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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended June 30, 2022

 

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)

 

(833) 565-0550

(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 10, 2022, there were 42,075,411 ordinary shares outstanding.

 

 

 

 
 

 

GAN LIMITED

FORM 10-Q

INDEX

 

    Page
  PART I - FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited) 3
  Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 3
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021 4
  Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2022 and 2021 5
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021 6
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 7
  Notes to Condensed Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
Item 3. Quantitative and Qualitative Disclosures about Market Risk 45
Item 4. Controls and Procedures 46
  PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 48
Item 1A. Risk Factors 48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 49
Item 6. Exhibits 50
  SIGNATURES 51

 

2
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GAN LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share amounts)

 

           
  

June 30,

2022

  

December 31,

2021

 
ASSETS          
Current assets          
Cash  $49,075   $39,477 
Accounts receivable, net of allowance for doubtful accounts of $116 and $120 at June 30, 2022 and December 2021, respectively   11,233    8,110 
Prepaid expenses   4,468    3,498 
Other current assets   2,574    3,337 
Total current assets   67,350    54,422 
           
Capitalized software development costs, net   16,047    14,430 
Goodwill   105,737    146,142 
Intangible assets, net   52,370    35,893 
Other assets   4,514    10,023 
Total assets  $246,018   $260,910 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current liabilities          
Accounts payable  $6,268   $5,268 
Accrued compensation and benefits   7,198    10,961 
Accrued expenses   3,343    4,669 
Liabilities to users   7,754    8,984 
Other current liabilities   2,870    3,151 
Total current liabilities   27,433    33,033 
           
Deferred income taxes   1,397    1,791 
Long-term debt   27,670     
Content licensing liabilities   19,158     
Other liabilities   1,354    2,049 
Total liabilities   77,012    36,873 
Commitments and contingencies (Note 17)   -    - 
Shareholders’ equity          
Ordinary shares, $0.01 par value, 100,000,000 shares authorized, 42,075,411 and 42,250,743 shares issued and outstanding at June 30, 2022 and December 2021, respectively   420    422 
Additional paid-in capital   324,833    319,551 
Accumulated deficit   (120,211)   (76,360)
Accumulated other comprehensive loss   (36,036)   (19,576)
Total shareholders’ equity   169,006    224,037 
Total liabilities and shareholders’ equity  $246,018   $260,910 

 

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
June 30,
   Six Months Ended
June 30,
 
   2022   2021   2022   2021 
                 
Revenue  $34,967   $34,350   $72,461   $61,468 
                     
Operating costs and expenses                    
Cost of revenue(1)   10,463    10,356    22,163    19,075 
Sales and marketing   7,267    5,480    13,365    9,581 
Product and technology   5,188    4,829    14,142    10,072 
General and administrative(1)   13,688    12,320    23,080    22,329 
Impairment   28,861        28,861     
Restructuring   712        1,771     
Depreciation and amortization   6,556    4,132    10,969    8,126 
Total operating costs and expenses   72,735    37,117    114,351    69,183 
Operating loss   (37,768)   (2,767)   (41,890)   (7,715)
Interest expense, net   1,080        1,071    1 
Other income   

(270

)       (270)   

 
Loss before income taxes   (38,578)   (2,767)   (42,691)   (7,716)
Income tax (benefit) expense   (229)   992    157    1,653 
Net loss  $(38,349)  $(3,759)  $(42,848)  $(9,369)
                     
Loss per share, basic and diluted  $(0.91)  $(0.09)  $(1.01)  $(0.22)
                     
Weighted average ordinary shares outstanding, basic and diluted   42,300,668    41,931,948    42,276,798    41,912,285 

 

(1) Excludes depreciation and amortization expense

 

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
June 30,
   Six Months Ended
June 30,
 
   2022   2021   2022   2021 
                 
Net loss  $(38,349)  $(3,759)  $(42,848)  $(9,369)
Other comprehensive (loss) income, net of tax                    
Foreign currency translation adjustments   (12,196)   2,443    (16,460)   (7,035)
Comprehensive loss  $(50,545)  $(1,316)  $(59,308)  $(16,404)

