美国
证券交易委员会
华盛顿，特区。20549
表格
(马克 一)
| 根据1934年证券交易法第13或15（d）节提交的季度报告书 |
截至季度结束
or
| 根据1934年证券交易法第13或15（d）节提交的过渡报告书 |
对于 从 ________ 到 ________ 的过渡期
委员会文件编号：
（公司章程中指定的准确公司名称）
| 不适用 | ||
（或其他辖区 （组织）的注册地点 |
（国税局雇主 (主要 执行人员之地址) |
| （地址 主要行政办公室） | （Zip 代码） |
根据交易所法规（17 CFR 240.14a-12）第14a-12规定的招股材料
在证券交易所法案第13或15(d)节规定的过去12个月内（或证券注册公司需要报告这些文件更短时间内），已提交所有要求提交的报告，并且已受到过去90天的提交要求的制约。
(公司更名、更改地址和更改财年情况的以往名称、以前地址和以前财年，如与上次报告有所改变)
根据法案第12(b)节注册的证券:
| 每一类别的名称 | 交易符号 | 在每个交易所注册的名称 | ||
请勾选标记以指示注册者是否（1）在过去12个月内（或注册者需要提交这些报告的更短时间内）已提交证券交易所法案第13或15（d）节要求提交的所有报告，及 （2）是否已被提交要求过去90天的提交要求所制约。
请在勾选框内勾选，以指示注册人在过去的12个月内(或注册人需要提交这些文件的时间更短)是否已经电子提交了每一份互动数据文件，该提交是根据证券法规定第405条规则和本章第232.405条规则规定。
在勾选标记处表示注册人是大型加速提交人、加速提交人、非加速提交人、小型报告公司还是新兴增长公司。请参阅证券交易法120亿条规则中“大型加速提交人”、“加速提交人”、“小型报告公司”和“新兴增长公司”的定义。
| 大型加速文件提交人 | ☐ | ☒ | ||
| 非加速文件提交人 | ☐ | 小型报告公司 | ||
| 新兴成长公司 |
如果是新兴成长公司，请勾选，如果注册人已选择不使用根据交易所法案第13(a)条提供的任何新的或修改的财务会计准则的延长过渡期，请勾选。
请勾选适用的圆圈，表示注册登记者是否是空壳公司(根据交易所法案第12b-2条的定义)。是 ☐ 否
2024年11月5日 普通股份已发行45,472,877股。
GAN 有限公司
☒季度报告，根据1934年证券交易法第13条或第15（d）条
指数
| 页面 | ||
| 第I部分 - 财务资讯 | ||
| 项目 1. | 基本报表（未经审核） | 3 |
| 2024年9月30日和2023年12月31日的总体资产负债表摘要 | 3 | |
| 2024年和2023年截至9月30日三个月和九个月的控制项综合损益表 | 4 | |
| 截至2024年9月30日及2023年，三个月及九个月的综合损益总表 | 5 | |
| 2024年9月30日和2023年9月30日三个和九个月控制项综合股东权益变动表 | 6 | |
| 截至2024年和2023年9月30日的综合现金流量表 | 7 | |
| 附注至简明综合财务报表 | 8 | |
| 项目 2. | 管理层对财务状况和业绩的讨论与分析 | 30 |
| 项目 3. | 有关市场风险的定量和定性披露 | 41 |
| 项目 4. | 内部控制及程序 | 41 |
| 第二部分 - 其他信息 | ||
| 项目 1. | 法律诉讼 | 42 |
| 项目 1A | 风险因素 | 42 |
| 项目 6. | 展品 | 43 |
| 签名 | 44 |
| 2 |
第一部分 财务资讯
项目 1. 基本报表
GAN 有限公司
缩减的 综合资产负债表（未经审核）
（以千为单位，除股份和每股金额外）
| 九月三十日 | 十二月三十一日， | |||||||
| 2024 | 2023 | |||||||
| 资产 | ||||||||
| 流动资产合计 | ||||||||
| 现金 | $ | $ | ||||||
| 应收账款，减去信用损失的等于$ | ||||||||
| 预付费用 | ||||||||
| 其他流动资产 | ||||||||
| 流动资产总额 | ||||||||
| 资本化的软件开发成本，净额 | ||||||||
| 无形资产，扣除累计摊销 | ||||||||
| 营运租赁使用权资产 | ||||||||
| 其他资产 | ||||||||
| 总资产 | $ | $ | ||||||
| 负债及股东权益（赤字） | ||||||||
| 流动负债 | ||||||||
| 应付帐款 | $ | $ | ||||||
| 应计的薪资和福利费用 | ||||||||
| 应付内容授权费 | ||||||||
| 用户数负债 | ||||||||
| 当期营运租赁负债 | ||||||||
| 其他流动负债 | ||||||||
| 流动负债总额 | ||||||||
| 递延所得税 | ||||||||
| 长期负债净额 | ||||||||
| 非流动经营租赁负债 | ||||||||
| 其他负债 | ||||||||
| 总负债 | ||||||||
| 承诺和条件（附注15） | ||||||||
| 股东权益（赤字） | ||||||||
| 普通股，每股面值 面值， 已授权的股份， and 2024年9月30日和2023年12月31日分别发行并流通的股份 | ||||||||
| 资本公积额额外增资 | ||||||||
| 累积亏损 | ( | ) | ( | ) | ||||
| 累积其他全面损失 | ( | ) | ( | ) | ||||
| 股东赤字总额 | ( | ) | ( | ) | ||||
| 总负债及股东权益（赤字） | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
GAN LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Operating costs and expenses | ||||||||||||||||
| Cost of revenue (1) | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Product and technology | ||||||||||||||||
| General and administrative (1) | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest expense, net | ||||||||||||||||
| Other loss (income), net | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax (benefit) expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Net income (loss) per share: | ||||||||||||||||
| Basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Weighted average ordinary shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| (1) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
GAN LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Other comprehensive loss, net of tax | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Comprehensive income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
GAN LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT) EQUITY (UNAUDITED)
(in thousands, except share amounts)
| Accumulated | Total | |||||||||||||||||||||||
| Additional | Other | Shareholders’ | ||||||||||||||||||||||
| Ordinary Shares | Paid-in | Accumulated | Comprehensive | Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | (Deficit) | |||||||||||||||||||
| Balance at January 1, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustments | — | ( | ) | ( | ) | |||||||||||||||||||
| Share-based compensation | — | |||||||||||||||||||||||
| Restricted share activity | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of ordinary shares upon exercise of stock options | ||||||||||||||||||||||||
| Repurchase of restricted shares to pay tax liability (Note 7) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustments | — | ( | ) | ( | ) | |||||||||||||||||||
| Share-based compensation | — | |||||||||||||||||||||||
| Restricted share activity | ||||||||||||||||||||||||
| Issuance of ordinary shares upon exercise of stock options | ||||||||||||||||||||||||
| Repurchase of restricted shares to pay tax liability (Note 7) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Net income | — | |||||||||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||
| Share-based compensation | — | |||||||||||||||||||||||
| Restricted share activity | ||||||||||||||||||||||||
| Issuance of ordinary shares upon exercise of stock options | ||||||||||||||||||||||||
| Repurchase of restricted shares to pay tax liability (Note 7) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Accumulated | Total | |||||||||||||||||||||||
| Additional | Other | Shareholders’ | ||||||||||||||||||||||
| Ordinary Shares | Paid-in | Accumulated | Comprehensive |
Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Loss | (Deficit) | |||||||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | | ||||||||||||||
| Net income | — | |||||||||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||
| Share-based compensation | — | |||||||||||||||||||||||
| Restricted share activity | ||||||||||||||||||||||||
| Repurchase of restricted shares to pay tax liability (Note 7) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Issuance of ordinary shares upon ESPP purchases | ||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustments | — | |||||||||||||||||||||||
| Share-based compensation | — | |||||||||||||||||||||||
| Restricted share activity | ||||||||||||||||||||||||
| Repurchase of restricted shares to pay tax liability (Note 7) | ( | ) | ||||||||||||||||||||||
| Issuance of ordinary shares upon exercise of stock options | ||||||||||||||||||||||||
| Issuance of ordinary shares in connection with Content Provider Agreement | ||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||
| Foreign currency translation adjustments | — | ( | ) | ( | ) | |||||||||||||||||||
| Share-based compensation | — | |||||||||||||||||||||||
| Restricted share activity | ( | ) | ( | ) | ||||||||||||||||||||
| Repurchase of restricted shares to pay tax liability (Note 7) | ( | ) | ||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
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)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of software and intangible assets | ||||||||
| Depreciation on property and equipment and finance lease right-of-use assets | ||||||||
| Non-cash interest and amortization of debt discount and debt issuance costs | ||||||||
| Share-based compensation expense | ||||||||
| Gain on extinguishment of content liability | ( |
) | ||||||
| Loss on extinguishment of debt | ||||||||
| Deferred income tax | ( |
) | ( |
) | ||||
| Change in fair value of synthetic equity | ( |
) | ||||||
| Other | ( |
) | ( |
) | ||||
| Changes in operating assets and liabilities, net of acquisition: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Prepaid expenses | ||||||||
| Other current assets | ( |
) | ( |
) | ||||
| Other assets | ( |
) | ||||||
| Accounts payable | ( |
) | ( |
) | ||||
| Accrued compensation and benefits | ( |
) | ||||||
| Accrued content license fees | ( |
) | ( |
) | ||||
| Liabilities to users | ( |
) | ( |
) | ||||
| Other current liabilities | ( |
) | ||||||
| Other liabilities | ( |
) | ||||||
| Net cash provided by (used in) operating activities | ( |
) | ||||||
| Cash Flows From Investing Activities | ||||||||
| Expenditures for capitalized software development costs | ( |
) | ( |
) | ||||
| Purchases of gaming licenses | ( |
) | ( |
) | ||||
| Purchases of property and equipment | ( |
) | ( |
) | ||||
| Net cash used in investing activities | ( |
) | ( |
) | ||||
| Cash Flows From Financing Activities | ||||||||
| Repurchase of restricted shares to pay tax liability | ( |
) | ||||||
| Proceeds from issuance of long-term debt | ||||||||
| Payment of debt issuance costs | ( |
) | ||||||
| Proceeds from issuance of ordinary shares under ESPP | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of foreign exchange rates on cash | ||||||||
| Net decrease in cash | ( |
) | ( |
) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental Cash Flow Information | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Non-Cash activities: | ||||||||
| Right-of-use asset obtained in exchange for new operating lease liability | ||||||||
| Contract asset and contingent liability related to synthetic equity | ||||||||
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.
