.1% and 16.6% of total revenue, respectively.
| 23 |
| Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||
| B2B | B2C | Total | B2B | B2C | Total | ||||||||||||||||||||||||||||||
| Revenues | $ | 13,530 | $ | 14,312 | $ | 27,842 | $ | 7,670 | $ | 0 | $ | 7,670 | |||||||||||||||||||||||
Cost of revenues (1) | 2,742 | 5,977 | 8,719 | 1,692 | 0 | 1,692 | |||||||||||||||||||||||||||||
Segment gross profit (1) | $ | 10,788 | $ | 8,335 | $ | 19,123 | $ | 5,978 | $ | 0 | $ | 5,978 | |||||||||||||||||||||||
| Table of Contents |
(1)
Excludes depreciationGAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and amortizationper share amounts)
The following table presents a reconciliation of segment gross profit to the consolidated income (loss)loss before income taxes for the three months ended March 31, 20212023 and 2020:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
Segment gross profit (1) | $ | 19,123 | $ | 5,978 | |||||||
| Sales and marketing | 4,101 | 863 | |||||||||
| Product and technology | 4,850 | 1,024 | |||||||||
General and administrative (1) | 10,011 | 2,391 | |||||||||
| Depreciation and amortization | 3,963 | 853 | |||||||||
| Interest expense, net | 1 | 8 | |||||||||
| Income (loss) before income taxes | $ | (3,803) | $ | 839 | |||||||
(1) RECONCILIATION OF CONSOLIDATED SEGMENT CONTRIBUTION TO CONSOLIDATED INCOME (LOSS) BEFORE INCOME TAXESExcludes depreciation and amortization
| 2023 | 2022 | |||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Segment contribution (1) | $ | 24,968 | $ | 25,794 | ||||
| Sales and marketing | 7,184 | 6,098 | ||||||
| Product and technology | 9,578 | 8,954 | ||||||
| General and administrative (1) | 10,006 | 9,392 | ||||||
| Restructuring | — | 1,059 | ||||||
| Depreciation and amortization | 4,201 | 4,413 | ||||||
| Interest expense (income), net | 1,716 | (9 | ) | |||||
| Other income, net | (9,292 | ) | — | |||||
| Income (loss) before income taxes | $ | 1,575 | $ | (4,113 | ) | |||
| (1) | Excludes depreciation and amortization expense |
Assets and liabilities are not separately analyzed or reported to the CODM and are not used to assist in decisions surrounding resource allocation and assessment of segment performance. As such, an analysis of segment assets and liabilities has not been included in this financial information.
The following table disaggregates total revenue by product and services for each segment:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| B2B: | |||||||||||
| Platform and content fees | $ | 9,184 | $ | 5,933 | |||||||
| Development services and other | 4,346 | 1,737 | |||||||||
| Total B2B | $ | 13,530 | $ | 7,670 | |||||||
| B2C: | |||||||||||
| Sportsbook | $ | 7,151 | $ | 0 | |||||||
| Casino | 6,471 | 0 | |||||||||
| Poker | 690 | 0 | |||||||||
| Total B2C | $ | 14,312 | $ | 0 | |||||||
| Total revenues | $ | 27,842 | $ | 7,670 | |||||||
| 2023 | 2022 | |||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| B2B: | ||||||||
| Platform and content license fees | $ | 8,627 | $ | 10,702 | ||||
| Development services and other | 2,652 | 2,368 | ||||||
| Total B2B revenue | 11,279 | 13,070 | ||||||
| B2C: | ||||||||
| Sportsbook | 9,967 | 11,184 | ||||||
| Casino | 13,189 | 12,579 | ||||||
| Poker | 694 | 661 | ||||||
| Total B2C revenue | 23,850 | 24,424 | ||||||
| Total revenue | $ | 35,129 | $ | 37,494 | ||||
Revenue by location of the customer for the three months ended March 31, 20212023 and 20202022 is as follows:
SCHEDULE OF REVENUE BY LOCATION OF THE CUSTOMER
| 2023 | 2022 | |||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| United States | $ | 8,516 | $ | 11,491 | ||||
| Europe | 12,677 | 12,564 | ||||||
| Latin America | 11,270 | 12,225 | ||||||
| Rest of the world | 2,666 | 1,214 | ||||||
| Total revenue | $ | 35,129 | $ | 37,494 | ||||
NOTE 12 — INCOME TAXES
The Company’s effective income tax rate was as follows:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| United States | $ | 11,473 | $ | 6,251 | |||||||
| Europe | 11,064 | 1,410 | |||||||||
| Latin America | 3,603 | 0 | |||||||||
| Rest of the world | 1,702 | 9 | |||||||||
| Total | $ | 27,842 | $ | 7,670 | |||||||
Our country of the following:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Domestic (Bermuda) | $ | 0 | $ | 0 | |||||||
| Foreign (Non-Bermuda) | 661 | 145 | |||||||||
| Total | $ | 661 | $ | 145 | |||||||
NOTE 13 — RESTRUCTURING
In January 2022, the Company implemented a strategic reduction of Coolbet (Note 4) did not causeits existing worldwide global workforce to simplify and streamline our organization and strengthen the overall competitiveness of its B2B segment. As a material changeresult of this initiative, the Company incurred $1.1 million in the effective tax rate forrestructuring charges related to this plan during the three months ended March 31, 2021 from the Company's annual effective tax rate for the year ended December 31, 2020 because the majority of
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except share and per share amounts)
NOTE 14 — COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company may be subject to legal actions and claims arising from contracts or other matters from time to time in the ordinary course of business. Management is not aware of any pending or threatened litigation, which are considered other than routine legal proceedings. The Company believes that the ultimate disposition or resolution of its routine legal proceedings will not have a material adverse effect on its financial position, results of operations or liquidity.
Content Licensing Agreements
In the second quarter of 2021, the Company entered into Content Licensing Agreements (the “Agreements”) with two third-party gaming content providers (“Content Providers”) specializing in developing and licensing interactive games. The Agreements granted the Company exclusive rights to use and distribute the online gaming content in North America. Each of the Content Providers is committed to developing a minimum number of games for the Company’s exclusive use over the five-year term, subject to extensions, of the respective Agreement. In exchange, the Company was required to pay fixed fees, totaling $48.5 million, of which $8.5 million were due upon execution of the Agreements, and the remaining fixed fees were to be paid systematically over the initial five-year terms. Additional payments could have been required if the Company’s total revenue generated from the licensed content exceed certain stipulated annual and cumulative thresholds during the contract terms. Under the terms of the Agreements, the Content Providers were to remit the cash flows from the online gaming content with its existing customers to the Company during the exclusivity period.
On January 27, 2022, the Company served a termination notice, for cause, to a Content Provider as certain conditions precedent associated with the completion of contractual obligations had not been satisfied by the agreed upon period in 2021. In accordance with the agreement, termination for cause results in a return of the initial payment of $3.5 million. In response to the Company’s termination notice, the Content Provider responded by alleging the Content Provider had met its contractual obligations, thereby obligating the Company to make the next, scheduled $3.0 million payment. In March, the Content Provider served the Company a notice of default letter notifying the Company of its alleged material breach of the agreement, and disputing the validity of the termination. On April 25, 2022, the Content Provider attempted to serve formal notice of termination of the agreement, reaffirming the $3.0 million obligation. The Company continues to assert that all contractual obligations to the Content Provider have been relieved as a result of the Company’s initial termination notice and will vigorously defend any claims made by the Content Provider. The Company further recognized an impairment loss related to the initial payment of $3.5 million in the condensed statement of operations for the year ended December 31, 2022.
