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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q/A

Amendment No. 1

 

 

 

(Mark One)

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021

 

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. 001-39274

 

 

GAN Limited

(Exact name of registrant as specified in its charter)

 

 

 

Bermuda   Not Applicable
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
400 Spectrum Center Drive, Suite 1900, Irvine, California   92618
(Address of principal executive offices)   (Zip Code)

 

(702) 964-5777

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Ordinary shares, par value $0.01   GAN   The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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 ☐   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 ☐ No ☒

 

At August 3, 2021, there were 42,017,684 ordinary shares outstanding.

 

 

 

 

 

 

EXPLANATORY NOTE

 

GAN Ltd, (the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (this “Amendment No. 1”) to amend its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021, filed with the Securities and Exchange Commission (the “SEC”) on August 16, 2021 (the “Original Form 10-Q”). The purpose of this Amendment No. 1 is to restate our previously issued unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2021, contained in the Original Form 10-Q (the “Restatement”).

 

Restatement Background

 

In connection with the preparation of the Company’s financial statements for the year ended December 31, 2021, the Company performed reviews of various process and the Company identified errors in the accounting for capitalized software development costs, as well as errors relating to the recognition of revenue associated with certain contractual deliverables. Based on this review, the Company determined that it improperly included employee costs for individuals that were not performing development activities within the capitalization process, and determined that a portion of the initial revenue recognized at the onset of certain customer contracts should instead have been recognized over the full term of the contract as the performance obligations were not complete during the periods at which such revenues were recognized. The effects of the error resulted in an overstatement of capitalized software development costs and revenue, resulting in an increase of previously reported net loss by $1.0 million and $2.2 million for the three and six months ended June 30, 2021, respectively. See Note 2 — Restatement of Prior Financial Information, for additional information.

 

The Company’s management and the Audit Committee of the Company’s Board of Directors determined that a material weakness existed in the Company’s internal control over financial reporting due to the lack of precision of management review controls that would prevent or detect material misstatements. This material weakness in the Company’s internal control over financial reporting resulted in the overstatement of capitalized software development costs and accelerated recognition of revenues. As such, Item 4 of Part I has been amended for our assessment of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Exchange Act. Refer to Controls and Procedures in Part I, Item 4.

 

Items Amended in this Amendment No. 1

 

The Amendment sets forth the information in the Original Filing in its entirety, as adjusted for the effects of the Restatement. The following items have been amended to reflect the Restatement:

 

  ● Part I, Item 1, Financial Statements
  ● Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations
  ● Part I, Item 4, Controls and Procedures
  ● Part II, Item 1A, Risk Factors
  ●

Part II, Item 6, Exhibits

 

Except as described above this Amendment No. 1 does not amend, update or change any other disclosures in the Original Form 10-Q. In addition, the information contained in this Amendment No. 1 does not reflect events occurring after the Original Form 10-Q and does not modify or update the disclosures therein, except to reflect the effects of the Restatement.

 

This Amendment includes new certifications from the Company’s Chief Executive Officer and Chief Financial Officer dated as of the date of filing of this Amendment, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. 

 

2

 

 

GAN LIMITED

FORM 10-Q/A

INDEX

 

    Page
  PART I - FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited) (Restated) 4
  Condensed Consolidated Balance Sheets as of June 30, 2021 (Restated) and December 31, 2020 4
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021 (Restated) and 2020 5
  Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2021 (Restated) and 2020 6
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2021 (Restated) and 2020 7
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 (Restated) and 2020 8
  Notes to Condensed Consolidated Financial Statements (Restated) 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated) 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 43
Item 4. Controls and Procedures (Restated) 44
  PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 45
Item 1A. Risk Factors 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 45
Item 6. Exhibits 46
  SIGNATURES 47

 

3

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Restated)

 

GAN LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share amounts)

 

   June 30,
2021		   December 31,
2020		 
   (Restated)     
ASSETS          
Current assets          
Cash  $52,086   $152,654 
Accounts receivable, net of allowance for doubtful accounts of $197 and $100 at June 30, 2021 and December 31, 2020, respectively   12,201    6,818 
Prepaid expenses   2,384    1,912 
Other current assets   2,099    2,112 
Total current assets   68,770    163,496 
           
Capitalized software development costs, net   10,393    6,648 
Goodwill   154,534    — 
Intangible assets, net   41,611    468 
Other assets   7,647    2,634 
Total assets  $282,955   $173,246 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable  $4,146   $4,926 
Accrued compensation and benefits   7,987    4,956 
Accrued expenses   5,405    3,363 
Liabilities to users   7,389    — 
Other current liabilities   3,860    4,067 
Total current liabilities   28,787    17,312 
           
Deferred income taxes   2,192    — 
Other liabilities   1,548    370 
Total liabilities   32,527    17,682 
           
Stockholders’ equity          
Ordinary shares, $0.01 par value, 100,000,000 shares authorized, 42,015,674 and 36,635,362 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively   420    365 
Additional paid-in capital   315,055    203,842 
Accumulated deficit   (55,135)   (45,766)
Accumulated other comprehensive loss   (9,912)   (2,877)
Total stockholders’ equity   250,428    155,564 
Total liabilities and stockholders’ equity  $282,955   $173,246 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4

 

 

GAN LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except share and per share amounts)

 

    1     2     3     4  
   Three Months Ended
June 30,		   Six Months Ended
June 30,		 
   2021   2020   2021   2020 
   (Restated)       (Restated)     
Revenues  $34,350   $8,323   $61,468   $15,993 
                     
Operating costs and expenses                    
Cost of revenues (1)   10,356    2,123    19,075    3,815 
Sales and marketing   5,480    1,642    9,581    2,505 
Product and technology   4,829    5,173    10,072    6,197 
General and administrative (1)   12,320    7,786    22,329    10,177 
Depreciation and amortization   4,132    716    8,126    1,569 
Total operating costs and expenses   37,117    17,440    69,183    24,263 
Operating loss   (2,767)   (9,117)   (7,715)   (8,270)
Interest expense, net   —    382    1    390 
Loss before income taxes   (2,767)   (9,499)   (7,716)   (8,660)
Income tax provision   992    170    1,653    315 
Net loss  $(3,759)  $(9,669)  $(9,369)  $(8,975)
                     
Loss per share, basic and diluted  $(0.09)  $(0.37)  $(0.22)  $(0.38)
                     
Weighted average ordinary shares outstanding, basic and diluted   41,931,948    26,227,944    41,912,285    23,870,084 

 

(1)Excludes depreciation and amortization

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5

 

 

GAN LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

 