The Company is a business-to-business (“B2B”) supplier of a proprietary gaming system, GameSTACK™ (“GameSTACK”), which is used predominately by the U.S. land-based casino industry. For its B2B customers, GameSTACK is a turnkey technology solution for regulated real money internet gambling (“real money iGaming” or “RMiG”), online sports gaming, and virtual simulated gaming (“SIM”). In addition, the Company’s B2B segment offers GAN Sports, an in-house online and retail sports betting technology platform, through internet connected self-service kiosks deployed at casino properties and mobile solutions. The Company is also a business-to-consumer (“B2C”) developer and operator of an online sports betting and casino platform under its “Coolbet” brand, providing international users with access through www.coolbet.com to its sportsbook, casino games and poker products. The Company operates its B2C segment in markets across Northern Europe, Latin America, and Canada.
On November 7, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SEGA SAMMY CREATION INC., a Japanese corporation (“SEGA SAMMY CREATION”), and Arc Bermuda Limited, a Bermuda exempted company limited by shares and a wholly-owned subsidiary of SEGA SAMMY CREATION (“Merger Sub”), pursuant to which, subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of SEGA SAMMY CREATION (the “Merger”). SEGA SAMMY CREATION and Merger Sub are affiliates of SEGA SAMMY HOLDINGS, INC.
Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, at the effective time of the Merger, and as a result of the Merger (and without any action on the part of SEGA SAMMY CREATION, Merger Sub, the Company or any holder thereof):
| ● | each of the Company’s ordinary shares issued immediately prior to the effective time of the Merger (other than shares held by SEGA SAMMY CREATION or Merger Sub, by the Company as a treasury share or by any person who properly asserts dissenters’ rights under Bermuda law) will be converted into the right to receive an amount in cash equal to $ per share, without interest and subject to any applicable tax withholding (the “Merger Consideration”); |
| ● | each of the Company’s outstanding restricted shares (whether vested or unvested) at the time of the Merger will become vested in full and non-forfeitable and will be converted into the right to receive the Merger Consideration; |
| ● | each of the Company’s outstanding restricted share units (whether vested or unvested) at the effective time of the Merger will become vested in full and will be automatically cancelled in exchange for the right to receive a single lump sum cash payment, without interest and subject to any applicable tax withholding, equal to the product of (a) the Merger Consideration and (b) the number of Company ordinary shares subject to such restricted share unit; and |
| ● | each of the Company’s outstanding options to acquire the Company ordinary shares (whether vested or unvested) at the effective time of the Merger will become vested in full and will be automatically cancelled in exchange for the right to receive a single lump sum cash payment, without interest and subject to any applicable tax withholding, equal to the product of (a) the excess, if any, of the Merger Consideration over the exercise price per share of the option and (b) the number of Company ordinary shares issuable upon the exercise in full of such option. |
Consummation of the Merger is not subject to a financing condition, but is subject to customary closing conditions, including (a) approval by the Company’s shareholders of the Merger Agreement, the Merger and the Statutory Merger Agreement, (b) receipt of applicable antitrust and CFIUS approvals or the expiration of applicable waiting periods, (c) absence of any order or injunction prohibiting the consummation of the Merger and (d) the accuracy of the Company’s representations and warranties contained in the Merger Agreement (subject to certain customary qualifications) and compliance by the Company with its agreements and covenants contained in the Merger Agreement. The closing of the Merger is also predicated upon receipt of approval of the Merger and change in control of the Company by all relevant gaming authorities. The Company anticipates that this will take some time, and that the closing of the Merger may not occur until early 2025.
On February 13, 2024, the Company held a special general meeting of the shareholders of the Company to consider and vote upon the Merger Agreement, at which meeting the shareholders approved the Merger Agreement. Also, the waiting period under applicable antitrust laws expired on June 6, 2024, and on June 27, 2024, the Company received clearance under CFIUS.
| 8 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The 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 results of the Parent and 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 and nine months ended September 30, 2024, are not necessarily indicative of the results that may be expected for the year ended December 31, 2024, or for any future annual or interim period. The condensed consolidated balance sheet as of December 31, 2023, 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, 2023.
Liquidity
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis. As of September 30, 2024, the
Company had an accumulated deficit of $
Additionally, the Company’s current financial condition, liquidity resources, and planned near-term cash flows from operations are sensitive to changes in macro-economic conditions, and the substantial variability inherent in the Company’s wager-based revenues streams. These factors, when considered together with potential covenant breaches under the Company’s Credit Facility indicate uncertainty related to the ability of the Company to meet its current obligations as they come due.
On
April 13, 2023, a subsidiary of the Company executed agreements to amend the Credit Facility and increase the principal balance from
$
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 described above, and cannot provide any assurance as to the availability or terms of any additional 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, or scale back its existing operations, 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 U.S. 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 future periods.
Foreign Currency Translation and Transactions
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 shareholders’ equity (deficit).
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 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to concentration of credit risk consist primarily of its cash and trade receivables.
The Company holds cash deposits in foreign countries, primarily in Northern Europe and Latin America, of approximately $
The Company maintains an allowance for potential credit losses, but historically has not experienced any significant losses related to individual customers or groups of customers in any particular geographic area.
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 casino operator customers, may experience a decline in wagering. A downturn in the economic environment can also lead to increased credit and collectability risk on the Company’s trade receivables, limitations on the Company’s ability to issue new debt, and reduced liquidity.
Revenue Recognition
Revenue from B2B Operations
The Company’s revenue from its B2B operations are primarily from its internet gaming Software-as-a-Service (“SaaS”) platform, GameSTACK, that its customers use to provide RMiG, online sports gaming and SIM services to its end users. The Company enters into contracts with its customers that generally range from three to five years and include renewal provisions. 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 sportsbook win, at the time of settlement of an event for RMiG
contracts, considered usage-based fees, or at the time of purchase for in-game virtual credit for SIM contracts. The determination of
the fee charged to its customers is negotiated and varies significantly. Certain of these RMiG contracts provide the Company with a minimum
monthly revenue guarantee in relation to the Company’s share of the casino operator’s net gaming revenue or net sportsbook
win. At September 30, 2024 the remaining unsatisfied performance obligations related to fixed minimum guaranteed revenue totaled $
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 customers 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 includes fixed and variable consideration and is billed monthly with the amount due generally thirty days from the date of the invoice. Variable consideration is allocated entirely to the period in which consideration is earned as the variable amounts relate specifically to the customer’s usage of the platform that day and allocating the usage-based fees to each day is consistent with the allocation objective, primarily that the change in amounts reflect the changing value to the customer. The Company’s internet gaming system, game content, support and marketing services are provided equally throughout the term of the contract. These services are made up of a daily requirement to provide access and use of the internet gaming system and optional support and marketing services to the customer over the same period of time. The series of distinct services represents a single performance obligation that is satisfied over time.