 

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

 

5
 

 

GAN LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share amounts)

 

                                    
    

Ordinary Shares

    

Additional

Paid-in

    Treasury    

Accumulated

    

Accumulated

Other

Comprehensive

    

Total

Shareholders’

 
    

Shares

    Amount    Capital    

Shares

    Deficit     

Loss 

    

Equity

 
                                    
Balance at January 1, 2022   42,250,743   $422   $319,551   $   $(76,360)  $(19,576)  $224,037 
Net loss                   (4,499)       (4,499)
Foreign currency translation adjustments                       (4,264)   (4,264)
Share-based compensation           1,316                1,316 
Accrued liability settled through issuance of shares           444                444 
Restricted share activity   2,365                         
Balance at March 31, 2022   42,253,108   $422   $321,311   $   $(80,859)  $(23,840)  $217,034 
Net loss                   (38,349)       (38,349)
Foreign currency translation adjustments                       (12,196)   (12,196)
Share-based compensation           2,659                2,659 
Accrued liability settled through issuance of shares           469                469 
Repurchases of ordinary shares   (303,113)           (1,006)           (1,006)
Ordinary share retirement       (3)       1,006    (1,003)       
Issuance of ordinary shares upon exercise of share options   125,416    1    394                395 
Balance at June 30, 2022   42,075,411   $420   $324,833   $   $(120,211)  $(36,036)  $169,006 

 

    

Ordinary Shares

    

Additional

Paid-in

    Treasury    

Accumulated

    

Accumulated

Other

Comprehensive

    

Total

Shareholders’

 
    

Shares

    Amount    Capital    

Shares

    Deficit     

Loss

    

Equity

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

 

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)

 

           
   Six Months Ended
June 30,
 
   2022   2021 
Cash Flows From Operating Activities          
Net loss  $(42,848)  $(9,369)
Adjustments to reconcile net loss to net cash (used in) from operating activities:          
Amortization of software and intangible assets   10,265    7,624 
Depreciation on property and equipment and finance lease right-of-use assets   704    502 
Amortization of debt discount and debt issuance costs   95     
Share-based compensation expense   3,678    3,951 
Impairment of goodwill   28,861     
Deferred income tax   

(253

)    
Other   (101)   139 
Changes in operating assets and liabilities, net of acquisitions:          
Accounts receivable   (3,110)   (5,354)
Prepaid expenses   (1,029)   342 
Other current assets   529   573 
Other assets   2,363    97 
Accounts payable   1,203    (2,094)
Accrued compensation and benefits   (3,251)   1,804 
Accrued expenses   (1,147)   2,500 
Liabilities to users   (546)   2,204 
Other current liabilities   (359)   (959)
Other liabilities   759    1,177 
Net cash (used in) from operating activities   (4,187)   3,137 
           
Cash Flows From Investing Activities          
Cash paid for acquisition, net of cash acquired       (92,404)
Expenditures for capitalized software development costs   (6,302)   (5,320)
Payments for content licensing arrangements   (5,500)   (3,500)
Purchases of gaming licenses   (16)   (207)
Purchases of property and equipment   (692)   (1,093)
Net cash used in investing activities   (12,510)   (102,524)
           
Cash Flows From Financing Activities          
Proceeds from issuance of long-term debt   30,000     
Payments of offering costs       (604)
Proceeds from exercise of share options   396    337 
Principal payments on finance leases       (54)
Repurchases of ordinary shares   (1,006)    
Payment of debt issuance costs   (2,425)    
Net cash provided by (used in) financing activities   26,965    (321)
           
Effect of foreign exchange rates on cash   (670)   (860)
           
Net increase (decrease) in cash   9,598    (100,568)
Cash and cash equivalents, beginning of period   39,477    152,654 
Cash and cash equivalents, end of period  $49,075   $52,086 
           