   (Restated)     2   (Restated)     3 
   Three Months Ended
June 30,		   Six Months Ended
June 30,		 
   2021   2020   2021   2020 
   (Restated)       (Restated)     
Net loss  $(3,759)  $(9,669)  $(9,369)  $(8,975)
Other comprehensive income (loss), net of tax                    
Foreign currency translation adjustments   2,443    41    (7,035)   (1,279)
Comprehensive loss  $(1,316)  $(9,628)  $(16,404)  $(10,254)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6

 

 

GAN LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share amounts)

 

         1     2     3     4     5  
                   Accumulated     
   Ordinary Shares   Additional Paid-in   Accumulated   Other Comprehensive   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Loss   Equity 
                               
Balance at December 31, 2020   36,635,362   $365   $203,842   $(45,766)  $(2,877)  $155,564 
Net loss (Restated)   —    —    —    (5,610)   —    (5,610)
Foreign currency translation adjustments   —    —    —    —    (9,478)   (9,478)
Share-based compensation expense   —    —    1,632    —    —    1,632 
Issuance of ordinary shares upon exercise of stock options   108,222    1    314    —    —    315 
Issuance of ordinary shares as partial consideration in Coolbet acquisition (Note 5)   5,260,516    53    106,630    —    —    106,683 
Fair value of replacement equity awards issued as consideration in Coolbet acquisition (Note 5)   —    —    297    —    —    297 
Balance at March 31, 2021   42,004,100   $419   $312,715   $(51,376)  $(12,355)  $249,403 
Net loss (Restated)   —    —    —    (3,759)   —    (3,759)
Foreign currency translation adjustments   —    —    —    —    2,443    2,443 
Share-based compensation expense   —    —    2,319    —    —    2,319 
Restricted stock activity   5,178    1    (1)   —    —    — 
Issuance of ordinary shares upon exercise of stock options   6,396    —    22    —    —    22 
Balance at June 30, 2021   42,015,674   $420   $315,055   $(55,135)  $(9,912)  $250,428 

 

                   Accumulated     
   Ordinary Shares   Additional Paid-in   Accumulated   Other Comprehensive   Total Stockholders’ 
   Shares   Amount   Capital   Deficit   Loss   Equity 
                               
Balance at December 31, 2019   21,486,059   $215   $40,862   $(23,024)  $(2,908)  $15,145 
Net income   —    —    —    694    —    694 
Foreign currency translation adjustments   —    —    —    —    (1,320)   (1,320)
Share-based compensation expense   —    —    295    —    —    295 
Issuance of ordinary shares upon exercise of stock options   64,908    1    86    —    —    87 
Balance at March 31, 2020   21,550,967   $216   $41,243   $(22,330)  $(4,228)  $14,901 
Net loss   —    —    —    (9,669)   —    (9,669)
Foreign currency translation adjustments   —    —    —    —    41    41 
Share-based compensation expense   —    —    4,225    —    —    4,225 
Issuance of restricted stock awards   93,680    —    —    —    —    — 
Proceeds from issuance of shares in initial public offering, net of issuance costs of $7,075   7,337,000    73    55,216    —    —    55,289 
Cash consideration paid to GAN plc shareholders   —    —    —    (2,525)   —    (2,525)
Issuance of ordinary shares upon exercise of stock options   678,613    6    2,104    —    —    2,110 
Balance at June 30, 2020   29,660,260   $295   $102,788   $(34,524)  $(4,187)  $64,372 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

7

 

 

GAN LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

    1     2  
   Six Months Ended
June 30,		 
   2021   2020 
   (Restated)     
Operating Activities          
Net loss  $(9,369)  $(8,975)
Adjustments to reconcile net loss to net cash from operating activities:          
Amortization of software and intangible assets   7,624    1,439 
Depreciation on property and equipment and finance lease right-of-use assets   502    122 
Share-based compensation expense   3,951    4,520 
Other   139    (19)
Changes in operating assets and liabilities, net of acquisition:          
Accounts receivable   (5,354)   (1,239)
Prepaid expenses   342    118 
Other current assets   573    (634)
Other assets   97    1,163 
Accounts payable   (2,094)   434 
Accrued compensation and benefits   1,804    4,740 
Accrued expenses   2,500    307 
Liabilities to users   2,204    — 
Other current liabilities   (959)   (477)
Other liabilities   1,177    209 
Net cash from operating activities   3,137    1,708 
           
Investing Activities          
Cash paid for acquisition, net of cash acquired   (92,404)   — 
Expenditures for capitalized software development costs   (5,320)   (1,748)
Payment of content licensing fee   (3,500)   — 
Purchases of gaming licenses   (207)   (12)
Purchases of property and equipment   (1,093)   (630)
Net cash used in investing activities   (102,524)   (2,390)
           
Financing Activities          
Proceeds received from issuance of ordinary shares in initial public offering, net   —    57,445 
Payments of offering costs   (604)   (1,678)
Proceeds from exercise of stock options   337    2,197 
Cash consideration paid to GAN plc shareholders   —    (2,525)
Principal payments on finance leases   (54)   (90)
Net cash from (used in) financing activities   (321)   55,349 
           
Effect of foreign exchange rates on cash    (860)   (888)
           
Net increase (decrease) in cash    (100,568)   53,779 
Cash, beginning of period   152,654    10,279 
Cash, end of period  $52,086   $64,058 
           
Supplemental Disclosure of Cash Flow Information:          
Ordinary shares issued as partial consideration to acquire all the outstanding shares of Coolbet (Note 5)  $106,683   $— 
Issuance of unvested stock options in exchange for unvested stock options of Coolbet (Note 5)   297    — 
Right-of-use asset obtained in exchange for new operating lease liabilities   252    — 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

8

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 1 — NATURE OF OPERATIONS

 

GAN Limited (the “Parent,” and with its subsidiaries, collectively the “Company”) is an exempted company limited by shares, incorporated and registered in Bermuda. GAN plc, the previous parent, began its operations in the United Kingdom (“U.K.”) in 2002 and listed its ordinary shares on the AIM, the London Stock Exchange’s market for smaller companies, in 2013. In May 2020, pursuant to a statutory Scheme of Arrangement under Part 26 of U.K Companies Act of 2006 (“Scheme of Arrangement”) approved by the shareholders of GAN plc, the shareholders of GAN plc exchanged their shares in GAN plc for shares in the Parent, thereby migrating the Company’s jurisdiction of organization from the U.K. to Bermuda. Thereafter, GAN Limited became the parent company of GAN plc. GAN plc was renamed GAN (UK) Limited (“GAN UK”).

