UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission
File No.
(Exact name of registrant as specified in its charter)
| Not Applicable | ||
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||
| Non-accelerated filer | ☐ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
At November 6, 2023, there were ordinary shares outstanding.
GAN LIMITED
FORM 10-Q
INDEX
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GAN LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Capitalized software development costs, net | ||||||||
| Intangible assets, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation and benefits | ||||||||
| Accrued content license fees | ||||||||
| Liabilities to users | ||||||||
| Current operating lease liabilities | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Deferred income taxes | ||||||||
| Long-term debt | ||||||||
| Content licensing liabilities | ||||||||
| Non-current operating lease liabilities | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 16) | ||||||||
| Shareholders’ equity | ||||||||
| Ordinary shares, $ par value, shares authorized, and shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Operating costs and expenses | ||||||||||||||||
| Cost of revenue (1) | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Product and technology | ||||||||||||||||
| General and administrative (1) | ||||||||||||||||
| Impairment | ||||||||||||||||
| Restructuring | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ||||||||||||||||
| Other income, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax (benefit) expense | ( | ) | ||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share, basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average ordinary shares outstanding, basic and diluted | ||||||||||||||||
| (1) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
GAN LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(in thousands)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive loss, net of tax | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
GAN LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Ordinary Shares | Paid-in | Treasury | Accumulated | Comprehensive | Shareholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Deficit | Loss | Equity | ||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||||||
| Ordinary Shares | Paid-in | Treasury | Accumulated | Comprehensive | Shareholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Deficit | Loss | Equity | ||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation adjustments | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Share-based compensation | — | |||||||||||||||||||||||||||
| Accrued liability settled through issuance of shares | — | |||||||||||||||||||||||||||
| Restricted share activity | ||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation adjustments | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Share-based compensation | — | |||||||||||||||||||||||||||
| Accrued liability settled through issuance of shares | — | |||||||||||||||||||||||||||
| Repurchase of ordinary shares | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Ordinary share retirement | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of ordinary shares upon exercise of share options | ||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Foreign currency translation adjustments | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Share-based compensation | — | |||||||||||||||||||||||||||
| Restricted share activity | ( | ) | ( | ) | ||||||||||||||||||||||||
| Issuance of ordinary shares upon exercise of share options | ||||||||||||||||||||||||||||
| Issuance of ordinary shares upon ESPP purchases | ||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
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, | ||||||||
| 2023 | 2022 | |||||||
| 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 | ||||||||
| Impairment of goodwill | ||||||||
| 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 used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Expenditures for capitalized software development costs | ( | ) | ( | ) | ||||
| Payments for content licensing arrangements | ( | ) | ||||||
| Purchases of gaming licenses | ( | ) | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from issuance of long-term debt | ||||||||
| Proceeds from exercise of share options | ||||||||
| Proceeds from issuance of ordinary shares under ESPP | ||||||||
| Repurchase of restricted shares to pay tax liability | ( | ) | ||||||
| Repurchase of ordinary shares | ( | ) | ||||||
| Proceeds from issuance of long-term debt | ||||||||
| Payment of debt issuance costs | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Effect of foreign exchange rates on cash | ( | ) | ||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental Cash Flow Information | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Intangible assets acquired in business acquisition included in current and long-term liabilities | ||||||||
| 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.
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, 2023 are not necessarily indicative of the results that may be expected for the year ended December 31, 2023 or for any future annual or interim period. The condensed consolidated balance sheet as of December 31, 2022 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, 2022.
During the second quarter of 2023, the Company completed a reorganization which resulted in the Company reclassifying its operating expenses between the sales and marketing, product and technology and general and administrative.
The following table provides the impact of operating expense reclassification for the three months ended September 30, 2022.
| Three Months Ended September 30, 2022 | ||||||||||||
| As previously | Impact of operating expense | As currently | ||||||||||
| reported | reclassification | reported | ||||||||||
| Operating expenses | ||||||||||||
| Sales and marketing | $ | $ | $ | |||||||||
| Product and technology | ||||||||||||
| General and administrative (1) | ( | ) | ||||||||||
| Total operating expenses | $ | $ | $ | |||||||||
| (1) |
The following table provides the impact of the reclassification of operating expenses for the nine months ended September 30, 2022.