On April 5, 2022, the Agreement with the remaining Content Provider was amended and restated. Prior to the amendment, the Company accounted for the hosting arrangement as a service contract and expensed service fees of $1.5 million to cost of revenue during the year ended December 31, 2022. In accordance with the restated arrangement, the Company amended certain commercial terms, which included obtaining the contractual right to lease the remote gaming servers, taking possession of the related software, and obtaining a service contract from the Content Provider for the duration of the arrangement.
The amended and restated Agreement was accounted for as a business combination. The consideration transferred in exchange for the identifiable intangible assets was comprised of the present value of the Company’s total expected fixed payments under the Agreement, the net assets recognized under the original agreement, as well as a contingent consideration. The contingent consideration represents additional amounts which the Company expected to pay to the Content Provider if the Company’s total revenue generated from the arrangement exceeds certain stipulated annual and cumulative thresholds during the contract term. In December 2022, the Company revised its 2023 budget and long-term plan as a result of material reductions in its expected future cash flows from its B2B segment, a strategic decision not to pursue and invest further in its original content strategy. Based on this update, as of December 31, 2022, the Company determined that the intangible assets associated with the Agreement with a carrying amount of $18.4 million were no longer recoverable and wrote them off in full. Additionally, the Company determined that the related customer relationships intangible assets with a carrying amount of $2.3 million were no longer recoverable and wrote them down to their estimated fair value of $1.6 million. Fair value was based on the expected future cash flows using Level 3 inputs under ASC 820 as well as expected contract term. The cash flows are those expected to be generated by the market participants, discounted at the risk-free rate of interest. Because negotiations have not yet concluded, it is reasonably possible that the estimate of the expected future cash flows may change in the near term resulting in the need to adjust the determination of fair value.
On March 29, 2023, the Company amended and restated its Content Licensing Agreement (the “Amended Agreement”) with the Content Provider which resulted in a reduced contract term ending March 31, 2024 and a reduction in the fixed fees payable under the arrangement by $15.0 million. Under the Amended Agreement, the fixed fee payment schedule was adjusted such that the remaining $4.0 million payable is due in equal installments of $0.2 million per calendar month, with the first installment being due in April 2023. The remaining $1.6 million outstanding at the expiration of the Amended Agreement will be reconciled against amounts payable by the Content Provider to the Company for revenue generated from the Company’s distribution of the content. In consideration for the execution of the Amended Agreement, in March 2023 the Company entered into a Subscription Agreement with the Content Provider, under which the Content Provider has subscribed to of the Company’s ordinary shares. The stock subscription represents a liability as of March 31, 2023 until such time as the additional shares are registered and issued to the Content Provider. The Company recorded a gain of $9.3million related to the extinguishment of the fixed fees recognized in other income, net during the three months ended March 31, 2023, net of the value of the stock subscription obligation recorded within accrued liabilities on the accompanying condensed consolidated balance sheets as of March 31, 2023. In the second quarter of 2023, the Company issued and registered the shares in connection with an S-1 resale registration statement.
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Chile VAT
Coolbet’s B2C casino and sports-betting platform is accessible in Chile. Since June 1, 2020, foreign digital service suppliers that provide services to individuals in Chile have been required to register for value-added tax (“VAT”) purposes. On September 20, 2021, the Company submitted an inquiry to the Chilean Internal Revenue Service (“SII”) for clarification on the basis to apply VAT. In December 2021, the SII issued a general resolution as a response to another iGaming platform operator stating the Tax Administration’s position that fees paid by users for entertainment services provided through online gaming and betting platforms are subject to VAT in Chile. The SII clarified its interpretation that the VAT tax rate of 19% shall be applied to “fees paid by the users”, specifically gross customer deposits on the iGaming platform. This was further reiterated by the CTA in June 2022 through a public response to an unnamed ruling request on the matter.
On May 13, 2022, the SII issued a resolution stating that unregistered foreign digital service providers will be subject to 19% withholding on payments through enforcement to issuers of credit cards, debit cards, and other forms of payment, effective August 1, 2022. The SII issued this noncompliant list of unregistered foreign digital service providers to enact enforcement of this withholding on a quarterly basis, with the most recent list issued on December 28, 2022. As of March 31, 2023 and through the date of filing, the Company has not registered for the Chilean VAT but has not been listed on the SII’s list for which this withholding should be applied, and the Company has not received formal notification of any VAT liability due to the SII.
On March 14, 2023, the SII issued a resolution stating that, although the SII lacks the power to qualify an activity as legal or illegal (which had been noted in previous SII resolutions), the SII is not empowered to register taxpayers for the simplified VAT regime who carry out activities that have been declared illegal by other State authorities that do have the power to qualify an activity as legal or illegal. It then notes that the SII has been informed by the Superintendency of Gambling Casinos that the offering of games of chance is only expressly authorized in certain instances under Chilean law, and thus taxpayers without domicile or residence in Chile that offer them are doing so illegally. As a result, the SII has excluded these taxpayers from the simplified VAT regime, effectively contradicting past guidance that stated the digital VAT law must be applied to online gaming and betting platforms.
The Company does not believe its activities in Chile are illegal based on external legal opinions obtained in previous years, and updated external legal opinions supporting the Company’s assertions. The Company had previously not registered for the Chilean VAT on digital service providers as the Company believed the application of VAT on gross customer deposits, as previously clarified by the SII, prior to the March 2023 resolution, did not represent a reasonable application of the law to the economic substance of the Company’s services; this previous application would have resulted in a material loss to the Company. The Company believes that Chilean tax laws and regulations support that only the fees directly charged by the Company’s platform, primarily poker fees, should be the taxable base for the Chilean digital VAT and has obtained an external legal opinion supporting this position, the application of which would not have a material impact to the Company’s financial statements. However, as a result of the SII excluding the Company’s activities from the digital VAT registration, we no longer believe a liability is probable for the past activities as of December 31, 2022 as the Company is now effectively prevented from complying with the digital VAT law. However, there is uncertainty as to the regulated environment, what amounts may be ultimately due on our previous activities and the ability to operate in this jurisdiction until the SII resolves the position. Resolution of this matter may result in fines, penalties, additional expenses or require us to exit the market. Revenues from Chile represented 29% and 31% of total consolidated revenue for the three months ended March 31, 2023 and 2022, respectively.
Synthetic Equity
Pursuant to the binding term sheet previously entered into with Red Rock Resorts, Inc., the Company entered into the Master Gaming Services Agreement with Station Casinos LLC (“Station”) on March 30, 2023, to launch GameSTACK and GAN Sports RMiG and sportsbook solutions at its properties through self-service kiosks as well as through on-premises and statewide mobile versions in Nevada, subject to applicable licensure. As an additional incentive for Station to support the commercial success of the launch in Nevada, the Master Gaming Services Agreement includes a Synthetic Equity Addendum which would require that the Company make a payment to Station in the event of a change of control in the Company (the “Change of Control Payment”), subject to certain conditions outlined in the Synthetic Equity Addendum. The Change of Control Payment is payable only in the event that a change of control occurs during the period as specified by the Synthetic Equity Addendum and that the Company’s market capitalization has increased during that time, calculated as proscribed by the Synthetic Equity Addendum, which the amount of such payment ranging from 2.5% to 5% of such increase in market capitalization over approximately $ per share, depending on whether certain minimum revenue conditions are met over the next five years. The payment represents an equity-linked financial instrument containing service, performance and market conditions and is measured and classified in accordance with stock-based compensation guidance. The initial grant date value represents an upfront payment to a customer which will be attributed as contra revenue over the initial contract term as revenue is recognized under the arrangement such that revenue is recognized at an amount for which it is probable a significant reversal in the amount of cumulative revenue recognized will not occur once the uncertainty about payments to customers is resolved. The initial grant date liability will be marked to market at each reporting period through operating income (loss). The initial grant date value was not significant to the financial statements as of March 31, 2023.