 

The Company is a business-to-business (“B2B”) supplier of Internet gambling Software-as-a-Service (“SaaS”) solutions predominately to the U.S. land-based casino industry and a business-to-consumer (“B2C”) developer and operator of an online sports betting and casino platform. The Company has developed a proprietary Internet gambling enterprise software system, GameSTACK™ (“GameSTACK”), which it licenses to land-based casino operators as a turnkey technology solution for regulated real money Internet gambling (“RMiG”), Internet sports gaming, and virtual simulated gaming (“SIM”).

 

The Company operates in two operating segments – B2B and B2C. The Company’s B2B segment is involved in the design, development and licensing of sports betting and casino gaming software to land-based casino operators. The Company’s B2C segment provides international users with access to its sportsbook, casino games and poker products.

 

On January 1, 2021, the Company acquired all of the outstanding shares of Vincent Group p.l.c., a Malta public limited company doing business as Coolbet (Note 5). Coolbet is a developer and operator of an online sports betting and casino platform. Coolbet operates a B2C casino and sports-betting platform that is accessible through its website in nine national markets across Northern Europe (Estonia, Finland, Iceland, Norway and Sweden), Latin America (Chile, Ecuador, and Peru) and North America (Canada).

 

NOTE 2 — RESTATEMENT OF PRIOR FINANCIAL INFORMATION

 

In connection with the preparation of the Company’s consolidated financial statements as of December 31, 2021, the Company has identified errors made in the Company’s historical condensed consolidated financial statements for the three and six months ended June 30, 2021. The errors primarily relate to (i) improperly capitalized costs for non-developers that did not meet the criteria of development activities in accordance with the applicable guidance and (ii) significant customization services provided during the set-up of RMiG instances, previously recognized at a point in time, which are only provided by the company and are not distinct. The related consideration should be allocated to the separately identifiable performance obligation consisting of access to the SaaS platform, recognized over time as the Company provides services to its customer in its delivery of services to the player end user. The impact of correcting the improperly capitalized costs is to reverse the capitalized costs and related amortization expense and recognize the expense within product and technology expense. The impact of correcting the revenues improperly recognized at a point in time is to reverse the revenues and recognize contract liabilities, as well as a pro-rata portion of the fixed fees as revenues for the period of the contract completed to date.

 

The following table summarizes the effect of the Restatement on the condensed consolidated balance sheet as of June 30, 2021:

 

   As Reported   Adjustment   As Restated 
Accounts receivable, net of allowance for doubtful accounts of $197 June 30, 2021   $11,976   $225   $12,201 
Capitalized software development costs, net   11,555    

(1,162

)   10,393 
Total assets   283,892    (937)   282,955 
Other current liabilities   

3,716

    

144

    

3,860

 
Other liabilities   

463

    

1,085

    

1,548

 
Total liabilities   

31,298

    

1,229

    

32,527

 
Accumulated deficit   (52,960)   (2,175)   (55,135)
Accumulated other comprehensive loss   (9,921)   

9

    (9,912)
Total stockholders’ equity   252,594    (2,166)   250,428 
Total liabilities and stockholders’ equity   283,892    (937)   282,955 

 

9

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

The following table summarizes the effect of the Restatement on the condensed consolidated statement of operations for the three months ended June 30, 2021:

 

   As Reported   Adjustment   As Restated 
Revenues  $34,628   $(278)  $34,350 
Product and technology  4,055   774   4,829 
General and administrative (1)  12,326   (6)  12,320 
Depreciation and amortization  4,149   (17)  4,132 
Total operating costs and expenses  36,366   751   37,117 
Operating loss  (1,738)  (1,029)  (2,767)
Loss before income taxes  (1,738)  (1,029)  (2,767)
Net loss  (2,730)  (1,029)  (3,759)
Loss per share, basic and diluted  $(0.07)  $(0.02)  $(0.09)

 

(1)Excludes depreciation and amortization

 

The following table summarizes the effect of the Restatement on the condensed consolidated statement of operations for the six months ended June 30, 2021:

 

   As Reported   Adjustment   As Restated 
Revenues  $62,470   $(1,002)  $61,468 
Product and technology   8,905    1,167    10,072 
General and administrative (1)   22,337    (8)   22,329 
Depreciation and amortization   8,112    14    8,126 
Total operating costs and expenses   68,010    1,173    69,183 
Operating loss   (5,540)   (2,175)   (7,715)
Loss before income taxes   (5,541)   (2,175)   (7,716)
Net loss   (7,194)   (2,175)   (9,369)
Loss per share, basic and diluted  $(0.17)  $(0.05)  $(0.22)

 

(1)Excludes depreciation and amortization

 

The following table summarizes the effect of the Restatement on the condensed consolidated statement of cash flows for the six months ended June 30, 2021:

 

   As Reported   Adjustment   As Restated 
Net loss  $(7,194)  $(2,175)  $(9,369)
Amortization of software and intangible assets   7,610    14    7,624 
Accounts receivable   (5,129)   (225)   (5,354)
Other current liabilities   (1,101)   142    (959)
Other liabilities   92    1,085    1,177 
Net cash from operating activities   4,296    (1,159)   3,137 
Expenditures for capitalized software development costs   (6,479)   1,159    (5,320)
Net cash used in investing activities   (103,683)   1,159    (102,524)

 

10

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 3 — BASIS OF PRESENTATION

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission for interim reporting. 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 six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ended December 31, 2021 or for any future annual or interim period. The condensed consolidated balance sheet as of December 31, 2020 included herein was derived from the audited consolidated financial statements as of that date. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Form 10-K”).

 

Share Exchange and Reorganization

 

On May 5, 2020, GAN Limited completed a share exchange and reorganization pursuant to a Scheme of Arrangement, whereby the shareholders of GAN plc agreed to exchange their ordinary shares on a basis of four ordinary shares to one ordinary share, for shares of GAN Limited, plus a pro rata portion of an aggregate of $2,525 (£2,004 or 2.32 pence per share) in cash (“Share Exchange”). Immediately subsequent to the Share Exchange, the shareholders of GAN Limited held the same economic interest as they had in GAN plc prior to the Share Exchange. Holders of share options in GAN plc also received reciprocal share options as applicable, in GAN Limited. The condensed consolidated financial statements have been prepared as if GAN Limited had been the parent entity for the periods presented. All share and per share amounts prior to the date of the share exchange and reorganization in these condensed consolidated financial statements have been retroactively adjusted to give effect to the Share Exchange.