| Nine Months Ended September 30, 2022 | ||||||||||||
| As previously | Impact of operating expense | As currently | ||||||||||
| reported | reclassification | reported | ||||||||||
| Operating expenses | ||||||||||||
| Sales and marketing | $ | $ | $ | |||||||||
| Product and technology | ||||||||||||
| General and administrative (1) | ( | ) | ||||||||||
| Total operating expenses | $ | $ | $ | |||||||||
| (1) |
| 8 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Liquidity
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis. As of September 30, 2023, the Company
had an accumulated deficit of $
In the fourth quarter of 2022, the Company initiated plans to address its liquidity needs and improve its operations and cash position primarily by (i) reducing and deferring personnel and operational costs for non-strategic initiatives, (ii) amending the Credit Facility to reduce cash interest obligations and amend financial covenants, (iii) identifying sources of additional capital, (iv) continuing investment in the growth areas of the Company’s consolidated operations, (v) continuing cost saving initiatives first implemented during the year ended December 31, 2022, and (vi) initiating a strategic review process to assess a range of strategic alternatives.
On
April 13, 2023, a subsidiary of the Company executed agreements to amend its existing credit facility to waive all events of default,
amend certain financial covenants, assign the rights to the credit facility from its existing lender to a third party, and increase the
principal balance from $
To the extent that the Company’s current resources, including its ability to generate operating cash flows, are insufficient to satisfy its cash requirements, the Company may seek additional equity or debt financing. The Company’s ability to do so depends on prevailing economic conditions and other factors, many of which are beyond management’s control. The Company does not currently have any such credit facilities or similar debt arrangements in place, outside of the Amended Credit Facility as described above, and cannot provide any assurance as to the availability or terms of any future financing that it may require to support its operations. If the needed financing is not available, or if the terms of financing are less desirable than expected, the Company may be forced to decrease its level of investment in new products and technologies, discontinue further expansion of the business, scale back its existing operations, or divest of assets, any of which could have an adverse impact on the Company and its financial prospects.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with 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.
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 gain (loss) of $(
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 $
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 collectibility risk on the Company’s trade receivables, limitations on the Company’s ability to issue new debt, and reduced liquidity.
| 9 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Revenue Recognition
Revenue from B2B Operations
The Company’s revenue from its B2B operations are primarily from its internet gaming Software-as-a-Service platform (“SaaS”), 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, 2023 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, and not a specified amount of services. 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, 2023 and December 31,
2022, the Company has 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 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. 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 in order to access the GameSTACK platform but are sold as a convenience to the customer. The Company procures the computer hardware on the customer’s behalf for a fee determined based on 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.
The Company generates revenue from time to time from the licensing of its U.S. patent, which governs the linkage of on-property reward cards to their counterpart internet gaming 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. The nature of the promise in transferring the license is to provide a right to use the patent as it exists. The Company does not have to undertake activities to change the functionality of the patent during the license period and the license has significant stand-alone functionality. Therefore, the Company recognizes the revenue from the license of the patent at the point in time when control of the license is transferred to the customer. Control is determined to transfer at the point in time the customer is able to use and benefit from the license.
| 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 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
Peer-to-peer poker offerings allow users to play poker against one another on the Company’s online poker platform for prize money. Revenue is recognized as a percentage of the reported rake. Additionally, the Company offers tournament poker which allows users to buy-in for a fixed price for prize money. For tournament play, revenue is recognized for the difference between the entry fees collected and the amounts paid out to users as prizes and winnings.
In each of the online gaming products, a single performance obligation exists at the time a wager is made to operate the games and award prizes or payouts to users based on a particular outcome. Revenue is recognized at the conclusion of each contest, wager, or wagering game hand. Additionally, certain incentives given to users, for example, that allow the user to make an additional wager at a reduced price, may provide the user with a material right which gives rise to a separate performance obligation.
The Company allocates a portion of the user’s wager to incentives that create material rights that are redeemed or expired in the future. The allocated revenue for gaming wagers is primarily recognized when the wagers occur because all such wagers settle immediately.
The Company applies a practical expedient by accounting for revenue from gaming on a portfolio basis because such wagers have similar characteristics, and the Company reasonably expects the effects on the financial statements of applying the revenue recognition guidance to the portfolio to not differ materially from that which would result if applying the guidance to an individual wagering contract.
| 12 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Cost of Revenue
Cost of revenue consists primarily of variable costs. These include mainly (i) content license fees, (ii) payment processing fees and chargebacks, (iii) platform technology, software, and connectivity costs directly associated with revenue generating activities, (iv) gaming duties, and (v) sportsbook feed / provider services. The Company incurs payment processing fees on B2C user deposits, withdrawals, and deposit reversals from payment processors. Cost of revenue excludes depreciation of the servers on which the Company’s gaming platforms reside as well as amortization of intangible assets including internally developed software.