NOTE 15 — SUBSEQUENT EVENTS
Amended Credit Facility
On April 13, 2023, a subsidiary of the Company executed the Amended Credit Facility to amend its existing Credit Facility to waive all events of default, amend certain financial covenants, assign the rights to the Credit Facility from its existing lender to a third party, and increase the principal balance from $30.0 million to $42.0 million with accrued PIK interest of 8.0% per year. The Amended Credit Facility became effective upon cash settlement of payments which completed on April 14, 2023.
The Amended Credit Facility matures on the third anniversary of its effective date and is fully guaranteed by the Company. There are no scheduled principal payments due under the Amended Credit Facility until maturity. The principal balance, accrued PIK interest, and an exit fee of 2.5% are due at maturity. The Amended Credit Facility stipulates that outstanding amounts will mature and be due and payable on the third anniversary of its effective date, or in the event of a change in control transaction. The Company incurred an estimated $3.1 million in debt issuance costs in connection with the Amended Credit Facility. The Amended Credit Facility contains customary negative covenants, a financial covenant requiring minimum liquidity of $10.0 million, as well as other financial covenants to be tested solely in the event the Company raises junior debt during the term of the Amended Credit Facility.
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Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the unaudited condensed consolidated financial statements, related notes, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes included in our 2022 Form 10-K.
Critical Accounting Policies and Estimates
For a discussion of our critical accounting policies and the means by which we develop estimates, refer to “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on our 2022 Annual Report on Form 10-K for10-K. There have been no material changes during the year ended December 31, 2020, which was filed with the Securities and Exchange Commission on March 31, 2021.
Forward-Looking Statements
This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, thatamended. These forward-looking statements reflect our current expectations and views of future events.events based on certain assumptions, and include any statement that does not directly relate to a historical fact. For example, statements in this Quarterly Report on Form 10-Q may include the potential impact of the expected timing of government approvals or opening of new regulated markets for online gaming, our financial guidance and expectations or targets for our operations, anticipated revenue growth or operating synergies related to our acquisition of Coolbet, and expectations about our ability to effectively execute our business strategy and expansion goals. These forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “should,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to”to,” or other similar expressions. These forward-looking statements include, among other things, statements relating to our goals and strategies, our competitive strengths, our expectations and targets for our results of operations, our business prospects and our expansion strategy. We have based these forward-looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.
Although we believe that we have a reasonable basis for each forward-looking statement, we caution you that theseforward-looking statements are based on our projectionsnot guarantees of the future that are subject to knownperformance and unknown risks and uncertainties and other factors that may cause our actual results level of activity or performance expressed or implied by these forward-looking statements, to differ.
•
our ability to successfully meet anticipated revenue levels from sales of our software licenses;
Overview
GAN Limited is a Bermuda exempted holding company and through its subsidiaries, operates in two lines of business. We are an award-winning providera business-to-business (“B2B”) supplier of enterprise softwareSoftware-as-a-Service (“SaaS”) solutions designedfor online casino gaming, commonly referred to accelerate the casino industry’s digital transformation towards Internet casino gamblingas iGaming, and online sports betting.
The B2B segment develops, markets and sells instances of GameSTACK, GAN Sports, and iSight Back Office technology that incorporates comprehensive player registration, account funding and back-office accounting and management tools that enable casino operators to efficiently, confidently and effectively extend their online presence.
The B2C segment includes the operations of Coolbet. Coolbet develops and operates a B2Can online sports betting and casino and sports-betting platform that is accessible through its website in eight national markets across Northern Europe, (Estonia, Finland, Iceland, Norway and Sweden), Latin America (Chile and Peru)Canada.
| 27 |
To meet demand and North America (Canada). We acquired Coolbet primarilyserve our growing number of U.S. casino operator clients, we continue to take advantageinvest in our software engineering capabilities and expand our operational support. The most significant component of Coolbet’s user interface and proprietary technical platform, to quickly integrate and offer a proprietary sportsbook offeringour operating costs generally relate to our land-based casino operators inemployee salary and benefits costs. Also, operating costs include technology and corporate infrastructure related-costs, as well as marketing expenditures with a focus on increasing and retaining B2C end-users.
Our net income (loss) was $1.5 million and ($4.5) million for the United States.
We believe that our current technology is highly scalable with relatively minimal capital investment required toand can support the launch of our product offerings for new customers and in new jurisdictions. We expect to improve ourachieve profitability through increased profits from organic growth of our casino operator customers in both existing and new jurisdictions, coupled with new margin expansion opportunities driven by the integration with Coolbet's sports betting technology and our Super RGS content offering which is open to B2C operators who are not already clients of ours.
| ● | organic growth of our existing casino operators, | |
| ● | expansion into newly regulated jurisdictions with existing and new customers, | |
| ● | margin expansion driven by the integration of Coolbet’s sports betting technology in our B2B product offerings, | |
| ● | strategically reducing our existing worldwide global workforce to simplify and streamline our organization and strengthen the overall competitiveness of our B2B segment, | |
| ● | revenue expansion from the roll-out of our Super RGS content offering to B2C operators who are not already clients, and | |
| ● | organic growth of our B2C business in existing and new jurisdictions. |
We hold a strategic U.S. patent, which governs the linkage of on-property reward cards to their counterpart Internetinternet gambling accounts together with bilateral transmission of reward points between the Internet gamblinginternet gaming technology system and the land-based casino management system present in all U.S. casino properties. In February 2021, we reached an agreement to license our U.S. patent to a second major U.S. casino operator group and we may license our patent to other major U.S. Internet gamblinginternet gaming operators in the future.
Consolidated Results of Operations
Three Months Ended March 31, 2021, there were no material changes2023 Compared to our accounting policies that we believe are critical to an understanding of financial condition and results of operations, which critical accounting policies are disclosed in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended DecemberThree Months Ended March 31, 2020, other than those critical accounting policies and estimates described below.
| Three Months Ended | ||||||||||||||||
| March 31, | Change | |||||||||||||||
| 2023 | 2022 | Amount | Percent | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenue | $ | 35,129 | $ | 37,494 | $ | (2,365 | ) | (6.3) | % | |||||||
| Operating costs and expenses | ||||||||||||||||
| Cost of revenue (1) | 10,161 | 11,700 | (1,539 | ) | (13.2) | % | ||||||||||
| Sales and marketing | 7,184 | 6,098 | 1,086 | 17.8 | % | |||||||||||
| Product and technology | 9,578 | 8,954 | 624 | 7.0 | % | |||||||||||
| General and administrative (1) | 10,006 | 9,392 | 614 | 6.5 | % | |||||||||||
| Restructuring | — | 1,059 | (1,059 | ) | (100.0) | % | ||||||||||
| Depreciation and amortization | 4,201 | 4,413 | (212 | ) | (4.8) | % | ||||||||||
| Total operating costs and expenses | 41,130 | 41,616 | (486 | ) | (1.2) | % | ||||||||||
| Operating loss | (6,001 | ) | (4,122 | ) | (1,879 | ) | 45.6 | % | ||||||||
| Interest expense (income), net | 1,716 | (9 | ) | 1,725 | n.m. | |||||||||||
| Other income, net | (9,292 | ) | — | (9,292 | ) | n.m. | ||||||||||
| Income (loss) before income taxes | 1,575 | (4,113 | ) | 5,688 | n.m. | |||||||||||
| Income tax expense | 74 | 386 | (312 | ) | (80.8) | % | ||||||||||
| Net income (loss) | $ | 1,501 | $ | (4,499 | ) | $ | 6,000 | n.m. | ||||||||
(1) Excludes depreciation and amortization expense
n.m. = not comparable to our consolidated results of operations for the three months ended March 31, 2020 and may not be comparable with our consolidated results for future periods. Our B2B segment results, presented and discussed below, are GAN’s legacy operations and our reported consolidated results for the three months ended March 31, 2020.