 

NOTE 4 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company’s significant accounting policies are included in “Note 3 – Summary of Significant Accounting Policies” of its 2020 Form 10-K. In addition to repeating some of these significant accounting policies, the Company has added significant accounting policies during the six months ended June 30, 2021 below.

 

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 the future periods.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the results of the Parent and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

 

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 stockholders’ 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 $2,443 and $(7,035) for the three and six months ended June 30, 2021, respectively. Foreign currency transaction and remeasurement gains and losses were a net gain (loss) of $41 and $(1,279) for the three and six months ended June 30, 2020, respectively.

 

11

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Risks and Uncertainties – COVID-19

 

The coronavirus disease 2019 (“COVID-19”) pandemic, which was declared a national emergency in the United States in March 2020, has significantly impacted the economic conditions and financial markets around the world. The closure of land-based casinos, social distancing, shelter-in-place, and similar restrictions implemented in response to the COVID-19 pandemic led to increases in the Company’s existing and new player activity in its online iGaming offerings as compared to historic trends, primarily at the start of the second quarter of 2020. Player activity in connection with the iGaming business has generally returned to pre-pandemic levels, or in certain cases, has increased, following the re-opening of land-based casinos and easing of local restrictions.

 

In certain of its international markets in which the Company’s B2C business has entered into recently (and has experienced significant growth during the first two quarters of 2021), it is not possible for the Company to estimate the impact, if any, the closure and re-opening of land-based casinos may have had, or may have, on its past or future operating results as the Company does not have any pre-COVID-19 comparative information for these markets.

 

Operating results in connection with the Company’s sports betting offerings, which initially declined due to the postponement and cancellation of major sporting events, are trending positively as compared to pre-pandemic levels following the return of sporting events (albeit at limited capacities for certain events). Primarily during the first three quarters of 2020, the cancellation of certain sporting events reduced related sports betting transactions, although the Company did experience slight increases in casino revenues as a result. While most sporting events have now resumed (some of which are held behind closed-doors or at limited capacities in stadiums), uncertainties still remain around these and other upcoming large-scale sporting events which can create higher volatility in the sports betting markets and may adversely impact the Company’s future financial results.

 

While the Company’s iGaming business has proven resilient during the pandemic, the ultimate impact of the pandemic on our operating results is unknown and will depend, in part, on the length of time COVID-19 disruptions exist and the subsequent behavior of players after restrictions are fully lifted. A recurrence of COVID-19 cases or an emergence of additional variants could adversely impact the Company’s future financial results, though results from the Company’s iGaming business may partially offset any reduction to the Company’s sports betting transactions. Significant uncertainties continue to exist as it relates to the magnitude of impact and duration of the COVID-19 pandemic. The Company has considered the impact of COVID-19 on its accounting policies, judgments and estimates as part of the preparation of these condensed consolidated financial statements.

 

Management and the Board of Directors are monitoring the impacts of COVID-19 on the Company’s operations and have not identified any major operational challenges through the date of issuance of these condensed consolidated financial statements. The Company has not experienced significant impacts to its liquidity to date. COVID-19 may impact the Company’s ability to access capital to the extent it affects the U.S capital markets. The Company has assessed the extent to which COVID-19 has impacted events after the reporting date and has not identified additional items to disclose as a result.

 

12

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Revenue Recognition

 

Platform and Content Fees

 

The Company’s platform and content revenues are generated primarily from its Internet gambling SaaS platform, GameSTACK, that its customers use to provide real money and simulated Internet gaming, and online sports betting. The Company enters into service agreements with its customers, that generally range from three to five years, and includes renewal provisions, under which it charges fees based on a percentage of the operator’s net gaming revenue or net sports win at the time of settlement of an event for real money gaming, considered usage-based fees, or at the time of purchase for in-game virtual credit for simulated gaming. The customers cannot take possession of the hosted software. Further, the Company generates revenues from the licensing of proprietary and third-party branded games (collectively “content licensing services”) hosted on the platform.

 

The Company’s promise to provide the RMiG SaaS platform and content licensing services on the hosted software is a single performance obligation. This performance obligation is recognized over time, as the Company provides services to its customer 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 generally due thirty days from the date of 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.

 

Purchases of virtual credits within a transaction period on the SIM platform, generally a monthly convention, are earned at a point in time, 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 SIM customers, the Company receives the fees for in-game virtual credit purchases made by end-user players and remits payment to the SIM casino operator (customer) for their share of the SIM revenues generated from the Company’s platform. At June 30, 2021 and December 31, 2020, the Company has recorded a liability of $1,957 and $2,520, respectively, for its customers’ share of the fees within other current liabilities in the condensed consolidated balance sheets.

  

The Company’s RMiG and SIM enterprise software platform offerings include iGaming content licensing services. The GameSTACK platform is capable of supporting, and is available to the customer, for both proprietary and third-party licensed gaming content. The customer, in this case the casino operator, generally controls the determination of which gaming content will be offered in their online casinos.

 

A customer can utilize the Company’s proprietary or licensed gaming content, or a customer can direct the Company to procure third-party gaming content on its behalf. The Company has determined it acts as the principal for providing the content licensing services when the Company controls the gaming content, and therefore presents the revenue on a gross basis in the consolidated statements of operations. When the customer directs the Company to procure third-party gaming content, the Company determined it is deemed an agent for providing the content licensing services, and therefore, records the revenue, net of licensing costs paid to the suppliers of that gaming content, in the consolidated statements of operations.

 

Gaming

 

The Company operates the B2C gaming site www.Coolbet.com outside of the U.S., which is built on 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 events. When a user’s wager wins, the Company pays the user a pre-determined amount known as fixed odds. Revenue from 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 2,000 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 from poker is reported at rake, less tournament costs and customer bonuses.

 

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. Such user incentives are recognized as a reduction to revenue upon redemption or as revenue when the incentive expires.

 

13

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Development Services

 

Gaming Development Services

 

Revenue is generated from fees for development of games for use on its RMiG and SIM platforms. The development revenue is recognized at the point in time when control of the game is transferred, typically the earlier of the customer’s acceptance or upon receipt of the certification of the game.

 

Platform Development Services

 

Platform development services consist of fees charged for ongoing development services to provide updates to the RMiG platforms for enhanced functionality or customization. Ongoing platform development services are typically billed monthly, at a daily rate, for services performed. Revenue from RMiG platform development services are considered additional distinct promises to the customer as they access the platform in a single-tenant architecture, the added features provide new, discrete capabilities independent of the original features and provide independent value to the customer. Revenue is recognized over time as the Company performs the services. For development services charged at a daily rate, revenue is measured using an input method based on effort expended, which uses direct labor hours incurred. As the performance obligations in these instances relate to the provision of development services over time, this method best reflects the transfer of control as the Company performs. In contracts that require a portion of the consideration to be received in advance, at the commencement of the contract, such advance payment is initially recorded as a contract liability.