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 tracking 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 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 September 30, 2024 and December 31,
2023, the Company recorded a liability due to its customers for their share of the fees of $
| 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 providing game content on its platform to its customers. A customer has access to the Company’s propriety and licensed game content and additionally, the customer can direct the Company to procure third-party game content on its behalf. The Company has determined it acts as the principal for providing the game content when the Company controls the game content, and therefore presents the revenue on a gross basis in the condensed consolidated statements of operations. When the customer directs the Company to procure third-party game content, the Company determined it is deemed an agent for providing such game content, and therefore, records the revenue, net of the costs of content license fees, in the condensed consolidated statements of operations.
The Company also provides ongoing development services involving updates to the RMiG platforms for enhanced functionality or customization. Ongoing development services are typically billed monthly, at a daily rate, for services performed. Revenue from RMiG platform development services that are identified as distinct performance obligations and enhance or create an asset the customer controls as the Company performs the services are recognized over time as services are performed. This revenue is measured using an input method based on effort expended, which uses direct labor hours incurred. These services have primarily related to post-launch development of third-party application integration software in the customer’s environment. Separately, the revenue generated from customers for development services that are distinct performance obligations and the customer benefits from the integrated SaaS offering are deferred over the license service term. These services have primarily related to enhancements to the Company’s platforms that do not enhance or create an asset the customer controls. In customer contracts that require a portion of the consideration to be received in advance or at the commencement of the contract, such amounts are recorded as a contract liability.
Other services include the resale of third-party computer hardware, such as servers and other related hardware devices, upon which the GameSTACK software is installed for its customers. These products are not required to be purchased 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 the 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 customer’s premises and configured to allow for remote access.
The Company has determined that it is acting as the principal in providing computer hardware and related services as it assumes 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 computer hardware and related services.
| 11 |
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. Contracts with its customers may include platform and licensing of game content services, as well as development services and computer hardware services. The variable consideration generated from the platform and the licensing of game content is allocated entirely to the performance obligations for platform and licensing of game content services and the remaining fixed fees for development services and computer hardware would be allocated to each of the remaining performance obligation based on their relative stand-alone selling prices. The variable consideration relates entirely to the effort to satisfy the platform and licensing game content services and the fixed consideration relates to the remaining performance obligations which is consistent with the allocation objective.
Revenue from B2C 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 8,100 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 expenses consist primarily 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 unit 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. In periods of income, diluted net income per share is calculated by dividing net income by the weighted average number of ordinary shares outstanding during the period plus dilutive shares. Dilutive shares includes stock options with a strike price less than the current market price during the period and unvested restricted share units assumed to be vested and issued under the treasury stock method. Stock options and restricted stock units that are anti-dilutive are excluded from the calculation.
| 13 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Cash
Cash
is comprised of cash held at banks and third-party service providers (“PSPs”). Certain PSPs require rolling reserves on daily
cash deposits that have varying short term durations, not exceeding six months, which are generally available to satisfy potential chargebacks.
These balances are included within cash on the accompanying condensed consolidated balance sheets. The rolling reserve balances were
$
The
Company is required to maintain compensating cash balances to satisfy its liabilities to users. Such balances are included within cash
in the condensed consolidated balance sheets and are not subject to creditor claims. At September 30, 2024 and December 31, 2023, the
related liabilities to users were $
Capitalized Software Development Costs, net
The Company capitalizes certain development costs related to its internet gaming platforms during the application 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 platform 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 platform.
Capitalized
software development costs are amortized on a straight-line basis over their estimated useful lives, which generally ranges from
to
Long-lived Assets
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 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 acquired intangible assets are 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 expectations and operating cost estimates. There are inherent uncertainties and management judgment is required in these valuations.
Long-lived assets, except goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company compares the undiscounted cash flows expected to be generated by that asset or asset group to their carrying amount. If the carrying amount of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying amount exceeds fair value. Fair value is determined through various techniques, such as discounted cash flow models using probability weighted estimated future cash flows and the use of valuation specialists. During the three and nine months ended September 30, 2024, there was no triggering event that would cause the Company to believe the value of its long-lived assets should be impaired.
Liabilities to Users
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.
Legal Contingencies and Litigation Accruals
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 for the estimated loss. Estimates of any such loss are subjective in nature and require the evaluation of numerous facts and assumptions as to future 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 financial results will increase or decrease accordingly. Legal costs associated with loss contingencies are expensed as incurred.
| 14 |
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 new debt are recorded as a reduction to the long-term debt balance on the condensed consolidated balance sheets and amortized over the term of the loan commitment as interest expense in the accompanying condensed consolidated statements of operations. The Company calculates amortization expense on capitalized debt issuance costs using the effective interest method in accordance with Accounting Standards Codification (“ASC”) 470, Debt.
Leases
The Company determines if an arrangement is a lease and classifies as operating or finance lease at the lease commencement date. A lease is defined as a contract, or part of a contract, that conveys the right to control the use of an asset for a time period in exchange for consideration. In accordance with ASC 842, Leases, the Company recognizes for all leases, except short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company accounts for the lease and non-lease components of its leases as a single lease component. Operating leases are included in operating lease ROU assets and operating lease liabilities, current and noncurrent, on the condensed consolidated balance sheets. Lease expense is recognized on a straight-line basis based on the total contractually required lease payments, over the term of the lease.
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 transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses the following hierarchy in measuring the fair value of the Company’s assets and liabilities, focusing on the most observable inputs when available:
| ● | 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 measure the fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company does not hold any significant Level 2 financial instruments. Level 3 financial instruments held by the Company include synthetic equity liability due to a customer. See Note 15 — Commitments and Contingencies for further detail. The instrument includes Level 3 inputs related to the contractual forecasts, in addition to observable inputs such as the stock volatility of the company, which are utilized in the Company’s Monte Carlo valuation. The valuation is not sensitive to significant movements in the forecast.
| 15 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Income Taxes
The Company is subject to income taxes in the United States, U.K., Bulgaria, Israel, Canada, Estonia, Malta, and Mexico. The Company records an income tax expense for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The effect on deferred income tax of a change in tax rates are recorded in the period of the enactment. Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not expected to be realized based on current available evidence. In evaluating the Company’s ability to recover deferred tax assets in the jurisdiction from which they arise, all available positive and negative evidence is considered, including results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax-planning strategies. The Company records a valuation allowance to reduce its deferred tax assets to the net amount that it believes is more likely than not to be realized.
The Company recognizes tax benefits from uncertain tax positions only if management believes that it is more likely than not that the tax position will be sustained 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 period in which such determination is made 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
Recently Adopted Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this update expand disclosures about a public entity’s reportable segments and require more enhanced information about a reportable segment’s significant expenses, interim segment profit or loss, and a description of how a public entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocated resources. The amendments clarify that a single reportable segment entity must apply ASC 280 in its entirety. The update will be effective for the annual periods beginning after December 15, 2023, or interim periods within fiscal years beginning after December 15, 2024. This ASU is applicable to our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, and subsequent interim periods, with early application permitted. We are currently assessing the effect of this update on our consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures. The amendments in this update expand disclosures in an entity’s income tax rate reconciliation table and regarding cash taxes paid information. The update will be effective for annual periods beginning after December 15, 2024 and is applicable to our Annual Report on Form 10-K for the fiscal year December 31, 2025, with early application permitted. We are currently assessing the effect of this update on our consolidated financial statements and disclosures.