The following table sets forth our results of operations as reportedconsolidated revenue by geographic region, for the three months ended March 31, 2021 and 2020:
| Three Months Ended March 31, | Change 2020 to 2021 | ||||||||||||||||||||||
| 2021 | 2020 | Amount | % | ||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||
| Revenues | $ | 27,842 | $ | 7,670 | $ | 20,172 | 263.0 | % | |||||||||||||||
| Operating costs and expenses | |||||||||||||||||||||||
Cost of revenues (1) | 8,719 | 1,692 | 7,027 | 415.3 | % | ||||||||||||||||||
| Sales and marketing | 4,101 | 863 | 3,238 | 375.2 | % | ||||||||||||||||||
| Product and technology | 4,850 | 1,024 | 3,826 | 373.6 | % | ||||||||||||||||||
General and administrative (1) | 10,011 | 2,391 | 7,620 | 318.7 | % | ||||||||||||||||||
| Depreciation and amortization | 3,963 | 853 | 3,110 | 364.6 | % | ||||||||||||||||||
| Total operating costs and expenses | 31,644 | 6,823 | 24,821 | 363.8 | % | ||||||||||||||||||
| Operating income (loss) | (3,802) | 847 | (4,649) | (548.9) | % | ||||||||||||||||||
| Interest expense, net | 1 | 8 | (7) | (87.5) | % | ||||||||||||||||||
| Income (loss) before income taxes | (3,803) | 839 | (4,642) | (553.3) | % | ||||||||||||||||||
| Income tax provision | 661 | 145 | 516 | 355.9 | % | ||||||||||||||||||
| Net income (loss) | $ | (4,464) | $ | 694 | $ | (5,158) | (743.2) | % | |||||||||||||||
(1) Excludes depreciation and amortization | |||||||||||||||||||||||
| n.m. = not meaningful | |||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||||||
| March 31, | Percentage of Revenue | Change | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | Amount | Percent | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| United States | $ | 8,516 | $ | 11,491 | 24.2 | % | 30.6 | % | $ | (2,975 | ) | (25.9 | )% | |||||||||||
| Europe | 12,677 | 12,564 | 36.1 | % | 33.5 | % | 113 | 0.9 | % | |||||||||||||||
| Latin America | 11,270 | 12,225 | 32.1 | % | 32.6 | % | (955 | ) | (7.8 | )% | ||||||||||||||
| Rest of the world | 2,666 | 1,214 | 7.6 | % | 3.3 | % | 1,452 | 119.6 | % | |||||||||||||||
| Total revenue | $ | 35,129 | $ | 37,494 | 100.0 | % | 100.0 | % | $ | (2,365 | ) | (6.3 | )% | |||||||||||
Information
| 29 |
| Three Months Ended March 31, | As a percentage of revenue | Change 2020 to 2021 | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| United States | $ | 11,473 | $ | 6,251 | 41.2 | % | 81.5 | % | $ | 5,222 | 83.5 | % | |||||||||||||||||||||||
| Europe | 11,064 | 1,410 | 39.7 | % | 18.4 | % | 9,654 | 684.7 | % | ||||||||||||||||||||||||||
| Latin America | 3,603 | — | 12.9 | % | — | % | 3,603 | n.m. | |||||||||||||||||||||||||||
| Rest of the world | 1,702 | 9 | 6.2 | % | 0.1 | % | 1,693 | n.m. | |||||||||||||||||||||||||||
| Total revenues | $ | 27,842 | $ | 7,670 | 100.0 | % | 100.0 | % | $ | 20,172 | 263.0 | % | |||||||||||||||||||||||
| n.m. = not meaningful | |||||||||||||||||||||||||||||||||||
| Table of Contents |
Revenue
Revenue was $35.1 million for the three months ended March 31, 2020. This significant2023, a decrease of $2.4 million from the comparable period in 2022. The decrease was primarily attributable to a decrease in our contractual revenue rates pursuant to the agreement regarding an exclusivity period with a B2B customer, that was partially offset by overall growth was achieved through organic growth and patent licensingin the B2B segment due to strong performance of our B2B customers during the quarter.
Revenue fluctuations in the United States are the result of decreased RMiG revenues in our B2B segment, with revenues increasing $5.9 million, coupled withoperations. The fluctuations in Europe were the additionresult of Coolbet's gaming revenues of $14.3 milliondeclines in our B2B performance, offset by an improvement in our B2C segment following the completion of our acquisition of Coolbet on January 1, 2021. During the three months ended March 31, 2021, revenues increased across each of our geographies when compared to the three months ended March 31, 2020, with increased revenues from the United States driven by strong growthoperations. The decrease in our B2B segment, combined with increases in our markets in Europe, Latin America andwas entirely attributable to our B2C operations. The increase in the rest of the world due to the inclusion of Coolbet's revenues within our reported results for the three months ended March 31, 2021.
Cost of Revenues
Cost of revenue increased $7.0 million compared to the prior period, of which the B2B and B2C segments contributed $1.0 million and $6.0 million, respectively. Increases to cost of B2B revenues were due to increased content license fees driven by the increase in related revenues while our B2C segment's costs were included in our results for the first time following the acquisition of Coolbet.
Sales and Marketing
Sales and marketing expense was $7.2 million for the three months ended March 31, 2023, an effectiveincrease of $1.1 million from the comparable period in 2022. The increase was primarily attributable to increased sales and marketing activities within our B2C operations to attract additional end-users.
Product and Technology
Product and technology expense was $9.6 million for the three months ended March 31, 2023, an increase of $0.6 million from the comparable period in 2022, primarily due to the decrease in capitalized development costs in our B2B segment of $2.1 million. This increase was partially offset by decreases in personnel costs within the B2B segment as the Company continues to assess its cost structure.
General and Administrative
General and administrative expense was $10.0 million for the three months ended March 31, 2023, an increase of $0.6 million, which related to increased salaries and wages resulting from the Company expanding the participants of its management incentive program as a means of retaining key contributors.
Depreciation and Amortization
Depreciation and amortization expense was $4.2 million for three months ended March 31, 2023, a decrease of $0.2 million from the comparable period in 2022. The decrease was primarily due to assets fully amortizing in prior periods.
Income Tax Expense
We recorded income tax rateexpense of (17.4)%, compared to $0.1 million for the three months ended March 31, 2020,2023, reflecting an effective tax rate of 17.3%4.7%, compared to income tax expense of $0.4 million for the three months ended March 31, 2022, reflecting an effective tax rate of (9.4)%. Our country of domicile is Bermuda, which effectively has a 0% statutory tax rate as it does not impose taxes on profits, income, dividends, or capital gains. The difference between this 0% tax rate and the effective income tax rate for three months ended March 31, 2023 and 2022 was due primarily to a mix of earnings in foreign jurisdictions that are subject to current tax and loss carryforwards in certain jurisdictions that are not expected to be recognized.
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Segment Operating Results
We report our operating results by segment in accordance with the “management approach.” The management approach designates the internal reporting used by our chief operating decision maker,Chief Operating Decision Maker (“CODM”), who is our Chief Executive Officer, for making decisions and assessing performance of our reportable segments.