 

Computer Hardware Sales

 

The Company resells third-party hardware, such as computing servers and other technical devices, upon which the GameSTACK software platform is installed for its customers, however the platform remains remotely controlled and maintained by the Company. Customers cannot take possession of the platform even when hosted on hardware that is owned by the customer or on third-party hardware. Neither the customer nor the Company retain substantially all of the economic benefits from their use of the hardware. These products are not required to be purchased in order to access the GameSTACK platform but are sold as a convenience to the customer. Revenue is recognized at the point in time when control of the hardware transfers to the customer. Control is transferred after the hardware has been procured, delivered, installed at the client’s premises and configured to allow for remote access.

 

The Company has determined that it is acting as the principal in these transactions as it takes responsibility for procuring, delivering, installing and configuring the hardware at the customer’s location and takes control of the hardware, prior to transfer. Revenue is presented at the gross amount of consideration to which it is entitled from the customer in exchange for the hardware.

 

Patent Licensing Revenue

 

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 gambling accounts together with bilateral transmission of reward points between the Internet gambling 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.

 

14

 

 

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. Customer contracts can include platform and content services as well as development services or hardware sales. The variable consideration is allocated entirely to the performance obligation for platform and content services as the variable consideration is allocable specifically to the delivery of the services in the period and the allocation is consistent with the allocation objective.

 

For gaming, 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.

 

Cash

 

The Company is required to maintain compensating cash balances to satisfy its liabilities to users. Such balances are included within cash on the condensed consolidated balance sheets and are not subject to creditor claims. At June 30, 2021 the related liabilities to users was $7,389.

 

Goodwill

 

Goodwill represents the excess of the fair value of the consideration transferred over the estimated fair values of the identifiable assets acquired and liabilities assumed on the acquisition date. As disclosed in Note 5, the Company has recorded goodwill in connection with the acquisition of Coolbet on January 1, 2021. Goodwill is not amortized, but rather is reviewed for impairment annually or more frequently if facts or circumstances indicate that the carrying value may not be recoverable.

 

The Company has determined that there are two reporting units: B2C and B2B. In its goodwill impairment testing, the Company has the option to perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of the reporting unit, including goodwill, is less than its carrying amount prior to performing the quantitative impairment test. The qualitative assessment evaluates various events and circumstances, such as macro-economic conditions, industry and market conditions, cost factors, relevant events and financial trends that may impact a reporting unit’s fair value. If it is determined that the estimated fair value of the reporting unit is more-likely-than not less than its carrying amount, including goodwill, the quantitative goodwill impairment test is required. Otherwise, no further analysis would be required.

 

If the quantitative impairment test for goodwill is deemed necessary, this quantitative impairment analysis compares the fair value of the Company’s reporting unit to its related carrying value. If the fair value of the reporting unit is less than its carrying amount, goodwill is written down to the fair value and an impairment loss is recognized. If the fair value of the reporting unit exceeds its carrying amount, no further analysis is required. Fair value of the reporting unit is determined using valuation techniques, primarily using discounted cash flow analysis.

 

The Company will perform its annual impairment review of goodwill as of October 1st and when events or circumstances change between annual impairment tests that may indicate that it is more-likely-than-not the fair value of a reporting unit may be below its carrying amount.

 

Long-lived Assets

 

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.

 

The fair value of the acquired intangible assets is primarily determined using the income approach. In performing these valuations, the Company’s key underlying assumptions used in the discounted cash flows were projected revenue, gross margin expectations and operating cost estimates. There are inherent uncertainties and management judgment required in these valuations.

 

Acquired in-process technology consists of a proprietary technical platform. The Company reviews the in-process technology for impairment at least annually or more frequently if an event occurs creating the potential for impairment, until such time as the in-process technology efforts are completed. When completed, the developed technology will be amortized over its estimated useful life based on and using amortization methods that reflect the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. The technology is expected to be completed in the latter part of 2021.

 

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 are 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.

 

15

 

 

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 software 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 software platform.

 

Capitalized software development costs are amortized on a straight-line basis over their estimated useful lives, which is generally three years, and are included within depreciation and amortization in the condensed consolidated statements of operations.

 

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.

 

Share-based Compensation

 

Share-based compensation expense is recognized for stock options and restricted stock issued to employees and non-employee members of the Company’s Board of Directors based on the fair value of these awards on the date of grant. The fair value of the stock options is estimated using a Black-Scholes option pricing model and the fair value of the restricted stock (restricted stock awards and restricted stock units) is based on the market price of the Company’s stock on the date of grant. The Company’s stock options and restricted stock issued have service conditions and are considered equity awards.

 

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.

 

Reclassifications of Prior Period Amounts

 

Certain prior period amounts have been reclassified to conform to the current period presentation. Specifically, due to the Coolbet acquisition of Vincent Group p.l.c. in 2021, the Company has reclassified certain balances that were previously presented in separate balance sheet captions to other current and noncurrent assets, other accrued expenses, and other current and noncurrent liabilities in the condensed consolidated balance sheet as of December 31, 2020. These reclassifications had no impact on previously disclosed amounts for current assets, current liabilities, total assets and total liabilities.

 

16

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 5 — ACQUISITION OF VINCENT GROUP P.L.C.

 

On January 1, 2021, the Company acquired all of the outstanding shares of Vincent Group p.l.c. (“Coolbet”). The Company acquired Coolbet to take advantage of Coolbet’s user interface and proprietary technical platform, to quickly integrate and offer a proprietary sportsbook offering to land-based casino operators in the U.S. The Company intends to continue to operate in the U.S. solely as a B2B provider to casinos and other operators. The addition of a proprietary sports betting engine will give the Company the ability to offer a “one-stop” solution to U.S. retail casino operators, while at the same time preserving the flexibility to incorporate third-party solutions when specified. The Company expects that its technology platform and expansive library of proprietary and third-party gaming content should enable it to add additional casino gaming content and platform support for the Company’s B2C offering in Europe and Latin America. The following table summarizes the consideration transferred and the recognized amounts of identifiable assets acquired and liabilities assumed at the acquisition date:

 

Fair value of the consideration transferred:

 

      
Cash paid to Vincent Group shareholders  $111,118 
Restricted ordinary shares issued to Vincent Group shareholders (1)   106,683 
Replacement equity-based awards to holders of Vincent Group equity-based awards (2)   297 
Total  $218,098 

 

(1)The share consideration represents 5,260,516 ordinary shares issued to the Vincent Group shareholders multiplied by the Company’s share price of $20.28 on the acquisition date. These unregistered shares were issued subject to a contractual lock-up period that further restricts the ability of these shares to be transferred or sold.