In November 2024, the FASB Issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. The amendments in this update require disclosures, in the notes to financial statements, of specified information about certain costs and expenses. The amendment clarifies which certain costs and expenses that are included in cost of sales and selling, general, and administrative expense categories that should be disclosed with qualitative descriptions of amounts that are not separately disaggregated quantitatively. Additionally, the amendment requires disclosure of total amounts of selling expenses and an entity’s definition of selling expense. The update will be effective for annual periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027, with early adoption permitted. This ASU is applicable to our Annual Report on Form 10-K for the fiscal year ended December 31, 2027, and subsequent interim periods. We are currently assessing the effect of this update on our consolidated financial statements and disclosures.
| 16 |
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 balance sheets at September 30, 2024 and December 31, 2023 and consisted of the following:
| Estimated Useful | September 30, | December 31, | ||||||||
| Life (in years) | 2024 | 2023 | ||||||||
| Fixtures, fittings and equipment | $ | $ | ||||||||
| Platform hardware | ||||||||||
| Total property and equipment, cost | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Total | $ | $ | ||||||||
Depreciation
expense related to property and equipment was $
NOTE 4 — CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET
Capitalized software development costs, net at September 30, 2024 and December 31, 2023 consisted of the following:
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Capitalized software development costs | $ | $ | ||||||
| Development in progress | ||||||||
| Total capitalized software development, cost | ||||||||
| Less: accumulated amortization | ( |
) | ( |
) | ||||
| Total | $ | $ | ||||||
At September 30, 2024, development in progress primarily represents costs associated with GAN Sports, costs associated with its newer GameSTACK technology, and enhancements to the Company’s proprietary B2C software platform.
Amortization
expense related to capitalized software development costs was $
| 17 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
NOTE 5 — INTANGIBLE ASSETS, NET
Intangible Assets
Definite-lived intangible assets, net consisted of the following:
| Weighted | ||||||||||||||||
| Average | September 30, 2024 | |||||||||||||||
| Amortization | Gross | |||||||||||||||
| Period | Carrying | Accumulated | Net Carrying | |||||||||||||
| (in years) | Amount | Amortization | Amount | |||||||||||||
| Developed technology | $ | $ | ( | ) | $ | |||||||||||
| Customer relationships | ( | ) | ||||||||||||||
| Trade names and trademarks | ( | ) | ||||||||||||||
| Gaming licenses | ( | ) | ||||||||||||||
| $ | $ | ( | ) | $ | ||||||||||||
| Weighted | ||||||||||||||||
| Average | December 31, 2023 | |||||||||||||||
| Amortization | Gross | |||||||||||||||
| Period | Carrying | Accumulated | Net Carrying | |||||||||||||
| (in years) | Amount | Amortization | Amount | |||||||||||||
| Developed technology | $ | $ | ( | ) | $ | |||||||||||
| Customer relationships | ( | ) | ||||||||||||||
| Trade names and trademarks | ( | ) | ||||||||||||||
| Gaming licenses | ( | ) | ||||||||||||||
| $ | $ | ( | ) | $ | ||||||||||||
Amortization
expense related to intangible assets was $
Estimated amortization expense for the next five years is as follows:
| Amount | ||||
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ | |||
| 18 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
NOTE 6 — DEBT
Credit Facility
On
April 26, 2022, a subsidiary of the Company entered into the Credit Facility which provides for $
The
Company incurred $
Subsequent Amendments
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 $
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
Debt Covenants
The Credit Facility contained affirmative and negative covenants, including certain financial covenants associated with the Company’s 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.
| 19 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
The carrying values of the Company’s long-term debt consist of the following:
| Effective Interest Rate | As of September 30, 2024 | |||||||
| Credit Facility | ||||||||
| Principal | % | $ | ||||||
| Less unamortized debt issuance costs | ( |
) | ||||||
| Long-term debt, net | $ | |||||||
The
Company incurred $
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 % of the previous year’s total outstanding ordinary shares on December 31st or as determined by the Board of Directors, for ordinary shares, incentive share options, nonqualified share options, share appreciation rights, restricted share grants, share units, and other equity awards for issuance to employees, consultants or non-employee directors. At September 30, 2024, the 2020 Plan provided for grants of up to ordinary shares and there were ordinary shares available for future issuance under the 2020 Plan.
Share Options
| Weighted | Weighted | |||||||||||||||
| Average | Average | Aggregate | ||||||||||||||
| Number of | Exercise | Contractual | Intrinsic | |||||||||||||
| Shares | Price | Term | Value | |||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited/expired or cancelled | ( | ) | ||||||||||||||
| Outstanding at September 30, 2024 | $ | $ | ||||||||||||||
| Options exercisable at September 30, 2024 | $ | $ | ||||||||||||||
The Company recorded share-based compensation expense related to share options of $ and $ for the three months ended September 30, 2024 and 2023, respectively, and $ and $ for the nine months ended September 30, 2024 and 2023, respectively. Share-based compensation expense was recorded net of capitalized software development costs of $ for the three months ended September 30, 2023, and $ and $ for the nine months ended September 30, 2024 and 2023, respectively. At September 30, 2024, there was a total unrecognized compensation cost of $ related to non-vested share options. The unrecognized compensation cost is expected to be recognized over a weighted-average period of years.
Share option awards generally vest %. During the nine months ended September 30, 2024, the Board of Directors approved the issuance of options to purchase ordinary shares to employees under the 2020 Plan, all of which were share options granted with an exercise price of $ per share to certain European-based employees in lieu of restricted share units. The value of these options are based on the market value of the Company’s ordinary shares at the date of the grant. As all such options are in-the-money, the Company determined that utilizing an option pricing model to estimate the fair value of these options was not necessary. The weighted average grant date fair value of options granted was $ and $ for the three months ended September 30, 2024 and 2023, respectively, and $ and $ for the nine months ended September 30, 2024 and 2023, respectively.
For options granted during the nine months ended September 30, 2024, the fair value of each share 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 share 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 share options and the date on which share-based compensation is expected to be settled. Expected volatility is determined by reference to volatility of certain identified peer group share trading information and share prices on the 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. The expected term of the options is based on historical data and represents the period of time that options granted are expected to be outstanding. For the three and nine months ended September 30, 2024 and 2023, volatility, term, and risk-free interest rate were not meaningful inputs as all outstanding options were $ per share for the Company’s European based employees.
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)
During the first and second quarter of 2024, there were no issuances of restricted share units to its non-employee directors or employees.
During the third quarter of 2024, the Board of Directors approved the issuance of restricted share units to its employees. The restricted share units vest over from the date of grant. The terms of the awards stipulate that vesting of any outstanding share units will be pro-rated for employees if their employment terminates after the first anniversary of the grant date.
The Company withholds a portion of the restricted share units granted to its officers and non-employee directors upon vesting 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 September 30, 2024, 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 September 30, 2024 and 2023, respectively, and $ and $ for the nine months ended September 30, 2024 and 2023, respectively. At September 30, 2024, there was a 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.
| Weighted | ||||||||
| Average | ||||||||
| Number of | Grant Date | |||||||
| Shares | Fair Value | |||||||
| Outstanding at December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( |
) | ||||||
| Forfeited/expired or cancelled | ( |
) | ||||||
| Outstanding at September 30, 2024 | $ | |||||||
Restricted Share Awards
Restricted share awards are issued to non-employee directors and certain key employees. The value of a restricted stock award is based on the market value of the Company’s ordinary shares at the date of the grant.
The Company recorded share-based compensation expense related to the restricted share awards of $ for the three months ended September 30, 2023 and $ for the nine months ended September 30, 2023. There was no share-based compensation expense related to restricted share awards in the current year. As of December 31, 2023, all awards were vested and there were no additional issuances in the current year.
2020 Employee Stock Purchase Plan
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.
| 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 option to purchase ordinary shares at a discount during a series of successive offering periods. The
option purchase price may be the lower of
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 the Company’s ordinary shares. These shares were issued on April 25, 2023. On May 8, 2023, the Company registered the shares in connection with an S-1 resale registration statement. Refer to Note 15 – Commitments 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
NOTE 9 — OTHER LOSS (INCOME), NET
Other loss (income), net consisted of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Other income (1) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Other loss (2) | ||||||||||||||||
| Total other loss (income), net | $ | $ | $ | $ | ( | ) | ||||||||||
| (1) | ||
| (2) |
Basic and diluted earnings (loss) per ordinary share is calculated as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Numerator-basic and diluted: | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Denominator: | ||||||||||||||||
| Basic weighted average ordinary shares outstanding | ||||||||||||||||
| Effective of dilutive securities (1) | ||||||||||||||||
| Share options outstanding | ||||||||||||||||
| Restricted share units | ||||||||||||||||
| Diluted weighted average ordinary shares | ||||||||||||||||
| Basic earnings (loss) per share | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Diluted earnings (loss) per share | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| (1) | For the three months ended September 30, 2024, share options with an exercise price 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 and nine months ended September 30, 2023, 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 September 30, 2023. For the nine months ended September 30, 2024, potentially dilutive securities consisting of certain share options, nonvested restricted shares and restricted share units totaling 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 nine months ended September 30, 2024 and 2023. |
| 22 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
NOTE 11 — REVENUE
The following table reflects revenue recognized for the three and nine months ended September 30, 2024 and 2023 in line with the timing of transfer of services:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue from services delivered at a point in time | $ | $ | $ | $ | ||||||||||||
| Revenue from services delivered over time | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Contract and Contract-Related Liabilities
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 contributed to jackpots. Contract-related liabilities are expected to be recognized as revenue within one year of being purchased, earned or deposited. Such liabilities are recorded in liabilities to users and other current liabilities in the condensed consolidated balance sheets.