Three Months Ended March 31, 20212023 Compared to Three Months Ended March 31, 2020
The following tables settable sets forth our segment results as reported for the three months ended March 31, 2021periods indicated:
| Three Months Ended | Percentage of Segment | |||||||||||||||||||||||
| March 31, | Revenue | Change | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | Amount | Percent | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| B2B | ||||||||||||||||||||||||
| Revenue | $ | 11,279 | $ | 13,070 | 100.0 | % | 100.0 | % | $ | (1,791 | ) | (13.7 | )% | |||||||||||
| Cost of revenue (1) | 1,995 | 3,903 | 17.7 | % | 29.9 | % | (1,908 | ) | (48.9 | )% | ||||||||||||||
| B2B segment contribution | $ | 9,284 | $ | 9,167 | 82.3 | % | 70.1 | % | $ | 117 | 1.3 | % | ||||||||||||
| B2C | ||||||||||||||||||||||||
| Revenue | $ | 23,850 | $ | 24,424 | 100.0 | % | 100.0 | % | $ | (574 | ) | (2.4 | )% | |||||||||||
| Cost of revenue (1) | 8,166 | 7,797 | 34.2 | % | 31.9 | % | 369 | 4.7 | % | |||||||||||||||
| B2C segment contribution | $ | 15,684 | $ | 16,627 | 65.8 | % | 68.1 | % | $ | (943 | ) | (5.7 | )% | |||||||||||
(1) Excludes depreciation and 2020.
| Three Months Ended March 31, | As a percentage of revenue | Change 2020 to 2021 | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| B2B | $ | 13,530 | $ | 7,670 | 48.6 | % | 100.0 | % | $ | 5,860 | 76.4 | % | |||||||||||||||||||||||
| B2C | 14,312 | — | 51.4 | % | N/A | 14,312 | N/A | ||||||||||||||||||||||||||||
| Total Revenues | $ | 27,842 | $ | 7,670 | 100.0 | % | 100.0 | % | $ | 20,172 | 263.0 | % | |||||||||||||||||||||||
| Three Months Ended March 31, | As a percentage of segment revenue | Change 2020 to 2021 | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Revenues | $ | 13,530 | $ | 7,670 | 100.0 | % | 100.0 | % | $ | 5,860 | 76.4 | % | |||||||||||||||||||||||
Cost of revenue (1) | 2,742 | 1,692 | 20.3 | % | 22.1 | % | 1,050 | 62.1 | % | ||||||||||||||||||||||||||
Segment gross profit (1) | $ | 10,788 | $ | 5,978 | 79.7 | % | 77.9 | % | $ | 4,810 | 80.5 | % | |||||||||||||||||||||||
(1) Excludes depreciation and amortization | |||||||||||||||||||||||||||||||||||
B2B revenues increased $5.9revenue decreased $1.8 million or 76.4% comparedprimarily due to a decrease in our contractual revenue rates pursuant to the prior year period.agreement regarding an exclusivity period with a B2B platform and content fee revenues contributed $3.3 million towards this increase, increasing 54.8% from $5.9 million during the three months ended March 31, 2020 to $9.2 million for the three months ended March 31, 2021. The increasecustomer, that was partially offset by overall growth in platform and content fees revenues was due to increases of $1.8 million in real money iGaming as we doubled the size of our U.S. real money casino operator customer base in operation from three customers as of March 31, 2020 to six customers as of March 31, 2021. Similarly, simulated gaming revenues within the B2B segment increased $1.5 million compared to the prior year period due to our expansion of our customer base from 12 customersorganic growth in operation as of March 31, 2020the B2B segment due to 16 customers in operation as of March 31, 2021. In January 2021 we simultaneously launched FanDuel, Churchill Downs and Wynn Resorts online in Michigan which contributed towards the growthstrong performance of our B2B platform and content fee revenues period over period.
B2B development services and other revenues additionally increased $2.6 million compared to the prior comparable 2020 period, due to $3.0 million patent licensing fee revenue recognized during the three months ended March 31, 2021, offset by a decrease of $0.4 in development service revenues.
Segment gross profit margincontribution for B2B, which excludes depreciation and amortization expense, increased marginally by 1.3% and is a measurewas relatively consistent as the declines in revenues described above were consistent with the decreases in cost of gross profit, was $10.8revenues.
B2C Segment
B2C revenue decreased $0.6 million forprimarily due to the three months ended March 31, 2021 (79.7%weakening of the currencies in which we derive our B2C operations’ revenues relative to the U.S. Dollar.
B2C cost of revenue increased $0.4 million primarily due to an increase in gaming duties as a percentageresult of segment revenue), as compared to $6.0 million for the three months ended March 31, 2020 (77.9% as a percentage of segment revenue).
| Three Months Ended March 31, | As a percentage of segment revenue | Change 2020 to 2021 | |||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Amount | % | ||||||||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||||||||
| Revenues | $ | 14,312 | $ | — | 100.0 | % | n/a | $ | 14,312 | n/a | |||||||||||||||||||||||||
Cost of revenue (1) | 5,977 | — | 41.8 | % | n/a | 5,977 | n/a | ||||||||||||||||||||||||||||
Segment gross profit (1) | $ | 8,335 | $ | — | 58.2 | % | n/a | 8,335 | n/a | ||||||||||||||||||||||||||
(1) Excludes depreciation and amortization | |||||||||||||||||||||||||||||||||||
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Non-GAAP Financial Measures
Adjusted EBITDA
Management uses the non-GAAP financial measure that is provided as supplemental disclosure, which is defined as net income (loss) before interest expense, net, income taxes, depreciation and amortization, impairments, share-based compensation expense and related expense, initial public offering related costs and other items which our Board of Directors considers to be infrequent or unusual in nature.
We define Adjusted EBITDA as net loss before interest expense (income), net, income tax expense (benefit), depreciation and amortization, impairments, share-based compensation expense and related expense, restructuring costs and other items which our Board of Directors considers to be infrequent or unusual in nature. The presentation of Adjusted EBITDA is not intended to be used in isolation or as a substitute for any measure prepared in accordance with U.S. GAAP. Adjusted EBITDA, as defined, may not be comparable to similarly titled measures used by other companies in the industry,GAAP and Adjusted EBITDA may exclude financial information that some investors may consider important in evaluating our performance.
Below is a reconciliation toof Adjusted EBITDA fromto net income (loss)loss, the most comparable U.S. GAAP measure, as presented in the condensed consolidated statements of operations for the three months ended March 31, 2021periods specified:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| (in thousands) | ||||||||
| Net income (loss) | $ | 1,501 | $ | (4,499 | ) | |||
| Income tax expense | 74 | 386 | ||||||
| Interest expense (income), net | 1,716 | (9 | ) | |||||
| Gain on amendment of Content Licensing Agreement (1) | (9,292 | ) | — | |||||
| Depreciation and amortization | 4,201 | 4,413 | ||||||
| Share-based compensation and related expense (2) | 1,839 | 1,621 | ||||||
| Restructuring | — | 1,059 | ||||||
| Adjusted EBITDA | $ | 39 | $ | 2,971 | ||||
(1)Includes $9.3 million gain related to the extinguishment of the fixed fees recognized in other income, net within the condensed consolidated statement of operations.