 

(2)The replacement equity-based awards consist of options to purchase 67,830 shares of the Company’s ordinary shares. In accordance with the applicable accounting guidance, the fair value of replacement equity-based awards attributable to pre-combination service is recorded as part of the consideration transferred in the acquisition, while the fair value of the replacement equity-based awards attributable to post-combination service is recorded separately from the business combination and recognized as compensation cost in the post-acquisition period over the remaining service period. The fair value of the replacement awards was estimated using the Black-Scholes option pricing model utilizing various assumptions. The vesting terms and conditions of the unvested options were replaced with terms identical to those of the original awards.

 

Recognized amounts of identifiable assets acquired and liabilities assumed at fair value:

 

      
Cash  $18,714 
Prepaid expenses and other current assets   1,512 
Property and equipment   343 
Operating lease right-of-use assets   416 
Intangible assets   48,370 
Other noncurrent assets   73 
Accounts payable   (1,182)
Liabilities to users   (5,373)
Other current liabilities   (1,797)
Operating lease liabilities   (167)
Deferred income taxes   (2,265)
Noncurrent operating lease liabilities   (231)
Total identifiable net assets   58,413 
Goodwill   159,685 
 Total identifiable assets acquired and liabilities assumed including goodwill, net  $218,098 

 

17

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Identifiable intangible assets acquired as part of the acquisition, including their respective expected useful lives, were as follows:

 

  

Estimated

useful life

(in years)

   Fair Value 
Trade names and trademarks  10.0   $5,800 
Developed technology  3.0    28,100 
In-process developed technology  —    8,400 
Customer relationships  3.0    5,600 
Licenses  various    470 
       $48,370 

 

The Company has not finalized the purchase price allocation, which is pending further analysis of the net assets acquired. The above cash consideration is subject to adjustment for the final working capital adjustment. Additionally, the Company is continuing to evaluate the tax impacts related to the acquisition. Accordingly, the purchase price allocation shown above could change materially. The Company recorded a net deferred income tax liability of $2,265 associated with the intangible assets recorded in the acquisition accounting.

 

The Company accounted for the acquisition of Coolbet using the acquisition method. The acquisition is treated as a stock purchase for accounting purposes. The goodwill is primarily attributable to the expected incremental revenue and profit to be derived from the Company’s introduction of Coolbet’s sports betting engine technology and intellectual technology to B2B customers in the U.S. and the assembled workforce of Coolbet. The Company intends to offer the Coolbet sports betting engine and associated capability to existing and new customers alongside its existing platform and Internet casino capability, as a complete turnkey solution or as an alternative sports betting engine to those currently relied upon by customers. Goodwill is not amortized, but is reviewed for impairment at least annually or if an event occurs or circumstances change that would more likely than not indicate the goodwill could be impaired. Goodwill recognized in the acquisition is not deductible for tax purposes. Goodwill arising from the acquisition has been preliminary assigned as of the acquisition date to the Company’s B2C and B2B segments in the amounts of $92,138 and $67,547, respectively, since they are expected to benefit from the synergies of the combination. The B2C and B2B segments are also the reporting units.

 

The Company incurred $1,309 of acquisition-related costs in total, of which $290 were recorded during the six months ended June 30, 2021. The remaining costs were incurred in 2020. Following the acquisition, Coolbet entirely comprises the Company’s B2C segment. Refer to Note 14 for the revenue and segment results of Coolbet since the acquisition date.

 

Pro Forma Operating Results

 

The operating results of Coolbet have been included in the condensed consolidated financial statements, beginning on January 1, 2021. The following unaudited pro forma information presents consolidated financial information as if the Coolbet acquisition had occurred on January 1, 2020. The unaudited pro forma results reflect certain adjustments related to the acquisition, such as amortization expense resulting from the intangible assets acquired, share-based compensation related to unvested replacement awards and an adjustment to reflect the Company’s income tax rate. Acquisition costs of $1,309 are also included as a nonrecurring charge. Such pro forma operating results were prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made as of January 1, 2020 or of the results that may occur in the future.

 

   Three Months Ended
June 30, 2020		   Six Months Ended
June 30, 2020		 
Revenues  $13,929   $28,744 
Net loss   (12,510)   (15,321)
Loss per share, basic and diluted   (0.40)   (0.53)

 

18

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 6 — CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET

 

Capitalized software development costs, net at June 30, 2021 and December 31, 2020 consisted of the following:

 

   June 30, 2021   December 31, 2020 
   (Restated)     
Capitalized software development costs  $28,340   $26,507 
Development in progress   3,668    2,641 
Total capitalized software development costs   32,008    29,148 
Less: accumulated amortization   (21,615)   (22,500)
Total  $10,393   $6,648 

 

At June 30, 2021, development in progress primarily represented costs associated with new content and enhancements to the software platform, as well as integration of Coolbet’s sportsbook into the B2B platform, which are expected to be fully placed in service by the end of 2021.

 

Amortization expense related to capitalized software development costs was $901 and $1,661 for the three and six months ended June 30, 2021, respectively, and $615 and $1,371 for the three and six months ended June 30, 2020, respectively.

 

NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

The changes in the carrying amount of goodwill, by segment, for the six months ended June 30, 2021 were as follows:

 

   B2B   B2C   Total 
Balance at December 31, 2020  $—   $—   $— 
Goodwill acquired in Coolbet acquisition   67,547    92,138    159,685 
Effect of foreign currency translation   (2,179)   (2,972)   (5,151)
Balance at June 30, 2021  $65,368   $89,166   $154,534 

 

Intangible Assets

 

Definite-lived intangible assets, net consisted of the following:

 

      June 30, 2021 
   Weighted Average Amortization Period 

Gross

Carrying

Amount

   Accumulated Amortization   Net Carrying Amount 
Developed technology  3.0 years  $27,194   $(4,532)  $22,662 
In-process technology  —   8,129    —    8,129 
Customer relationships  3.0 years   5,419    (903)   4,516 
Trade names and trademarks  10.0 years   5,966    (630)   5,336 
Gaming licenses  6.5 years   2,044    (1,076)   968 
      $48,752   $(7,141)  $41,611 

 

19

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

      December 31, 2020 
   Weighted Average Amortization Period  Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
Trade names and trademarks  3.0 years  $343   $(343)  $— 
Gaming licenses  5.3 years   1,366    (898)   468 
      $1,709   $(1,241)  $468 

 

In-process technology consists of a proprietary technical platform (Refer to Note 5 – Acquisition of Vincent Group p.l.c.). The technology is expected to be completed in the latter part of 2021 and, once completed and placed into service, will be amortized over its estimated useful life.