Sales and Marketing
Sales and marketing expense primarily consists of general marketing and advertising costs, B2C user acquisition expenses and personnel costs within our sales and marketing functions. Sales and marketing costs are expensed as incurred.
Product and Technology
Product and technology expense consists 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 expense consists of costs, including gaming operations costs, not related to sales and marketing, product and technology or revenue. General and administrative costs include professional services (including legal, regulatory and compliance, audit, and consulting expenses), rent contingencies, insurance, allowance for credit losses, foreign currency transaction gains and losses, and costs related to the compensation of executive and non-executive personnel, including share-based compensation.
Content Licensing Fees
Content licensing fees are paid to third parties for gaming content which are expensed as incurred. Content licensing fees are calculated as a percentage of net gaming revenues in respect of the third-party games, as stipulated in the third-party agreements.
Share-based compensation expense is recognized for share options and restricted shares issued to employees and non-employee members of the Company’s Board of Directors. The Company’s issued share options and restricted shares, which are primarily considered equity awards and include only service conditions, are valued based on the fair value of these awards on the date of grant. The fair value of the share options is estimated using a Black-Scholes option pricing model and the fair value of the restricted shares (restricted share awards and restricted share units) is based on the market price of the Company’s shares on the date of grant.
Certain restricted share units awards issued to non-employee members of the Company’s Board of Directors permit shares upon vesting to be withheld, as a means of meeting the non-employee director’s tax withholding requirements, and paid in cash to the non-employee director. The Company additionally incurs share-based compensation expense under compensation arrangements with certain of its employees under which the Company will settle bonuses for a fixed dollar amount by issuing a variable number of shares based on the Company’s share price on the settlement date. These awards are classified as liability-based awards which are measured based on the fair value of the award at the end of each reporting period until settled. Related compensation expense is recognized based on changes to the fair value over the applicable service period.
Share-based compensation is recorded over the requisite service period, generally defined as the vesting period. For awards with graded vesting and only service conditions, compensation cost is recorded on a straight-line basis over the requisite service period of the entire award. Forfeitures are recorded in the period in which they occur.
Basic earnings per share is calculated by dividing earnings by the weighted average number of ordinary shares outstanding during the year. In periods of loss, basic and diluted per share information are the same.
Cash
Cash
is comprised of cash held at the bank and third-party service providers. The Company is required to maintain 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, 2023 and December 31, 2022, the related liabilities to users were $
| 13 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Capitalized Software Development Costs, net
The Company capitalizes certain development costs related to its internet gaming platforms during the 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 three to five years, and are included within depreciation and amortization expense in the condensed consolidated statements of operations.
| 14 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
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 into with strategic partners. The market access arrangements authorize the Company to offer online gaming and online sports betting in certain regulated markets. These costs are capitalized and amortized on a straight-line basis over their estimated useful lives, beginning with the commencement of operations.
The fair value of acquired intangible assets is primarily determined using the income approach. In performing these valuations, the Company’s key underlying assumptions used in the discounted cash flows were projected revenue, gross margin 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, 2023, 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.
| 15 |
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 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 the synthetic equity liability due to a customer, refer to Note 16 — Commitments and Contingencies. 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.
| 16 |
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 two operating segments, B2B and B2C. Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess the Company’s performance. The Company’s CODM is the Chief Executive Officer. The CODM allocates resources and assesses performance based upon discrete financial information at the operating segment level.
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires an acquirer to measure and recognize contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers, rather than using fair value on the acquisition date. This amendment is effective for fiscal years beginning after December 15, 2022, including interim periods within those annual periods, and should be applied prospectively to business combinations occurring on or after the effective date. The Company adopted the amended guidance on January 1, 2023, and such adoption did not materially impact the financial statements.