In
August 2023, WSI US, LLC (“WynnBet”) notified the Company of its intent to modify its multi-state revenue contract with the
Company and, in November 2023, the Company completed its negotiations with WynnBet (the “WynnBet modification”). The results
of renegotiations were primarily to amend performance obligations such that (i) obligations in certain states that had not launched at
the modification date were formally terminated, (ii) obligations in certain states that launched prior to the modification date had the
term reduced, and (iii) obligations in certain states such as Nevada, Massachusetts and New York would continue under more favorable
commercial terms. The total consideration allocated to these modifications was $
The
Company determined that the remaining performance obligations related to each state that either already launched or would launch under
the modified agreement and allocated the $
WynnBet
further agreed to terms for the state of Michigan governed by a separate revenue arrangement that provided WynnBet with an optional
performance obligations for either migrations services or termination rights, at their choosing, of $
In
August 2024, WynnBet terminated its operations in the state of New York. The Company received and recognized $
Additional
consideration was provided related to the Company’s right of first refusal to obtain WynnBet’s operation in the state of
Michigan amounting to $
| 23 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
The following table reflects contract liabilities arising from cash consideration received in advance from customers for the periods presented:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Contract liabilities from advance customer payments, beginning of the period | $ | $ | $ | |||||||||||||
| Contract liabilities from advance customer payments, end of the period (1) | ||||||||||||||||
| Revenue recognized from amounts included in contract liabilities from advance customer payments at the beginning of the period | ||||||||||||||||
| (1) |
NOTE 12 — 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 efficiently, confidently and effectively extend their presence online in places that have permitted online real money gaming. The B2C segment, which includes the operations of Coolbet, develops and operates a B2C online sports betting and casino platform that is accessible through its website in markets across Northern Europe, Latin America and Canada.
Information reported to the Company’s Chief Executive Officer, the 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’s revenue and contribution. Segment contribution represents the amounts 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.
Summarized financial information by reportable segments for the three months ended September 30, 2024 and 2023 is as follows:
| Three Months Ended | ||||||||||||||||||||||||
| September 30, | ||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||
| B2B | B2C | Total | B2B | B2C | Total | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenue (1) | ||||||||||||||||||||||||
| Segment contribution | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (1) |
During
the three months ended September 30, 2024 and 2023, one customer in the B2B segment individually accounted for
Summarized financial information by reportable segments for the nine months ended September 30, 2024 and 2023 is as follows:
| Nine Months Ended | ||||||||||||||||||||||||
| September 30, | ||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||
| B2B | B2C | Total | B2B | B2C | Total | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenue (1) | ||||||||||||||||||||||||
| Segment contribution | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (1) |
During
the nine months ended September 30, 2024 and 2023, one customer in the B2B segment individually accounted for
| 24 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
The following table presents a reconciliation of segment gross profit to the consolidated income (loss) before income taxes for the three and nine months ended September 30, 2024 and 2023:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Segment contribution (1) | $ | $ | $ | $ | ||||||||||||
| Sales and marketing | ||||||||||||||||
| Product and technology | ||||||||||||||||
| General and administrative (1) | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Interest expense, net | ||||||||||||||||
| Other loss (income), net | ( | ) | ||||||||||||||
| Income (loss) before income taxes | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| (1) |
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 | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| B2B: | ||||||||||||||||
| Platform and content license fees | $ | $ | $ | $ | ||||||||||||
| Development services and other | ||||||||||||||||
| Total B2B revenue | ||||||||||||||||
| B2C: | ||||||||||||||||
| Sportsbook | ||||||||||||||||
| Casino | ||||||||||||||||
| Poker | ||||||||||||||||
| Total B2C revenue | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Revenue by location of the customer for the three and nine months ended September 30, 2024 and 2023 is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| Latin America | ||||||||||||||||
| Rest of the world | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
NOTE 13 — INCOME TAXES
The
Company’s effective income tax rate was (
Our
country of domicile is Bermuda, which effectively has a
| 25 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
NOTE 14 — LEASES
The
Company determines if an arrangement is a lease and classifies as operating or finance lease at the lease commencement date. A lease
is defined as a contract, or part of contract, that conveys the right to control the use of an asset for a time period in exchange for
consideration. At September 30, 2024, the Company’s lease portfolio consists of operating leases related to office facilities in
Estonia and Bulgaria. The lease terms for both leases are five years. Options to extend or terminate a lease are included in the lease
term when it is reasonably certain that the Company will exercise such options. In some jurisdictions it is customary for lease contracts
to provide for payments to increase each year by inflation, or to be reset periodically to market rental rates or the periodic rent is
fixed over the lease term. Lease payments for operating leases, consisting of fixed payments for base rent, is recognized on a straight-line
basis over the lease term. The Company elected to record short-term lease costs on a straight-line basis over the term of the leases
related to its shared work space facilities primarily in the United States and London, and incurred $
Operating Leases - Lessee
The following table discloses the operating asset and liability balances at September 30, 2024 and December 31, 2023:
| As of | ||||||||||
| Leases | Classification | September 30, 2024 | December 31, 2023 | |||||||
| Assets | ||||||||||
| Total operating leased assets, net | Operating lease right-of-use assets(1) | $ | $ | |||||||
| Liabilities | ||||||||||
| Current | Operating lease liabilities | $ | $ | |||||||
| Non-current | Operating lease liabilities – non-current | |||||||||
| Total lease liabilities | $ | $ | ||||||||
| (1) |
The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The incremental borrowing rate is based on the Company’s credit rating based on its market valuation metrics and corporate yield curves observed for public companies with similar credit ratings.
Operating
lease costs were $
| 26 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Maturities of lease liabilities, including reconciliation to the lease liabilities, based on required contractual payments, are as follows:
| Operating Leases | ||||
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Total lease payments | ||||
| Less: future interest costs | ||||
| Present value of lease liabilities | $ | |||
Other information related to leases as of and for the nine months ended September 30, 2024 and 2023 was as follows:
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Operating lease weighted-average remaining lease term (years) | ||||||||
| Operating lease weighted-average discount rate | % | % | ||||||
| Cash paid for the amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
NOTE 15 — 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 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
were 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 $
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 $
| 27 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
On
March 29, 2023, the Company amended and restated its Content Licensing Agreement (the “Amended Agreement”) with the other
Content Provider which resulted in a reduced contract term ending March 31, 2024 and a reduction in the fixed fees payable under the
arrangement. The Company recorded a gain of $
Chile Operations
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
On
May 13, 2022, the SII issued a resolution stating that unregistered foreign digital service providers will be subject to
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.
On September 12, 2023, the Supreme Court of Chile issued a ruling requiring one telecommunication company to block 23 iGaming websites. The ruling related specifically to one local internet service provider (“ISP”), and a state-owned land-based casino which holds the rights to offer online sports betting (“the Local Provider”). The order to block the websites only applied to the 23 specific URL addresses mentioned in the legal action. The Local Provider’s legal action was based on a “protection recourse” filing and assert that the Local Provider’s constitutional right to maintain a legal monopoly over sports betting was infringed upon. The Supreme Court of Chile’s ruling only affected the named parties of the case and did not establish legal precedent. In response to the ruling, the Company modified the URL and resumed operations.
On December 12, 2023, the Chamber of Deputies Hall held a legislative discussion on a bill that regulates the development of online betting platforms in Chile. The bill was approved by the Chamber and will proceed to the second constitutional process in the Senate.
| 28 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
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
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
On
November 7, 2023, the Company entered into the Merger Agreement at a share price of $. The close of the merger is also predicated
upon receipt of approval of the Merger and change in control of the Company by all relevant gaming authorities and other conditions.
The Company anticipates that securing such regulatory approvals will take some time, and that the closing of the Merger may not occur
until early 2025. Refer to Note 1 – Nature of Operations. As the Company entered into, and announced, the Merger Agreement
prior to the revenue conditions being met, and the share price would be less than $ per share threshold, there would be no liability.
A 75% probability was applied to the sale scenario resulting in $
The underlying revenue arrangement commenced in December 2023, and the asset is probable of recovery.
| 29 |
Item 2. Management’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 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 2023 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 2023 Annual Report on Form 10-K. There have been no material changes during the periods covered by this Quarterly Report on Form 10-Q from the critical policies described in our Form 10-K.