 

Amortization expense related to intangible assets was $2,968 and $5,963 and for the three and six months ended June 30, 2021, respectively, and $32 and $68 for the three and six months ended June 30, 2020, respectively. The estimated amortization expense for the next five years is as follows: $5,876 for 2021; $11,761 for 2022; $11,741 for 2023; $706 for 2024; $695 for 2025.

 

NOTE 8 — ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

   June 30,
2021		   December 31,
2020		 
Content licensing fees  $2,732   $1,984 
Sales taxes   1,111    756 
Income taxes   1,075    17 
Other   487    606 
Total  $5,405   $3,363 

 

NOTE 9 — OTHER CURRENT LIABILITIES

 

Other current liabilities consisted of the following:

 

   June 30,
2021		   December 31,
2020		 
   (Restated)     
Revenue share due to SIM customers  $1,957   $2,520 
Contract liabilities   725    1,083 
Operating lease liabilities   508    262 
Other   670    202 
Total  $3,860   $4,067 

 

Revenue share due to SIM customers represents the fees collected for in-game virtual credit purchases made by end-user players due to SIM casino operator customers for their share of the SIM revenues generated from the Company’s platform.

 

20

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 10 — SHARE-BASED COMPENSATION

 

In April 2020, the Board of Directors established the GAN Limited 2020 Equity Incentive Plan (“2020 Plan”) which has been approved by the shareholders. The 2020 Plan provides for grants of up to 4,400,000 shares then increases through 2029, by the lesser of 4% of the previous year’s total outstanding ordinary shares on December 31st or as determined by the Board of Directors, for ordinary shares, incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock grants, stock units, and other equity awards for issuance to employees, consultant or non-employee directors. The share-based awards are issued at no less than fair market value of an ordinary share on the date of grant. At June 30, 2021, there were 475,240 shares remaining available for future issuance under the 2020 Plan.

 

Stock Options

 

Stock option awards are granted with an exercise price equal to the fair market value, as determined under the 2020 Plan, of the Company’s ordinary shares on the date of grant. Stock option awards generally vest 25% after one year and then monthly over the next 36 months thereafter and have a maximum term of ten years.

 

During the six months ended June 30, 2021, the Board of Directors approved the issuance of options to purchase 1,462,310 ordinary shares to employees, including executives and certain long-standing employees under the 2020 Plan.

 

In addition, in accordance with the acquisition agreement, the Company issued 67,830 replacement stock option awards to continuing employees of Coolbet. The fair value of the replacement stock options will be recognized ratably over the remaining service period, ranging from one to three years.

 

A summary of the stock option activity as of and for the six months ended June 30, 2021 is as follows:

 

   Number of Shares   Weighted Average Exercise Price   Weighted Average Contractual Term  

Aggregate Intrinsic

Value

 
Outstanding at December 31, 2020   3,061,859   $8.06    8.5   $37,410 
Granted   1,530,140    23.01           
Exercised   (114,618)   2.93           
Forfeited/expired or cancelled   (61,890)   24.10           
Outstanding at June 30, 2021   4,415,491   $13.15    8.4   $14,529 
Options exercisable at June 30, 2021   2,031,250   $4.65    7.6   $23,950 

 

The Company recorded share-based compensation expense related to stock-options of $1,807 and $2,946 for the three and six months ended June 30, 2021, respectively, and $4,150 and $4,445 for the three and six months ended June 30, 2020, respectively. Such share-based compensation expense is recorded net of capitalized software development costs of $57 and $7 for the three months ended June 30, 2021 and 2020, respectively, and $105 and $30 for the six months ended June 30, 2021 and 2020, respectively. Additionally, the share-based compensation expense for the three and six months ended June 30, 2020 includes $3,881 from acceleration of vesting of awards in connection with the Company’s initial public offering. At June 30, 2021, there was $23,202 of total unrecognized compensation cost related to nonvested stock options. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 3.4 years.

 

The grant date fair value of each stock option grant was determined using the following weighted average assumptions:

 

   2021   2020 
   Six Months Ended
June 30,		 
   2021   2020 
Expected stock price volatility   61.52%   73.52%
Expected term (in years)   4.94    5.00 
Risk-free interest rate   0.74%   0.33%
Dividend yield   0%   0%

 

The weighted average grant date fair value of options granted was $9.17 and $12.10 for the three and six months ended June 30, 2021, respectively, and $10.44 and $9.36 for the three and six months ended June 30, 2020, respectively. The fair value of each stock 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 stock 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 stock options and the date on which share-based compensation will be settled.

 

21

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Expected volatility is determined by reference to volatility of certain identified peer group share trading information and stock prices on the Nasdaq. 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.

 

For the period prior to the Company’s initial public offering in May 2020, expected volatility was determined by reference to the historic volatility of GAN UK’s share price on the AIM, the London Stock Exchange. The risk-free interest rate for the expected term of the option was based on the U.K. Gilt 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 addition, in 2020, the Company recorded a liability for social taxes and income taxes related to certain unexercised legacy options at the time of Share Exchange. The Company is accounting for the required cash payment as a cash-settled share-based compensation transaction. The company recorded an expense of $(88) and $(181) related to these options during the three and six months ended June 30, 2021, respectively.

 

Restricted Stock Units

 

On March 9, 2021, the Board of Directors approved the issuance of 10,358 restricted stock units to non-employee directors. The restricted stock units vest over one year from the date of grant with 25% vesting per quarter. The value of restricted stock units is based on the market value of the Company’s ordinary shares at the date of grant. The restricted stock units were issued with a grant date fair value of $25.10 per share. During the six months ended June 30, 2021, 5,178 restricted stock units vested and as of June 30, 2021 5,180 restricted stock units remain outstanding. The Company recorded share-based compensation expense related to the restricted stock units of $105 and $130 for the three and six months ended June 30, 2021, respectively. At June 30, 2021, there was $130 of total unrecognized compensation cost related to nonvested restricted stock units. The remaining cost is expected to be recognized during the next six months. The total fair value of the restricted stock units that vested during the six months ended June 30, 2021 was $130.