(2) Includes $1.4 million and 2020:
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Net income (loss) | $ | (4,464) | $ | 694 | |||||||
| Income tax provision | 661 | 145 | |||||||||
| Interest expense, net | 1 | 8 | |||||||||
| Depreciation and amortization | 3,963 | 853 | |||||||||
| Share-based compensation and related expense | 1,539 | 295 | |||||||||
| Initial public offering transaction related | — | 554 | |||||||||
| Adjusted EBITDA | $ | 1,700 | $ | 2,549 | |||||||
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Key Performance Indicators
Our management uses the following key performance indicators (“KPIs”) as indicators of trends and results of the business. These KPIs give our management an indication of the level of engagement between the player and ourthe Company’s platforms. No estimation is necessary in quantifying these KPIs, nor do they represent U.S. GAAP based measurements. These KPIs are subject to various risks such as customer concentration, competition, licensing and regulation, and macroeconomic conditions. Refer to “Item 1A. Risk Factors” in our Annual Report on Form 10-K for further risks associated with our business which would affect these KPIs.
| Three Months Ended March 31, | Change 2020 to 2021 | ||||||||||||||||||||||
| 2021 | 2020 | Amount | % | ||||||||||||||||||||
| B2B Gross Operator Revenue (in millions) | $ | 214.2 | $ | 141.9 | $ | 72.3 | 51.0 | % | |||||||||||||||
| B2B Active Player-Days (days, in millions) | 9.5 | 9.0 | 0.5 | 5.6 | % | ||||||||||||||||||
| B2B ARPDAU | $ | 22.48 | $ | 15.72 | $ | 6.76 | 43.0 | % | |||||||||||||||
| B2C Active Customers | 111,566 | N/A | N/A | N/A | |||||||||||||||||||
| B2C Marketing Spend Ratio | 14 | % | N/A | N/A | N/A | ||||||||||||||||||
| Three Months Ended | ||||||||||||||||
| March 31, | Change | |||||||||||||||
| 2023 | 2022 | Amount | Percent | |||||||||||||
| B2B Gross Operator Revenue (in millions) | $ | 422.8 | $ | 297.8 | $ | 125.0 | 42.0 | % | ||||||||
| B2B Take Rate | 2.7 | % | 4.4 | % | (1.7 | )% | N/A | |||||||||
| B2C Active Customers (in thousands) | 257 | 230 | 27 | 11.7 | % | |||||||||||
| B2C Marketing Spend Ratio | 21 | % | 19 | % | 2.0 | % | N/A | |||||||||
| B2C Sports Margin | 7.1 | % | 7.2 | % | (0.1 | )% | N/A | |||||||||
B2B Gross Operator Revenue
We define B2B Gross Operator Revenue as the sum of our B2B corporate customers’ gross revenue from SIM, gross gaming revenue from RMiG, and gross sports winwins from real money regulated sports betting.sportsbook offerings. B2B Gross Operator Revenue, which is not comparable to financial information presented in conformity with U.S. GAAP, gives management and users of our financial statements an indication of the extent of transactions processed through our B2B corporate customers’ platforms and allows management to understand the extent of activity that itour platform is processing.
The increase in gross operator revenueGross Operator Revenue for the three months ended March 31, 2021,2023, as compared to the three months ended March 31, 2020,2022, was driven primarily attributable to the acquisition of Coolbetby organic growth in January 2021Michigan, New Jersey, and continuedexisting customers in Pennsylvania. Additional growth resulted from expansion of new and existing clients into new jurisdictions, such as Arkansas and Ontario, launch of retail sportsbook solution for new U.S. customers and business, coupled with a shift towards RMiG and SIM, which experienced substantial growth since the COVID-19 outbreak began disrupting retail casino operations and the sports betting calendar.
B2B Active Player-Days
We define B2B Active Player-DaysTake Rate as unique individuals who log on and wager each day (either wagering with real money or playing with virtual credits used in SIM), aggregated duringa quotient of B2B segment revenue retained by the respective period. By way of an illustrative example: one (1) unique individual logging in and wagering each day in a single calendar year would, in aggregate, represent 365Company over the total Gross Operator Revenue generated by our B2B Active Player-Days.corporate customers. B2B Active Player-Days provides an indicator of consistent and daily interaction that individuals have with our platforms. B2B Active Player-Days allowsTake Rate gives management and users to understand not only total users who interact with
The increasedecrease in B2B Active Player-DaysTake Rate for the three months ended March 31, 2021,2023 as compared to the three months ended March 31, 2020,2022 was primarily attributabledriven by a decrease in our contractual revenue rates pursuant to the continued expansion of existing and new U.S. customers and business, coupledagreement regarding an exclusivity period with a shift towards RMiG and SIM, which experienced substantial growth since the COVID-19 outbreak began disrupting retail casino operations and the sports betting calendar. As those markets further recover from their COVID-induced interruptions, the major boosts seen in RMiG and SIM has started to subside, though we are still achieving strong levels of revenue from these markets.B2B customer.
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We define B2C Active Customers as a user that places a wager during the period. This metric allows management to monitor the customer segmentation, growth drivers, and ultimately creates opportunities to identify and add value to the user experience. This metric allows management and users of the financial statements to measure the platform traffic and track related trends.
The increase in B2C Active Customers for the three months ended March 31, 2023 was primarily driven by customer acquisition in Latin America.
B2C Marketing Spend Ratio
We define B2C Marketing Spend Ratio as the total B2C direct marketing expense for the period divided by the total B2C revenues. This metric allows management to measure the success of marketing costs during a given period andperiod. Additionally, this metric allows management to compare across jurisdictions. Managementjurisdictions and the users of the financial statements can use this metricother subsets, as a comparison to peers and track the success of marketing costs over time versus revenue level, plus use as an additional indication of return on marketing investment.
The increase in B2C Marketing Spend Ratio for the three months ended March 31, 2023 was primarily driven by increased marketing spend in Latin America, and higher customer acquisition costs as a result of regulatory updates in Northern Europe, and several marketing and sponsorship in Latin American to develop greater brand awareness during the current period.
B2C Sports Margin
We define B2C Sports Margin as the ratio of wagers minus winnings to total amount wagered, adjusted for open wagers at period end. Sports betting involves a user placing a bet on the outcome of a sporting event with the chance to win a pre-determined amount, often referred to as fixed odds. Our B2C sportsbook revenue is generated by setting odds that are intended to provide a built-in theoretical margin in each sports bet offered to our users. This metric allows management to measure sportsbook performance against its expected outcome.
The decrease in B2C Sports Margin for three months ended March 31, 2023 was primarily attributable to more favorable outcomes in the prior period.
Liquidity and Capital Resources
Material Cash Commitments
Our primary uses of cash include funding 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 and other sources of funding. Our currentongoing working capital needs, relate mainlycontent licensing discussed below, and developing and maintaining our proprietary software platforms. Such capital allocations are contemplated while considering other opportunities we may have to deploy our capital.
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During the expansionyear ended December 31, 2022, we entered into a Content Licensing Agreement (the “Agreement”) with a third-party gambling content provider specializing in developing and licensing interactive games which was amended and restated on April 5, 2022. The Agreement grants us exclusive right to use and distribute the online gaming content in North America. The content provider is committed to developing a minimum number of games for our exclusive use over the five-year term, subject to extensions. In exchange, we are required to pay fixed fees, totaling $30.0 million, of which $5.0 million was due upon execution of the Agreement, and the remaining fixed fees are paid systematically over the initial five-year term. Additional payments could be required if our total revenue generated from the licensed content exceeds certain stipulated annual and cumulative thresholds during the contract term. In March 2023, the Company amended and restated its Content Licensing Agreement with the Content Provider, which resulted in a reduced contract term and a reduction in the fixed fees payable under the arrangement by $15 million.
The execution of our operationsgrowth strategy will require continued significant capital expenditures, and the normal operation ofwe expect to continue investing in our products and technologies as we seek to scale our business. Our ability
We utilized cash in investing activities of $1.8 million and $4.0 million for the three months ended March 31, 2023 and 2022, respectively. Of these activities, expenditures related to meet these working capital needsinternally developed capitalized software represented $1.3 million and grow$3.5 million, respectively, and property and equipment (including licenses for internal use software) represented $0.4 million for both periods.