Supplemental Disclosure of Noncash Investing and Financing Activities:          
Intangible assets acquired in business acquisition included in current and long-term liabilities  $26,244   $ 
Ordinary shares issued as partial consideration to acquire all the outstanding shares of Coolbet       106,683 
Issuance of unvested share options in exchange for unvested share options of Coolbet       297 

 

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

 

7
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 1 — NATURE OF OPERATIONS

 

GAN Limited (the “Parent,” and with its subsidiaries, collectively the “Company”) is an exempted company limited by shares, incorporated and registered in Bermuda. GAN plc, the previous parent, began its operations in the United Kingdom (“U.K.”) in 2002 and listed its ordinary shares on the AIM, the London Stock Exchange’s market for smaller companies, in 2013.

 

On January 1, 2021, the Company acquired all of the outstanding shares of Vincent Group p.l.c. (“Vincent Group”), a Malta public limited company doing business as “Coolbet”. Coolbet is a developer and operator of an online sports betting and casino platform that is accessible through its website in markets across Northern Europe, Latin America and Canada.

 

The Company is a business-to-business (“B2B”) supplier of a proprietary gaming system, GameSTACK™ (“GameSTACK”), which is used predominately in 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”). The Company is also a business-to-consumer (“B2C”) developer and operator of an online sports betting and casino platform, providing international users with access through www.coolbet.com to its sportsbook, casino games and poker products. The Company operates in two operating segments – B2B and B2C.

 

NOTE 2 — BASIS OF PRESENTATION

 

Basis of Presentation

 

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). 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, 2022 are not necessarily indicative of the results that may be expected for the year ended December 31, 2022 or for any future annual or interim period. The condensed consolidated balance sheet as of December 31, 2021 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, 2021.

 

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company’s significant accounting policies are included in “Note 3 – Summary of Significant Accounting Policies” of its 2021 Form 10-K. In addition to repeating some of these significant accounting policies, the Company has added certain new significant accounting policies during the six months ended June 30, 2022, as described below.

 

8
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

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.

 

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 shareholders’ equity.

 

Gains and losses arising from transactions denominated in a currency other than the functional currency are included in general and administrative expense in the condensed consolidated statements of operations as incurred. Foreign currency transaction and remeasurement gains and losses were a net loss of $311 and $126 for the three months ended June 30, 2022 and 2021, respectively, and $1,178 and $172 for the six months ended June 30, 2022 and 2021, respectively.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of its cash and trade receivables. At June 30, 2022, the Company held cash deposits in foreign countries, primarily in Northern Europe and Latin America, of approximately $39.7 million, which are subject to local banking laws and may bear higher or lower risk than cash deposited in the United States. Cash held in the United States is maintained in a major financial institution in excess of federally insured limits. As part of our cash management processes, the Company performs periodic evaluations of the credit standing of the financial institutions and we have not sustained any credit losses from instruments held at these financial institutions. Additionally, the Company maintains an allowance for potential credit losses, but historically has not experienced any significant losses related to individual customers or groups of customers in any particular geographic area.

 

Risks and Uncertainties – COVID-19

 

The coronavirus disease 2019 (“COVID-19”) pandemic, which was declared a national emergency in the United States in March 2020, significantly impacted the economic conditions and financial markets around the world. Although more normalized activities have resumed, the ultimate impact of the pandemic on the Company’s future 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 if suspension or cancellation of sporting events or closure of land-based casinos were to follow. 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 and has not identified additional items to disclose as a result.

 

9
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Additionally, 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.

 

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, GameSTACK, that its customers use to provide real money internet gambling (“RMiG”), online sports gaming and simulated internet gaming (“SIM”) 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 it 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 June 30, 2022 the remaining unsatisfied performance obligations related to fixed minimum guaranteed revenue totaled $0.9 million.

 

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 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 support services to the customer over a period of time, as well as to provide marketing services, 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 Company receives fees for the purchases of in-game virtual credit made by end-users and remits payment to the SIM customer for their share of the SIM revenues. At June 30, 2022 and December 31, 2021, the Company has recorded a liability due to its customers for their share of the fees of $968 and $2,171, respectively, within other current liabilities in the condensed consolidated balance sheets.