In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock, which amends or supersedes various SEC paragraphs within the Accounting Standards Codification to conform to past SEC announcements and guidance issued by the SEC. The ASU does not provide any new guidance, and as such, there is no transition effective date. ASU 2023-03 did not have a material impact on our condensed consolidated financial statements.
| 17 |
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, 2023 and December 31, 2022 and consisted of the following:
| Estimated Useful | September 30, | December 31, | ||||||||
| Life (in years) | 2023 | 2022 | ||||||||
| Fixtures, fittings and equipment | $ | $ | ||||||||
| Platform hardware | ||||||||||
| Total property and equipment, cost | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Total | $ | $ | ||||||||
Depreciation
expense related to property and equipment was $
| 18 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
NOTE 4 — CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET
Capitalized software development costs, net at September 30, 2023 and December 31, 2022 consisted of the following:
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Capitalized software development costs | $ | $ | ||||||
| Development in progress | ||||||||
| Total capitalized software development, cost | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
At September 30, 2023, 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 $
| 19 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
NOTE 5 — INTANGIBLE ASSETS
Intangible Assets
Definite-lived intangible assets, net consisted of the following:
| Weighted | September 30, 2023 | |||||||||||||||
| Average | Gross | |||||||||||||||
| Amortization | Carrying | Accumulated | Net Carrying | |||||||||||||
| Period (in years) | Amount | Amortization | Amount | |||||||||||||
| Developed technology | $ | $ | ( | ) | $ | |||||||||||
| Customer relationships | ( | ) | ||||||||||||||
| Trade names and trademarks | ( | ) | ||||||||||||||
| Gaming licenses | ( | ) | ||||||||||||||
| $ | $ | ( | ) | $ | ||||||||||||
| Weighted | December 31, 2022 | |||||||||||||||
| Average | Gross | |||||||||||||||
| Amortization | Carrying | Accumulated | Net Carrying | |||||||||||||
| Period (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 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ | |||
| 20 |
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 a fixed term credit facility (the “Credit Facility”) which provides
for $
During
the year ended December 31, 2022, 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.
The carrying values of the Company’s long-term debt consist of the following:
| Effective Interest Rate | As of September 30, 2023 | |||||||
| Credit Facility | ||||||||
| Principal | % | $ | ||||||
| Less unamortized debt issuance costs | ( | ) | ||||||
| Long-term debt, net | $ | |||||||
The
Company incurred $
| 21 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
In April 2020, the Board of Directors established the GAN Limited 2020 Equity Incentive Plan (“2020 Plan”) which has been approved by the Company’s shareholders. The 2020 Plan initially provides for grants of up to ordinary shares, which then increases through 2029, by the lesser of % 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, 2023, 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, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited/expired or cancelled | ( | ) | ||||||||||||||
| Outstanding at September 30, 2023 | $ | $ | ||||||||||||||
| Options exercisable at September 30, 2023 | $ | $ | ||||||||||||||
The Company recorded share-based compensation expense related to share options of $ and $ for the three months ended September 30, 2023 and 2022, respectively and $ and $ for the nine months ended September 30, 2023 and 2022, respectively. Such share-based compensation expense was recorded net of capitalized software development costs of $ and $ for the three months ended September 30, 2023 and 2022, respectively and $ and $ for the nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023, there was total unrecognized compensation cost of $ related to nonvested share options. The unrecognized compensation cost is expected to be recognized over a weighted-average period of years.
Share option awards generally vest % . During the nine months ended September 30, 2023, 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 of these 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, 2023 and 2022, respectively and $and $for the nine months ended September 30, 2023 and 2022, respectively.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Expected share price volatility | n.m. | % | % | n.m. | % | % | ||||||||||
| Expected term (in years) | n.m. | n.m. | ||||||||||||||
| Risk-free interest rate | n.m. | % | % | n.m. | % | % | ||||||||||
| Dividend yield | % | % | % | % | ||||||||||||
For options granted during the nine months ended September 30, 2023, 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. In the current year, volatility, term, and risk-free interest rate were not meaningful inputs as all 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.
| 22 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
In March 2023, 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 restricted share units will be pro-rated for employees if their employment terminates after the first anniversary of the grant date.
During the second quarter of 2023, the Board of Directors approved the issuance of restricted share units to its non-employee directors and employees. The restricted share units vest over four years from the date of grant. The terms of the awards stipulate that vesting of any outstanding restricted share units will be pro-rated for employees if their employment terminates after the first anniversary of the grant date.