Sources of Liquidity
Since our business will depend on many factors, including our future working capital needs, the evolution of our operating cash flows and our ability to secure additional sources of financing. Weinception, we have primarily funded our operations through cash generated from operations, cash generated from financing activities including our U.S. initial public offering and term credit facility, and cash on hand,hand. In May 2020, we completed our U.S. initial public offering under which we sold an aggregate of 7,337,000 ordinary shares for net proceeds of $57.4 million and in December 2020, we conducted a follow-on offering under which we sold 6,790,956 ordinary shares for net proceeds of $98.5 million. In January 2021, we completed the acquisition of Coolbet for a purchase price of $218.1 million, including the issuance of 5,260,516 ordinary shares, replacement equity-based awards valued at $0.3 million and cash of $111.1 million, which was funded from the follow-on offering proceeds and available cash on hand. During the year ended December 31, 2022, we repurchased $1.0 million of our own shares as we believed our share price was undervalued and did not reflect the long-term opportunities ahead of us.
In April 2022, we entered into a $30.0 million term credit facility with net proceeds of $27.6 million (the “Credit Facility”). The Credit Facility contains affirmative and negative covenants, including certain financial covenants associated with our financial results. The financial covenants test periods began on March 31, 2023. We obtained waivers for all financial covenants as of March 31, 2023.
On April 13, 2023, we executed agreements to amend the Credit Facility to waive all events of default, amend certain financial covenants, assign the rights to the Credit Facility from our existing lender to a third party, and increase the principal balance from $30.0 million to $42.0 million with accrued paid in-kind (“PIK”) interest of 8.0% per year (together, forming the “Amended Credit Facility”). The Amended Credit Facility becomes effective upon cash settlement of payments initiated on April 13, 2023, which is probable to occur within one week of initiation and would represent a cure of any events of default under the Credit Facility and thereby prevent any amounts from becoming due and payable under the Credit Facility’s subjective acceleration clause. The Amended Credit Facility contains a financial covenant, among other covenants, requiring minimum liquidity of $10.0 million. Refer to Note 15 – Subsequent Events in the accompanying condensed consolidated financial statements for further detail with respect to the Amended Credit Facility.
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We believe cash generated from operations and through the sale of our ordinary shares in our initial public offering and follow-on offering.
To the extent that our current resources, including our ability to generate operating cash flows, are insufficient to satisfy our cash requirements, we may need to seek additional equity or debt financing. Our ability to do so depends on prevailing economic conditions and other factors, many of which are beyond our control.
We do not currently have any such credit facilities or similar debt arrangements in place, outside of the Amended Credit Facility as described above, and cannot provide any assurance as to the availability or terms of any additional future financing that we may require to support our operations. 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 products and technologies, discontinue further expansion of our business, or scale back our existing operations, any of which could have an adverse impact on our business and financial prospects.
A summary of our operating, investing and financing activities is shown in the following table:
| Three Months Ended March 31, | Change 2020 to 2021 | ||||||||||||||||||||||
| (in thousands, except percentages) | 2021 | 2020 | Amount | % | |||||||||||||||||||
| Net cash used in operating activities | $ | (4,145) | $ | (1,439) | $ | (2,706) | (188.0) | % | |||||||||||||||
| Net cash used in investing activities | (95,017) | (971) | (94,046) | n.m. | |||||||||||||||||||
| Net cash used in financing activities | (289) | (866) | 577 | 66.6 | % | ||||||||||||||||||
| Effect of foreign exchange rates on cash | (1,018) | (850) | (168) | (19.8) | % | ||||||||||||||||||
| Net decrease in cash | $ | (100,469) | $ | (4,126) | $ | (96,343) | n.m. | ||||||||||||||||
| n.m. = not meaningful | |||||||||||||||||||||||
| Three Months Ended | ||||||||||||||||
| March 31, | Change | |||||||||||||||
| (dollars in thousands) | 2023 | 2022 | Amount | Percent | ||||||||||||
| Net cash used in operating activities | $ | (4,175 | ) | $ | (2,024 | ) | (2,151 | ) | n.m. | |||||||
| Net cash used in investing activities | (1,762 | ) | (3,988 | ) | 2,226 | (55.8 | )% | |||||||||
| Net cash used in financing activities | (47 | ) | — | (47 | ) | — | % | |||||||||
| Effect of foreign exchange rates on cash | 819 | 118 | 701 | n.m. | ||||||||||||
| Net decrease in cash | $ | (5,165 | ) | $ | (5,894 | ) | $ | 729 | (12.4) | % | ||||||
n.m. = not meaningful
Operating Activities
Net cash used in operating activities increased $2.7$2.2 million, or (188.0)%,primarily resulting from $1.4a decrease in earnings after adjustments to reconcile net income (loss) to cash flows from operations of $3.4 million. The amounts were offset by favorable fluctuations in working capital of 1.3 million.
Investing Activities
Net cash used in investing activities decreased $2.2 million net outflowprimarily due to a reduction of capitalized development within the B2B segment.
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Financing Activities
Net cash used in investing activities was relatively consistent during the three months ended March 31, 20202023 compared to $4.1 million net outflow for the three months ended March 31, 2021. The increase in net cash used in operating activities is primarily the result of the net loss for the current period and changes in operating assets and liabilities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, as defined by Item 10 of Regulation S-K, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer (together, the “Certifying Officers”), as appropriate, to allow for timely decisions regarding required disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance, not absolute assurance, of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer,the Certifying Officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our chief executive officer and chief financial officerthe Certifying Officers concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of March 31, 2021.
Material Weakness in Internal Control Over Financial Reporting
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, material weaknesses were identified in the Company’s internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim or annual condensed consolidated financial statements will not be prevented or detected on a timely basis.
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During the course of management’s year-end procedures, the Company examined employee costs attributed to capitalized software development costs, net and concluded that certain time previously evaluated as capitalizable was not a direct cost of software development and accounted for inconsistently with applicable accounting principles. In addition, the Company evaluated the accounting for revenue from contracts with customers that include significant customization services, previously recognized upon launch, that only the Company can perform and are necessary for the set-up of instances of the RMiG platform, concluding the services are not distinct and the related contract consideration should be allocated to the single performance obligation consisting of the right to access the SaaS platform, recognized over time during the three months endedestimated term of the arrangement. The Company also identified deficiencies in the design of the control environment whereby certain finance users were granted “super user” access and security administration rights to the financial reporting systems, the activity of these users with elevated access were not actively monitored, and no segregation of duties over journal entry preparation and approval within the B2C segment existed.
The Company’s management and audit committee of the board of directors also determined that the fact that the Company did not design appropriate controls to evaluate risks to the entity from improper segregation of duties, review user access rights, monitor activities of finance users with elevated rights within the financial reporting system, and maintain manual controls at a level of precision to mitigate potential misstatements that could be present through the lack of segregation of journal entry preparation and approval within certain financial reporting systems constituted an additional material weakness. While the Company has actively begun to implement controls to remediate the material weaknesses, these weaknesses have not been resolved as of March 31, 2021,2023.
Remediation Plans
We continue to evaluate measures to remediate the identified material weaknesses. These measures include implementing appropriate controls to segregate journal entry preparation and approvals and to actively monitor finance users with elevated rights.
We intend to continue to take steps to remediate the material weakness described above and further evolving our accounting processes, controls, and reviews. The Company plans to continue to assess its internal controls and procedures and intends to take further action as necessary or appropriate to address any other matters it identifies or are brought to its attention. We will not be able to fully remediate this material weakness until these steps have been completed and have been operating effectively for a sufficient period of time.