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. These forward-looking statements reflect our current expectations and views of future 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, the results of our restructuring efforts, 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,” or other similar expressions.
Although we believe that we have a reasonable basis for each forward-looking statement, forward-looking statements are not guarantees of future performance and our actual results could differ significantly from the results discussed or implied in these forward-looking statements. Factors that might cause such differences are described in “Item 1A. Risk Factors” in our 2023 Form 10-K and in this Quarterly Report on Form 10-Q.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. These forward-looking statements speak only as of the date on which they are made. We do not assume any obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
GAN Limited is an exempted holding company organized in Bermuda exempted holding company and through its subsidiaries, consists of two lines of business. We are a business-to-business (“B2B”) supplier of enterprise Software-as-a-Service (“SaaS”) solutions for online casino gaming, commonly referred to as iGaming, and online sports betting applications. Beginning with our January 2021 acquisition of Vincent Group p.l.c., a Malta public limited company (“Coolbet”), we are also a business-to-consumer (“B2C”) developer and operator of an online sports betting and casino platform, which offers consumers in select markets in Northern Europe, Latin America, and Canada access to a digital portal for engaging in sports betting, online casino games, and poker. These two lines of business are also the Company’s reportable segments.
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 an online sports betting and casino platform that is accessible through its website in markets across Northern Europe, Latin America and Canada.
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To meet demand and serve our U.S. casino operator clients, we continue to invest in our software engineering capabilities and expand our operational support. The most significant component of our operating costs generally relate to our employee 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 was $2.1 million for the three months ended September 30, 2024 compared to a net loss of $8.2 million for the three months ended September 30, 2023.Our net loss was $3.8 million and $25.1 million for the nine months ended September 30, 2024 and 2023, respectively.
We believe that our current technology is highly scalable and can support the launch of our product offerings for new customers and in new jurisdictions. We expect to achieve profitability through increased revenues from:
| ● | 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 U.S. patent, which governs the linkage of on-property reward cards to their counterpart internet gambling accounts together with bilateral transmission of reward points between the internet gaming technology system and the land-based casino management system present in all U.S. casino properties.
Consolidated Results of Operations
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
The following table sets forth our consolidated results of operations for the periods indicated:
| Three Months Ended | ||||||||||||||||
| September 30, | Change | |||||||||||||||
| 2024 | 2023 | Amount | Percent | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenue | $ | 37,098 | $ | 29,817 | $ | 7,281 | 24.4 | % | ||||||||
| Operating costs and expenses | ||||||||||||||||
| Cost of revenue (1) | 9,920 | 9,242 | 678 | 7.3 | % | |||||||||||
| Sales and marketing | 6,778 | 7,196 | (418 | ) | (5.8 | )% | ||||||||||
| Product and technology | 8,467 | 9,150 | (683 | ) | (7.5 | )% | ||||||||||
| General and administrative (1) | 7,823 | 7,060 | 763 | 10.8 | % | |||||||||||
| Depreciation and amortization | 1,978 | 4,339 | (2,361 | ) | (54.4 | )% | ||||||||||
| Total operating costs and expenses | 34,966 | 36,987 | (2,021 | ) | (5.5 | )% | ||||||||||
| Operating income (loss) | 2,132 | (7,170 | ) | 9,302 | n.m. | |||||||||||
| Interest expense, net | 1,160 | 1,264 | (104 | ) | (8.2 | )% | ||||||||||
| Income (loss) before income taxes | 972 | (8,434 | ) | 9,406 | n.m. | |||||||||||
| Income tax benefit | (1,111 | ) | (274 | ) | (837 | ) | n.m. | |||||||||
| Net income (loss) | $ | 2,083 | $ | (8,160 | ) | $ | 10,243 | n.m. | ||||||||
(1) Excludes depreciation and amortization expense.
n.m. = not meaningful
Geographic Information
The following table sets forth our consolidated revenue by geographic region, for the periods indicated:
| Three Months Ended | ||||||||||||||||||||||||
| September 30, | Percentage of Revenue | Change | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | Amount | Percent | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| United States | $ | 14,082 | $ | 7,459 | 38.0 | % | 25.0 | % | $ | 6,623 | 88.8 | % | ||||||||||||
| Europe | 12,159 | 10,890 | 32.8 | % | 36.5 | % | 1,269 | 11.7 | % | |||||||||||||||
| Latin America | 8,356 | 9,132 | 22.5 | % | 30.6 | % | (776 | ) | (8.5 | )% | ||||||||||||||
| Rest of the world | 2,501 | 2,336 | 6.7 | % | 7.9 | % | 165 | 7.1 | % | |||||||||||||||
| Total revenue | $ | 37,098 | $ | 29,817 | 100.0 | % | 100.0 | % | $ | 7,281 | 24.4 | % | ||||||||||||
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Revenue
Revenue was $37.1 million for the three months ended September 30, 2024, an increase of $7.3 million from the comparable period in 2023. The increase was primarily attributable to an increase in the United States resulting from the expansion of our B2B operations in Nevada and recognition of revenue related to migration services connected to a B2B partner exit in Michigan. Growth in Europe was driven by increased player activity and higher margins resulting from favorable sporting event outcomes within the B2C operations. These increases were partially offset by declines in the B2C operations in Latin America driven by reduced player activity and unfavorable exchange rates.
Cost of Revenue
Cost of revenue was $9.9 million for the three months ended September 30, 2024, an increase of $0.7 million in the comparable period in 2023. This increase was due to increased gaming taxes in our B2C operations in Latin America driven by the implementation of regulation.
Sales and Marketing
Sales and marketing expense was $6.8 million for the three months ended September 30, 2024, a decrease of $0.4 million from the comparable period in 2023. The decrease was primarily attributable to the Company’s deployment of an affiliate marketing strategy in the Latin America region that reduces the up-front marketing costs required for customer acquisition.
Product and Technology
Product and technology expense was $8.5 million for the three months ended September 30, 2024, a decrease of $0.7 million from the comparable period in 2023. This decrease is due primarily to overall reduction of compensation costs and reduced headcount realized as part of ongoing cost saving initiatives.
General and Administrative
General and administrative expense was $7.8 million for the three months ended September 30, 2024, an increase of $0.8 million from the comparable period in 2023. This decrease is due primarily to overall reduction of compensation costs and reduced headcount realized as part of ongoing cost saving initiatives.
Depreciation and Amortization
Depreciation and amortization expense was $2.0 million for three months ended September 30, 2024, a decrease of $2.4 million from the comparable period in 2023. The decrease was primarily due to the reduction of depreciable assets that were fully amortized compared to the prior periods.
Income Tax Benefit
We recorded income tax benefit of $1.1 million for the three months ended September 30, 2024, reflecting an effective tax rate of (114.3)%, compared to income tax benefit of $0.3 million for the three months ended September 30, 2023, reflecting an effective tax rate of 3.2%. 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 September 30, 2024 and 2023 was due primarily to a mix of earnings in foreign jurisdictions that are subject to current or deferred tax and loss carryforwards in certain jurisdictions that are not expected to be realized.
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Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
The following table sets forth our consolidated results of operations for the periods indicated:
| Nine Months Ended | ||||||||||||||||
| September 30, | Change | |||||||||||||||
| 2024 | 2023 | Amount | Percent | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
| Revenue | $ | 103,309 | $ | 98,704 | $ | 4,605 | 4.7 | % | ||||||||
| Operating costs and expenses | ||||||||||||||||
| Cost of revenue (1) | 29,487 | 28,888 | 599 | 2.1 | % | |||||||||||
| Sales and marketing | 19,851 | 21,704 | (1,853 | ) | (8.5 | )% | ||||||||||
| Product and technology | 26,220 | 29,966 | (3,746 | ) | (12.5 | )% | ||||||||||
| General and administrative (1) | 22,962 | 27,095 | (4,133 | ) | (15.3 | )% | ||||||||||
| Depreciation and amortization | 5,731 | 12,783 | (7,052 | ) | (55.2 | )% | ||||||||||
| Total operating costs and expenses | 104,251 | 120,436 | (16,185 | ) | (13.4 | )% | ||||||||||
| Operating loss | (942 | ) | (21,732 | ) | 20,790 | (95.7 | )% | |||||||||
| Interest expense, net | 3,449 | 3,885 | (436 | ) | (11.2 | )% | ||||||||||
| Other income (loss) | 1 | (934 | ) | 935 | n.m. | |||||||||||
| Loss before income taxes | (4,392 | ) | (24,683 | ) | 20,291 | (82.2 | )% | |||||||||
| Income tax (benefit) expense | (584 | ) | 385 | (969 | ) | n.m. | ||||||||||
| Net loss | $ | (3,808 | ) | $ | (25,068 | ) | $ | 21,260 | (84.8 | )% | ||||||
(1) Excludes depreciation and amortization expense.