 

Restricted Stock Awards

On June 15, 2020, the Board of Directors approved the issuance of 93,680 restricted stock awards to the chief executive officer and non-employee directors. The restricted stock awards vest one year from the date of grant. The value of restricted stock is based on the market value of the Company’s ordinary shares at the date of grant. The restricted stock awards were issued with a grant date fair value of $18.19 per share. The Company recorded share-based compensation expense related to the restricted stock awards of $350 and $770 for the three and six months ended June 30, 2021, respectively. The Company recorded share-based compensation expense related to the restricted stock awards of $75 during the three and six months ended June 30, 2020. In June 2021 the restricted stock awards vested and the total fair value of the restricted stock awards that vested during the six months ended June 30, 2021 was $1,704.

 

NOTE 11 — INTEREST EXPENSE, NET

 

Interest expense, net consisted of the following:

 

   2021   2020   2021   2020 
   Three Months Ended
June 30,		   Six Months Ended
June 30,		 
   2021   2020   2021   2020 
Interest expense (1)  $—   $385   $1   $393 
Interest income   —    (3)   —    (3)
Interest expense, net  $—   $382   $1   $390 

 

(1)Interest expense includes interest on a related party loan during the three and six months ended June 30, 2020. Refer to Note 16 – Related Party Transactions.

 

22

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 12 — LOSS PER SHARE

 

Loss per share is computed by dividing net loss by the weighted average number of ordinary shares outstanding, basic and diluted, during the period.

 

Potentially dilutive securities consisting of certain stock options, nonvested restricted stock awards and restricted stock 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
June 30,		   Six Months Ended
June 30,		 
   2021   2020   2021   2020 
Stock options   4,415,491    3,044,306    4,415,491    3,044,306 
Restricted stock awards   —    93,680    —    93,680 
Restricted stock units   5,180    —    5,180    — 
Total   4,420,671    3,137,986    4,420,671    3,137,986 

 

NOTE 13 — REVENUES

 

The following table reflects revenues recognized for the three and six months ended June 30, 2021 and 2020 in line with the timing of transfer of services:

 

   Three Months Ended
June 30,		   Six Months Ended
June 30,		 
   2021   2020   2021   2020 
   (Restated)       (Restated)     
Revenues from services delivered at a point in time  $24,097   $100   $41,409   $100 
Revenues from services delivered over time   10,253    8,223    20,059    15,893 
Total  $34,350   $8,323   $61,468   $15,993 

 

During the three months ended June 30, 2021, revenues recognized at a point in time was $24,097, of which $23,982 related to gaming revenues and $115 related to development services and other revenues. During the six months ended June 30, 2021, revenues recognized at a point in time was $41,409, of which $38,294 related to gaming revenues and $3,115 related to development services and other revenues.

 

During the three and six months ended June 30, 2021, the Company had one customer which individually generated revenue greater than 10% of the Company’s total revenue, all of which related to the B2B segment. During the three and six months ended June 30, 2021, the customer generated revenue of $3,919 and $7,914 and represented 11.4% and 12.9% of total revenue, respectively. During the three and six months ended June 30, 2020, the customer generated revenue of $3,661 and $8,009, and represented 44.0% and 50.1% of total revenue, respectively.

 

23

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Costs to Obtain a Contract

 

The Company defers contract costs that are recoverable and incremental to obtaining sales contracts with its customers. Contract costs, consisting primarily of sales commissions, are amortized on a systemic basis that is consistent with the transfer to the customer of the services to which the asset relates. Contract costs are periodically reviewed for impairment. An impairment exists if the carrying amount of the asset exceeds the amount of the consideration the entity expects to receive in exchange for providing the services, less the remaining costs that relate directly to providing those services. Deferred contract costs are recorded in Other current assets and Other assets in the condensed consolidated balance sheets. The following table reflects the activity in deferred contract costs for the periods presented:

 

   2021   2020 
   Six Months Ended
June 30,		 
   2021   2020 
Balance at the beginning of the period  $353   $86 
Capitalized expenditures   82    35 
Amortization   (44)   (8)
Effect of foreign currency translation   3    (5)
Balance at the end of the period  $394   $108 

 

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 contributions to jackpot. 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 on the condensed consolidated balance sheets.

 

The following table reflects contract liabilities arising from cash consideration received in advance from customers for the periods presented:

 

     2021     2020   2021   2020 
   Three Months Ended
June 30,		   Six Months Ended
June 30,		 
   2021   2020   2021   2020 
   (Restated)       (Restated)     
Contract liabilities from advance customer payments, beginning of the period  $   1,840   $ 2,095   $1,083   $3,023 
Contract liabilities from advance customer payments, end of the period    1,811     1,865    1,811    1,865 
Revenue recognized from amounts included in contract liabilities from advance customer payments at the beginning of the period    103     237    89    1,014 

 

At June 30, 2021, the Company recorded contract liabilities from advance customer payments of $725 and $1,086 in Other current liabilities and Other liabilities, respectively, in the condensed consolidated balance sheet.

 

NOTE 14 — SEGMENT REPORTING

 

Effective as of January 1, 2021, the Company changed the structure of its internal organization with the acquisition of the Vincent Group p.l.c. (Note 5), which caused the composition of its reportable segments to change. As such, the Company implemented a segment reorganization in order to more closely align its segment reporting with its current operating structure. The Company’s new reportable segments are B2B and B2C. The B2B segment develops, markets and sells instances of iSight Back Office and GameSTACK technology that incorporates comprehensive player registration, account funding and back-office accounting and management tools that enable the casino operator customers to efficiently, confidently and effectively extend their presence online in places that have permitted online real money gambling. The B2C segment, which includes entirely the operations of the Vincent Group p.l.c., beginning on January 1, 2021, develops and operates a B2C online sports betting and casino platform accessible through its website in nine national markets across Northern Europe (Estonia, Finland, Iceland, Norway and Sweden), Latin America (Chile, Ecuador and Peru) and North America (Canada). In conjunction with the new reporting structure, the Company recast the segment disclosures to combine its previous two reportable segments, RMiG and SIM, into one reportable segment, B2B, for the three and six months ended June 30, 2020.

 

Information reported to the Company’s chief executive officer, the chief operating decision maker (“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 gross profit. Segment gross profit represents the gross profit 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.

 

24

 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Summarized financial information by reportable segments for the three and six months ended June 30, 2021 and 2020 is as follows:

 

   B2B   B2C   Total   B2B   B2C   Total 
   Three Months Ended June 30, 
   2021   2020 
   B2B   B2C   Total   B2B   B2C   Total 
   (Restated)           (Restated)         
Revenues  $10,368   $23,982   $34,350   $8,323   $—   $8,323 
Cost of revenues (1)