In August 2023, the Board of Directors approved the issuance of restricted share units to its non-employee directors and employees. The restricted share units vest over four years from the date of grant. The terms of the awards stipulate that vesting of any outstanding restricted 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 nine months ended September 30, 2023, restricted share units held by the Company’s officers and non-employee directors vested and the Company repurchased of the shares to cover the tax expense incurred by the officers and non-employee directors.
The Company recorded share-based compensation expense related to restricted share units of $and $for the three months ended September 30, 2023 and 2022, respectively, and $ and $for the nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023, there was total unrecognized compensation cost of $ related to non-vested restricted share units. The unrecognized compensation cost is expected to be recognized over a weighted-average period of years.
| 23 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
| Weighted | ||||||||
| Average | ||||||||
| Number of | Grant Date | |||||||
| Shares | Fair Value | |||||||
| Outstanding at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited/expired or cancelled | ( | ) | ||||||
| Outstanding at September 30, 2023 | ||||||||
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 $ and $ for the three months ended September
30, 2023 and 2022, respectively, and $ and $ for the nine months ended September 30, 2023 and 2022, respectively. At September
30, 2023, there was total unrecognized compensation cost of $ related to the nonvested shares granted. The cost is expected to be recognized
over a weighted average period of years. There were
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.
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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 16 – 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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Other income (1) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| Other loss (2) | ||||||||||||||||
| Other income, net | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
| (1) | ||
| (2) |
Loss per ordinary share, basic and diluted, is computed by dividing net loss by the weighted average number of ordinary shares outstanding during the period. Potentially dilutive securities consisting of certain share options, nonvested restricted shares and restricted share units were excluded from the computation of diluted weighted average ordinary shares outstanding as inclusion would be anti-dilutive, are summarized as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Share options | ||||||||||||||||
| Restricted shares | ||||||||||||||||
| Restricted share units | ||||||||||||||||
| Total | ||||||||||||||||
NOTE 11 — REVENUE
The following table reflects revenue recognized for the three and nine months ended September 30, 2023 and 2022 in line with the timing of transfer of services:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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.
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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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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, 2023 and 2022 is as follows:
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| B2B | B2C | Total | B2B | B2C | Total | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenue (1) | ||||||||||||||||||||||||
| Segment contribution | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (1) |
During
the three months ended September 30, 2023 and 2022, one customer in the B2B segment individually accounted for
Summarized financial information by reportable segments for the nine months ended September 30, 2023 and 2022 is as follows:
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| B2B | B2C | Total | B2B | B2C | Total | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of revenue (1) | ||||||||||||||||||||||||
| Segment contribution | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (1) |
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GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
During
the nine months ended September 30, 2023 and 2022, one customer in the B2B segment individually accounted for
The following table presents a reconciliation of segment gross profit to the consolidated loss before income taxes for the three and nine months ended September 30, 2023 and 2022:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Segment contribution (1) | $ | $ | $ | $ | ||||||||||||
| Sales and marketing | ||||||||||||||||
| Product and technology | ||||||||||||||||
| General and administrative (1) | ||||||||||||||||
| Impairment | ||||||||||||||||
| Restructuring | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Other income, net | ( | ) | ( | ) | ( | ) | ||||||||||
| 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.
| 27 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
The following table disaggregates total revenue by product and services for each segment:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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, 2023 and 2022 is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||
| Europe | ||||||||||||||||
| Latin America | ||||||||||||||||
| Rest of the world | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
NOTE 13 — INCOME TAXES
The
Company’s effective income tax rate was
Our
country of domicile is Bermuda, which effectively has a
NOTE 14 — RESTRUCTURING
In
January 2022, the Company implemented a strategic reduction of its existing worldwide global workforce to simplify and
streamline its organization and strengthen the overall competitiveness of its B2B segment. As a result of this initiative, the
Company incurred $
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GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
NOTE 15 — 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, 2023, 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.
Operating Leases - Lessee
The following table discloses the operating asset and liability balances at September 30, 2023 and December 31, 2022:
| As of | ||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||
| Leases | Classification | |||||||||
| 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.
| 29 |
GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
Operating
lease costs were $
Maturities of lease liabilities, including reconciliation to the lease liabilities, based on required contractual payments, are as follows:
| Operating Leases | ||||
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| 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, 2023 and 2022 was as follows:
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| 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 | $ | $ | ||||||
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GAN LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share amounts)
NOTE 16 — COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company may be subject to legal actions and claims arising from contracts or other matters f