The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will fully remediate the material weakness in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weakness in our internal control over financial reporting, which may necessitate further action.
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Changes in Internal Controls Over Financial Reporting
Except for the remediation efforts described above, there was no change in our internal control over financial reporting that occurred during the quarter covered by this Form 10-Q that has materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to legal proceedings that have not been fully resolved and that have arisen in the ordinary course of business. We are not currently a party to any legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business.
The outcome of litigation is inherently uncertain. If one or more matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. Regardless of outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 1A. Risk Factors
Our business, financial condition and operating results can be affected by a number of factors, as disclosedboth known and unknown, including those described below and in Part I, Item 1A of our Annual Report on2022 Form 10-K forunder the year ended December 31, 2020 filedheading “Risk Factors,” any of which, alone or in combination with other, could cause our actual operating results and financial condition to vary materially from past, or from anticipated future operating results or financial condition.
Our B2C operations generate a significant portion of its revenues from “unregulated” markets and changes in regulation in those markets could result in us losing business in those markets or incurring additional expenses in order to comply with any new regulatory scheme.
Our B2C operations currently generate a significant portion of its revenues in markets that currently do not have a local licensing scheme, including Latin America and Northern Europe. Certain of those markets, or other markets where we may operate in the SECfuture, are in the process of developing regulations that require registration and regulatory compliance or could do so in the near term. The adoption of regulations and licensing requirements may increase costs, reduce net gaming revenue or require us to cease operations depending on March 31, 2021.the range of unforeseen developments in proposed rules and regulations governing online gaming in the international markets in which we currently operate.
Our B2C operations generate a significant portion of our revenue in markets where tax regulations are evolving, and could result in additional tax liabilities that could materially affect our financial condition and results of operations.
Our B2C operations currently generate a significant portion of its revenues in markets that have evolving tax legislation, including Latin America and Canada. Those markets, or other markets where we may operate in the future are actively considering or could adopt regulations that adversely affect our operations. The adoption of tax regulations may increase costs, reduce net gaming revenue or require us to cease operations depending on the range of unforeseen possible changes to the statutes governing online gaming in the international markets in which we currently operate.
Macroeconomic conditions can materially adversely affect the Company’s business, results of operations and financial condition.
Recent adverse macroeconomic conditions, including inflation, higher interest rates, slower growth or recession, the strengthening of the U.S. dollar, and corresponding currency fluctuations can have an adverse material impact on the Company’s future results of operations, cash flows, and financial condition, particularly with respect to foreign currency adjustments relating to our international operations. Such conditions may also affect consumers’ willingness to make discretionary purchases, and therefore the Company, along with its casino operator customers, may experience a decline in wagering. A downturn in the economic environment can also lead to increased credit and collectibility risk on the Company’s trade receivables, limitations on the Company’s ability to issue new debt, and reduced liquidity.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 31, 2022, the Board of Directors re-authorized and extended the share repurchase program initially authorized on Form S-1 (File No. 333-237372) forNovember 30, 2021, which permits the initial public offeringCompany to purchase up to $5.0 million of ourthe Company’s outstanding ordinary shares on the Nasdaq Stock Market. The extension was declared effective bypublicly announced on June 13, 2022. Repurchases are executed through open market purchases or privately negotiated transactions. The Company may purchase the Securitiesordinary shares at the prevailing market price at the time of purchase. The Company is not obligated to acquire any particular number of shares and Exchange Commissionrepurchases may be suspended or terminated at any time. The share repurchase program expired on May 4, 2020.November 3, 2022.
During the three months ended March 31, 2023, the Company had no share repurchases under this program. The net proceeds from our initial public offering have been used for working capital purposes sinceapproximate dollar value of shares that may yet be purchased under the dateplan was $4.0 million as of our initial public offering, in accordance with the planned use of proceeds set forth in our final prospectus filed with the Securities and Exchange Commission on May 4, 2020 pursuant to Rule 424(b)(4).
Item 6. Exhibits
| Exhibit Number | Description of Document | Form | Exhibit Number | Date Filed | ||||
| 3.1 | Memorandum of Association of GAN Limited | F-1 | 3.1 | April 17, 2020 | ||||
| 3.2 | By-Laws of GAN Limited | F-1 | 3.2 | April 17, 2020 | ||||
| 31.1* | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||
| 31.2* | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||
| 32.1** | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * | |||||||
| 32.2** | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * | |||||||
| 101* | Inline XBRL Document set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of the Quarterly Report on Form 10-Q. | |||||||
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
| * | Filed herewith. | |||||||
| ** | Furnished herewith. | |||||||
| + | Indicates management contract or compensatory plan or arrangement | |||||||
| Incorporation by Reference | ||||||||||||||||||||||||||||||||
| Exhibit Number | Description of Document | Filed Herewith + | Form | Exhibit Number | Date Filed | |||||||||||||||||||||||||||
| 3.1 | F-1 | 3.1 | April 17, 2020 | |||||||||||||||||||||||||||||
| 3.2 | F-1 | 3.2 | April 27, 2020 | |||||||||||||||||||||||||||||
| 4.1 | F-1 | 4.1 | April 27, 2020 | |||||||||||||||||||||||||||||
| 4.3 | 10-K | 4.3 | March 31, 2021 | |||||||||||||||||||||||||||||
| 10.1 | 10-K | 10.6 | March 31, 2021 | |||||||||||||||||||||||||||||
| 10.2 | 10-K | 10.7 | March 31, 2021 | |||||||||||||||||||||||||||||
| 10.3 | 10-K | 10.8 | March 31, 2021 | |||||||||||||||||||||||||||||
| 10.4 | 10-K | 10.9 | March 31, 2021 | |||||||||||||||||||||||||||||
| 10.5 | 10-K | 10.10 | March 31, 2021 | |||||||||||||||||||||||||||||
| 10.6 | 10-K | 10.11 | March 31, 2021 | |||||||||||||||||||||||||||||
| 31.1 | X | |||||||||||||||||||||||||||||||
| 31.2 | X | |||||||||||||||||||||||||||||||
| 32.1 | X | |||||||||||||||||||||||||||||||
| 32.2 | X | |||||||||||||||||||||||||||||||
| 101.INS** | Inline XBRL Instance Document | |||||||||||||||||||||||||||||||
| 101.SCH*** | Inline XBRL Taxonomy Extension Schema Document. | X | ||||||||||||||||||||||||||||||
| 101.CAL*** | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | X | ||||||||||||||||||||||||||||||
| 101.DEF*** | Inline XBRL Taxonomy Extension Definition Linkbase Document. | X | ||||||||||||||||||||||||||||||
| 101.LAB*** | Inline XBRL Taxonomy Extension Label Linkbase Document. | X | ||||||||||||||||||||||||||||||
| 101.PRE*** | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | X | ||||||||||||||||||||||||||||||
| 104*** | The cover page from this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, has been formatted in Inline XBRL. | X | ||||||||||||||||||||||||||||||
| * | Furnished herewith. | |||||||||||||||||||||||||||||||
| ** | The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||||||||||||||
| *** | Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections. | |||||||||||||||||||||||||||||||
| + | Filed herewith unless otherwise indicated as furnished herewith. | |||||||||||||||||||||||||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GAN Limited | |||||||||
| Date: May | By: | /s/ DERMOT S. SMURFIT | |||||||
| Dermot S. Smurfit | |||||||||
| Chief Executive Officer | |||||||||
| (Principal Executive Officer) | |||||||||
| /s/ BRIAN CHANG | |||||||||
| Brian Chang | |||||||||
| Interim Chief Financial Officer | |||||||||
| (Principal Financial and Accounting Officer) | |||||||||
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