n.m. = not meaningful
Geographic Information
The following table sets forth our consolidated revenue by geographic region, for the periods indicated:
| Nine Months Ended | ||||||||||||||||||||||||
| September 30, | Percentage of Revenue | Change | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | Amount | Percent | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| United States | $ | 33,628 | $ | 23,271 | 32.6 | % | 23.6 | % | $ | 10,357 | 44.5 | % | ||||||||||||
| Europe | 37,887 | 35,674 | 36.6 | % | 36.1 | % | 2,213 | 6.2 | % | |||||||||||||||
| Latin America | 23,456 | 32,790 | 22.7 | % | 33.2 | % | (9,334 | ) | (28.5 | )% | ||||||||||||||
| Rest of the world | 8,338 | 6,969 | 8.1 | % | 7.1 | % | 1,369 | 19.7 | % | |||||||||||||||
| Total revenue | $ | 103,309 | $ | 98,704 | 100.0 | % | 100.0 | % | $ | 4,605 | 4.7 | % | ||||||||||||
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Revenue
Revenue was $103.3 million for the nine months ended September 30, 2024, an increase of $4.6 million from the comparable period in 2023. The increase was primarily attributable to an increase in the United States resulting from the expansion of our B2B operations in Nevada and recognition of revenue related to migration services connected to a B2B partner exit in Michigan. Growth in Europe was driven by increased player activity and higher margins resulting from favorable sporting event outcomes within the B2C operations. These increases were partially offset by declines in the B2C operations in Latin America driven by reduced player activity, unfavorable exchange rates and lower margins resulting from unfavorable sporting event outcomes within the B2C operations.
Cost of Revenue
Cost of revenue was $29.5 million for the nine months ended September 30, 2024, which was relatively consistent with the comparable prior period.
Sales and Marketing
Sales and marketing expense was $19.9 million for the nine months ended September 30, 2024, a decrease of $1.9 million from the comparable period in 2023. The decrease was primarily attributable to the Company’s deployment of an affiliate marketing strategy in the Latin America region that reduces the up-front marketing costs required for customer acquisition.
Product and Technology
Product and technology expense was $26.2 million for the nine months ended September 30, 2024, a decrease of $3.8 million from the comparable period in 2023. This decrease is due primarily to overall reduction of compensation costs and reduced headcount realized as part of ongoing cost saving initiatives.
General and Administrative
General and administrative expense was $23.0 million for the nine months ended September 30, 2024, a decrease of $4.1 million from the comparable period in 2023. This decrease is due primarily to overall reduction of compensation costs and reduced headcount realized as part of ongoing cost saving initiatives.
Depreciation and Amortization
Depreciation and amortization expense was $5.7 million for nine months ended September 30, 2024, a decrease of $7.1 million from the comparable period in 2023. The decrease was primarily due to the reduction of depreciable assets that were fully amortized compared to the prior period.
Income Tax (Benefit) Expense
We recorded income tax benefit of $0.6 million for the nine months ended September 30, 2024, reflecting an effective tax rate of 13.3%, compared to income tax expense of $0.4 million for the nine months ended September 30, 2023, reflecting an effective tax rate of (1.6)%. 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 nine months ended September 30, 2024 and 2023 was due primarily to a mix of earnings in foreign jurisdictions that are subject to current or deferred tax and loss carryforwards in certain jurisdictions that are not expected to be realized.
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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 (“CODM”), who is our Chief Executive Officer, for making decisions and assessing performance of our reportable segments.
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
The following table sets forth our segment results for the periods indicated:
| Three Months Ended | Percentage of Segment | |||||||||||||||||||||||
| September 30, | Revenue | Change | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | Amount | Percent | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| B2B | ||||||||||||||||||||||||
| Revenue | $ | 16,375 | $ | 10,178 | 100.0 | % | 100.0 | % | $ | 6,197 | 60.9 | % | ||||||||||||
| Cost of revenue (1) | 2,278 | 2,055 | 13.9 | % | 20.2 | % | 223 | 10.9 | % | |||||||||||||||
| B2B segment contribution | $ | 14,097 | $ | 8,123 | 86.1 | % | 79.8 | % | $ | 5,974 | 73.5 | % | ||||||||||||
| B2C | ||||||||||||||||||||||||
| Revenue | $ | 20,723 | $ | 19,639 | 100.0 | % | 100.0 | % | $ | 1,084 | 5.5 | % | ||||||||||||
| Cost of revenue (1) | 7,642 | 7,187 | 36.9 | % | 36.6 | % | 455 | 6.3 | % | |||||||||||||||
| B2C segment contribution | $ | 13,081 | $ | 12,452 | 63.1 | % | 63.4 | % | $ | 629 | 5.1 | % | ||||||||||||
(1) Excludes depreciation and amortization expense.
B2B Segment
B2B revenue increased by $6.2 million primarily due to an expansion of our B2B offerings in the state of Nevada and the recognition of migration service revenue in the state of Michigan.
B2B cost of revenue increased by $0.2 million due to expansion of our B2B offerings in the state of Nevada.
Segment contribution for B2B, which excludes depreciation and amortization expense, increased by 73.5% due to the increase in revenue described above.
B2C Segment
B2C revenue increased by $1.1 million primarily due to increased player activity and higher margins in Europe, offset by reduced player activity and unfavorable exchange rates in Latin America.
B2C cost of revenue increased by $0.5 million primarily due to reduced player activity in Latin America.
Segment contribution for B2C, which excludes depreciation and amortization expense, increased by 5.1%. This increase was primarily driven by the increase in revenues described above.
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Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
The following table sets forth our segment results for the periods indicated:
| Nine Months Ended | Percentage of Segment | |||||||||||||||||||||||
| September 30, | Revenue | Change | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | Amount | Percent | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| B2B | ||||||||||||||||||||||||
| Revenue | $ | 41,711 | $ | 31,352 | 100.0 | % | 100.0 | % | $ | 10,359 | 33.0 | % | ||||||||||||
| Cost of revenue (1) | 6,570 | 6,129 | 15.8 | % | 19.5 | % | 441 | 7.2 | % | |||||||||||||||
| B2B segment contribution | $ | 35,141 | $ | 25,223 | 84.2 | % | 80.5 | % | $ | 9,918 | 39.3 | % | ||||||||||||
| B2C | ||||||||||||||||||||||||
| Revenue | $ | 61,598 | $ | 67,352 | 100.0 | % | 100.0 | % | $ | (5,754 | ) | (8.5 | )% | |||||||||||
| Cost of revenue (1) | 22,917 | 22,759 | 37.2 | % | 33.8 | % | 158 | 0.7 | % | |||||||||||||||
| B2C segment contribution | $ | 38,681 | $ | 44,593 | 62.8 | % | 66.2 | % | $ | (5,912 | ) | (13.3 | )% | |||||||||||
(1) Excludes depreciation and amortization expense.
B2B Segment
B2B revenue increased by $10.4 million primarily due to an expansion of our B2B offerings in the state of Nevada and the recognition of migration service revenue in the state of Michigan.
B2B cost of revenue increased by $0.4 million primarily due to the expansion of our B2B offerings in the state of Nevada and the recognition of migration service revenue in the state of Michigan.
Segment contribution for B2B, which excludes depreciation and amortization expense, increased by 39.3% due to the increase in revenue described above.
B2C Segment
B2C revenue decreased by $5.8 million primarily due to reduced player activity in Latin America, unfavorable exchange rates and lower sports margins.
B2C cost of revenue increased by $0.2 million primarily due to reduced player activity in Latin America.
Segment contribution for B2C, which excludes depreciation and amortization expense, decreased by 13.3%. This decrease was primarily driven by the factors described above.
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Non-GAAP Financial Measures
Adjusted EBITDA
Management uses the non-GAAP measure of Adjusted EBITDA to measure its financial performance. Specifically, it uses Adjusted EBITDA (i) as a measure to compare our operating performance from period to period, as it removes the effect of items not directly resulting from our core operations, and (ii) as a means of assessing our core business performance against others in the industry, because it eliminates some of the effects that are generated by differences in capital structure, depreciation, tax effects and unusual and infrequent events.