 

10
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

The Company uses third-party content providers in supplying game content in its performance of providing game content on its platform to its customers. A customer has access to the Company’s propriety and licensed game content and additionally, the customer can direct the Company to procure third-party game content on its behalf. The Company has determined it acts as the principal for providing the game content when the Company controls the game content, and therefore presents the revenue on a gross basis in the condensed consolidated statements of operations. When the customer directs the Company to procure third-party game content, the Company determined it is deemed an agent for providing such game content, and therefore, records the revenue, net of the costs of content license fees, in the condensed consolidated statements of operations.

 

The Company also provides ongoing development services involving updates to the RMiG platforms for enhanced functionality or customization. Ongoing development services are typically billed monthly, at a daily rate, for services performed. Revenue from RMiG platform development services that are identified as distinct performance obligations and relate either to an asset the customer controls or from which the customer receives value are recognized over the period the services are performed. This revenue is measured using an input method based on effort expended, which uses direct labor hours incurred. As the performance obligation relates to the provision of development services over time, this method reflects the transfer of control as the Company performs the services. Separately, revenue generated from customers for development services that are not identified as distinct performance obligations are deferred over the license service term. 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 a 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 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 obligation 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 3,100 third-party iGaming products such as digital slot machines and table games such as blackjack and roulette. Revenue from casino games is reported net after deduction of winnings, jackpot contribution and customer bonuses.

 

Peer-to-peer poker offerings allow users to play poker against one another on the Company’s online poker platform for prize money. Revenue is recognized as a percentage of the reported rake. Additionally, the Company offers tournament poker which allows users to buy-in for a fixed price for prize money. For tournament play, revenue is recognized for the difference between the entry fees collected and the amounts paid out to users as prizes and winnings.

 

In each of the online gaming products, a single performance obligation exists at the time a wager is made to operate the games and award prizes or payouts to users based on a particular outcome. Revenue is recognized at the conclusion of each contest, wager, or wagering game hand. Additionally, certain incentives given to users, for example, that allow the user to make an additional wager at a reduced price, may provide the user with a material right which gives rise to a separate performance obligation.

 

The Company allocates a portion of the user’s wager to incentives that create material rights that are redeemed or expired in the future. The allocated revenue for gaming wagers is primarily recognized when the wagers occur because all such wagers settle immediately.

 

The Company applies a practical expedient by accounting for revenue from gaming on a portfolio basis because such wagers have similar characteristics, and the Company reasonably expects the effects on the financial statements of applying the revenue recognition guidance to the portfolio to not differ materially from that which would result if applying the guidance to an individual wagering contract.

 

12
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

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.

 

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

 

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.

 

Loss Per Share, Basic and Diluted

 

Basic loss per share is calculated by dividing the net loss 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 June 30, 2022 and December 31, 2021, the related liabilities to users was $7,754 and $8,984, respectively.

 

13
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Property and Equipment, net

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is generally computed on a straight-line basis over the estimated useful lives of the assets. Maintenance and repairs are charged to expense in the period they are incurred. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in the statement of operations.

 

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.

 

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. The Company has recorded goodwill primarily from its acquisition of Coolbet in January 2021. Goodwill is not amortized, but rather is reviewed for impairment annually (as of October 1st) or more frequently if facts or circumstances indicate that it is more-likely-than-not the fair value of a reporting unit may be below its carrying amount.

 

The Company has determined that it has 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 discounted cash flow analysis.

 

ASC Topic 350 requires that goodwill be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company performed a qualitative assessment to determine whether events or circumstances such as those described in ASC 350-20-35-3C existed and concluded that, due to the significant and sustained decline in share price and market capitalization of the Company since the Coolbet acquisition, such triggers existed during the interim period; therefore, an interim quantitative impairment test was performed. As a result of the quantitative impairment test performed, the Company recorded an impairment to goodwill of $28.9 million during the three and six months ended June 30, 2022.