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 and Adjusted EBITDA may exclude financial information that some investors may consider important in evaluating our performance. Because Adjusted EBITDA is not a U.S. GAAP measure, the way we define Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in the industry.
Below is a reconciliation of Adjusted EBITDA to net loss, the most comparable U.S. GAAP measure, as presented in the condensed consolidated statements of operations for the periods specified:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Net income (loss) | $ | 2,083 | $ | (8,160 | ) | $ | (3,808 | ) | $ | (25,068 | ) | |||||
| Income tax (benefit) expense | (1,111 | ) | (274 | ) | (584 | ) | 385 | |||||||||
| Interest expense | 1,160 | 1,264 | 3,449 | 3,885 | ||||||||||||
| Gain on amendment of Content Licensing Agreement | — | — | — | (9,719 | ) | |||||||||||
| Loss on debt extinguishment | — | — | — | 8,784 | ||||||||||||
| Revaluation of contingent liability | — | (509 | ) | — | (288 | ) | ||||||||||
| Depreciation and amortization | 1,978 | 4,339 | 5,731 | 12,783 | ||||||||||||
| Share-based compensation and related expense (1) | 1,258 | 818 | 2,998 | 4,726 | ||||||||||||
| Transaction related costs | 44 | — | 788 | — | ||||||||||||
| Adjusted EBITDA | $ | 5,412 | $ | (2,522 | ) | $ | 8,574 | $ | (4,512 | ) | ||||||
(1) Includes $1.1 million and $1.5 million in equity-classified expense for the three months ended September 30, 2024 and 2023, respectively, and $2.8 million and $4.5 million for the nine months ended September 30, 2024 and 2023, respectively, and expense of $0.0 million and $0.1 million from liability-classified awards for the three months ended September 30, 2024 and 2023, respectively, and $(0.0) million and $0.1 million for the nine months ended September 30, 2024 and 2023, respectively. Such amounts exclude capitalized amounts. Additionally, share-based compensation and related expense is offset by a release of $1.0 million in short term incentive compensation that was to be settled in equity for the three months and nine months ended September 30, 2023. Refer to Note 7 – Share-based Compensation for further details.
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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 the 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” for further risks associated with our business which would affect these KPIs.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| B2B Gross Operator Revenue (in millions) | $ | 610.4 | $ | 424.1 | $ | 1,851.7 | $ | 1,273.1 | ||||||||
| B2B Take Rate | 2.7 | % | 2.4 | % | 2.3 | % | 2.5 | % | ||||||||
| B2C Active Customers (in thousands) | 226 | 244 | 382 | 432 | ||||||||||||
| B2C Marketing Spend Ratio | 24 | % | 26 | % | 23 | % | 22 | % | ||||||||
| B2C Sports Margin | 7.2 | % | 6.0 | % | 7.1 | % | 7.2 | % | ||||||||
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 wins from 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 our platform is processing.
The increase in Gross Operator Revenue for the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, was driven primarily by organic growth in Pennsylvania, Michigan, New Jersey, Connecticut, and Ontario.
B2B Take Rate
We define B2B Take Rate as a quotient of B2B segment revenue retained by the Company over the total Gross Operator Revenue generated by our B2B corporate customers. B2B Take Rate gives management and users of our financial statements an indication of the impact of the statutory terms and the efficiency of the commercial terms on the business.
The increase in B2B Take Rate for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was due primarily to increased revenue recognized in the current quarter related to a partner exit in Michigan. The decrease in B2B Take Rate for the nine months ended September 30, 2024 compared to the prior year comparable period was primarily due to a decrease in our contractual revenue rates pursuant to an agreement regarding the expiration of an exclusivity period with a B2B customer in 2023.
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B2C Active Customers
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 decrease in B2C Active Customers for the three and nine months ended September 30, 2024 was primarily driven by reduced 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. Additionally, this metric allows management to compare across jurisdictions and other subsets, as an additional indication of return on marketing investment.
The decrease in the B2C Marketing Spend Ratio for the three months ended September 30, 2024 was primarily driven by the deployment of affiliate marketing strategies primarily in Latin America. B2C Marketing Spend Ratio for the nine months ended September 30, 2024 was relatively consistent with the prior year.
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 fluctuations in the B2C Sports Margin for the three and nine months ended September 30, 2024, were primarily attributable to the outcomes of individual sporting events.
Liquidity and Capital Resources
Material Cash Commitments
Our primary uses of cash include funding our ongoing working capital needs and developing and maintaining our proprietary software platforms. Such capital allocations are contemplated while considering other opportunities we may have to deploy our capital.
The execution of our growth strategy will require continued significant capital expenditures, and we expect to continue investing in our products and technologies as we seek to scale our business.
We utilized cash in investing activities of $2.3 million and $4.8 million for the nine months ended September 30, 2024 and 2023, respectively. Of these activities, expenditures related to internally developed capitalized software represented $1.6 million and $2.8 million, respectively, and property and equipment (including licenses for internal use software) represented $0.4 million and $1.6 million, respectively.
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Sources of Liquidity
Since our inception, 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.
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 contained 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, and were in compliance as of September 30, 2024.
On April 13, 2023, we executed agreements to amend the Credit Facility (forming the “Amended Credit Facility”). The Amended Credit Facility became effective upon cash settlement of payments completed on April 14, 2023. The Amended Credit Facility contains a financial covenant, among other covenants, requiring minimum liquidity of $10.0 million. Refer to Note 6 – Debt in the accompanying condensed consolidated financial statements for further detail with respect to the Amended Credit Facility.
We believe cash generated from operations and cash on hand will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. We are actively addressing internal costs to conserve cash and executing these programs will be critical to our ability to continue funding our operations for at least the next twelve months.
To the extent that our current resources, including our ability to generate operating cash flows, are insufficient to satisfy our cash requirements, we may 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.
Cash Flow Analysis
A summary of our operating, investing and financing activities is shown in the following table:
| Nine Months Ended | ||||||||||||||||
| September 30, | Change | |||||||||||||||
| (dollars in thousands) | 2024 | 2023 | Amount | Percent | ||||||||||||
| Net cash provided by (used in) operating activities | $ | 138 | $ | (3,640 | ) | 3,778 | n.m. | |||||||||
| Net cash used in investing activities | (2,249 | ) | (4,772 | ) | 2,523 | (52.9 | )% | |||||||||
| Net cash provided by financing activities | 3 | 1,253 | (1,250 | ) | (99.8 | )% | ||||||||||
| Effect of foreign exchange rates on cash | 9 | 451 | (442 | ) | (98.0 | )% | ||||||||||
| Net decrease in cash | $ | (2,099 | ) | $ | (6,708 | ) | $ | 4,609 | (68.7 | )% | ||||||
n.m. = not meaningful
Operating Activities
Net cash provided by (used in) operating activities increased by $3.8 million primarily due to an increase in cash generated from working capital of $9.4 million. The remaining increase in cash provided by operating activities was due to overall decreased costs that contributed to a decrease in loss from operations.
Investing Activities
Net cash used in investing activities decreased by $2.5 million primarily due to a reduction of capitalized development of $1.1 million primarily related to the B2B segment, and a decrease in purchase of property and equipment of $1.3 million related to the Company’s new facilities in Europe incurred in the prior year.
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Financing Activities
Net cash provided by financing activities decreased by $1.3 million, which was primarily related to the Company’s amendment of its credit facility in the prior year.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a smaller reporting company, 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 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 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. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements will not occur or that all control issues, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including 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, the Certifying Officers concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2024. The Certifying Officers based their conclusion on the fact that the Company has identified material weaknesses in controls over financial reporting, detailed below. In light of this fact, our management has performed additional analyses, reconciliations, and other procedures and have concluded that, notwithstanding the material weaknesses in our internal control over financial reporting, the condensed consolidated financial statements for the periods covered by and included in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.
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, 2023, 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 prior year-end procedures, the Company’s management and audit committee of the board of directors 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 and determined that these deficiencies constituted a material weakness. While the Company has actively begun to implement controls to remediate the material weakness, this material weakness has not been resolved as of September 30, 2024.
Remediation Plans
We continue to evaluate measures to remediate the identified material weakness. 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.
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 is 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 the 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
There are no material changes from the risk factors as disclosed in Part I, Item 1A under the heading “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 13, 2024.
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Item 6. Exhibits
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SIGNATURES
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: November 8, 2024 | By: | /s/ SEAMUS MCGILL |
| Seamus McGill | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| /s/ BRIAN CHANG | ||
| Brian Chang | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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