 

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.

 

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 is required in these valuations.

 

Acquired in-process developed technology consists of a proprietary technical platform. The Company reviews the in-process developed 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 developed technology efforts are completed. When completed, the developed technology will be amortized over its estimated useful life based on an amortization method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. The integrated technology is expected to be completed in the fourth quarter of 2022.

 

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. During the three months ended June 30, 2022, 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 on the 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.

 

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 following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis as required by ASC 820, by level, within the fair value hierarchy as of June 30, 2022:

 

   Fair Value   Level 1   Level 2   Level 3 
   June 30, 2022 
   Fair Value   Level 1   Level 2   Level 3 
Liability                    
Contingent content liability  $4,369   $   $   $4,369 

 

The contingent content liability represents additional amounts which the Company expects to pay to Ainsworth Game Technology, a third-party gaming content provider (“the Content Provider”) if the Company’s total revenue generated from its content licensing arrangement with the Content Provider exceeds certain stipulated annual and cumulative thresholds during the contract term. The fair value of the contingent content liability is determined using Level 3 inputs, since estimating the fair value of this contingent content liability requires the use of significant and subjective inputs that may and are likely to change over the duration of the liability with related changes in internally generated anticipated games revenue as well as external market factors. The contingent content liability was valued using a Monte Carlo simulation based on management’s anticipated annual games revenue forecasts. The fair value of the contingent content liability was initially recognized during the three months ended June 30, 2022 in connection with its modified arrangement with the Content Provider on April 5, 2022 and is recorded within Content licensing liabilities within the condensed consolidated balance sheets. Refer to Note 4 – Acquisition for further detail.

 

Income Taxes

 

The Company is subject to income taxes in the United States, U.K., Bulgaria, Israel, Canada, and Malta. The Company records an income tax (benefit) 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.

 

16
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

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 Issued Accounting Pronouncements

 

In October 2021, the Financial Accounting Standards Board 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. Early adoption is permitted. The Company will apply the amended guidance on a prospective basis to business combinations that occur on or after January 1, 2023.

 

NOTE 4 — ACQUISITION

 

Content licensing agreement with Ainsworth Game Technology

 

In the second quarter of 2021, the Company entered into a Content Licensing Agreement (the “Agreement”) with Ainsworth Game Technology, a third-party gaming content provider (the “Content Provider”) specializing in developing and licensing interactive games. The Agreement grants the Company exclusive rights to use and distribute the online gaming content in North America, and the Content Provider is committed to developing a minimum number of games for the Company’s exclusive use over a five-year term, subject to extensions.

 

On April 5, 2022, the Company amended and restated the Agreement. In accordance with the restated arrangement, the Company amended certain commercial terms, which included obtaining the contractual right to lease the remote gaming servers, taking possession of the related software, and obtaining a service contract from the Content Provider for the duration of the arrangement. The total fixed fees remaining under the amended arrangement totaled $25.0 million, of which $5.5 million was paid during the six months ended June 30, 2022 with the remaining $4.5 million due in 2022, and $5.0 million in each of the years 2023 through 2025. Fixed fee payments are presented in the condensed consolidated statements of cash flows as payments for content licensing arrangements within cash flows from investing activities. Additional payments could be required if the Company’s total revenue generated from the arrangement exceed certain stipulated annual and cumulative thresholds during the contract term.

 

The amended and restated Agreement is accounted for as a business combination as the assets acquired and the liabilities assumed under the arrangement constitute a business in accordance with ASC 805, Business Combinations. Consideration transferred is comprised of the present value of the Company’s total expected fixed payments under the Agreement, the net assets recognized under the original agreement, as well as a contingent consideration.

 

The 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:

 

       

Present value of future fixed fee payments

   $18,808 
Net assets recognized under original agreement    3,067 
Contingent consideration    4,369 
Total   $26,244 

 

 

The contingent consideration represents additional amounts which the Company expects to pay to the Content Provider if the Company’s total revenue generated from the arrangement exceed certain stipulated annual and cumulative thresholds during the contract term. The maximum amount of the payment is unlimited as it is determined based on the Company’s performance over the related games revenue over the arrangement term. The fair value of the contingent consideration is determined using Level 3 inputs, since estimating the fair value of this contingent consideration requires the use of significant and subjective inputs that may and are likely to change over the duration of the liability with related changes in internally generated anticipated games revenue as well as external market factors. The contingent consideration was valued using a Monte Carlo simulation based on management’s anticipated annual games revenue forecasts.

 

Identifiable assets and liabilities assumed at fair value were entirely comprised of intangible assets acquired as part of the content licensing arrangement. The fair values of intangible assets were estimated using inputs classified as Level 3 under the income approach using either the royalty income method (content licenses) or the multi-period excess earnings method (customer relationships). The Company has not yet finalized the purchase price allocation, which is pending further analysis of the net assets acquired, weighted average cost of capital assumptions, and certain Level 3 inputs used in the Monte Carlo simulation used to value the contingent consideration. Identifiable intangible assets , including their respective expected useful lives, were as follows:

 

  

Estimated useful life

(in years)

   Fair Value 
Content licenses intangible asset   4.6   $22,938 
Customer relationships intangible asset   4.0    3,306 
Acquired right of use lease asset   4.6    116 

Acquired right of use lease liability

   4.6    (116)
Total identifiable net assets       $26,244 

 

In addition to these assets acquired, a service contract was acquired with total expected future expenses of $1.4 million.

 

17
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 5 — PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net is recorded in other assets in the condensed consolidated balance sheets at June 30, 2022 and December 31, 2021 and consisted of the following:

 

  

Estimated

Useful Life

 

June 30,

2022

  

December 31,

2021

 
        
Fixtures, fittings and equipment  3-5 years  $3,283   $2,935 
Platform hardware  5 years   1,952    2,054 
Total property and equipment, cost      5,235    4,989 
Less: accumulated depreciation      (2,802)   (2,444)
Total     $2,433   $2,545 

 

Depreciation expense related to property and equipment was $303 and $239 for the three months ended June 30, 2022 and 2021, respectively, and $614 and $457 for the six months ended June 30, 2022 and 2021, respectively.

 

NOTE 6 — CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET

 

Capitalized software development costs, net at June 30, 2022 and December 31, 2021 consisted of the following:

 

           
  

June 30,

2022

  

December 31,

2021

 
Capitalized software development costs  $29,543   $26,127 
Development in progress   5,281    5,910 
Total capitalized software development, cost   34,824    32,037 
Less: accumulated amortization   (18,777)   (17,607)
Total  $16,047   $14,430 

 

At June 30, 2022, development in progress primarily represents costs associated with new proprietary content, enhancements to the B2B software platform, and the development of GAN Sports. The GAN Sports B2B sportsbook technology is expected to be placed in service in the fourth quarter of 2022.

 

Amortization expense related to capitalized software development costs was $1,953 and $901 for the three months ended June 30, 2022 and 2021, respectively, and $3,115 and $1,661 for the six months ended June 30, 2022 and 2021, respectively.

 

18
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

The changes in the carrying amount of goodwill, by segment, for the six months ended June 30, 2022 were as follows:

 

   B2B   B2C   Total 
Balance at January 1, 2022  $72,230   $73,912   $146,142 
Impairment   (28,861)       (28,861)
Effect of foreign currency translation   (5,709)   (5,835)   (11,544)
Balance at June 30, 2022  $37,660   $68,077   $105,737 

 

The Company performs its annual goodwill impairment test as of October 1 and monitors for interim triggering events on an ongoing basis as events occur or circumstances change that would more likely than not reduce the fair value below its carrying amount. Goodwill is reviewed for impairment utilizing either a qualitative assessment or a quantitative goodwill impairment test. Due to the significant and sustained decline in share price and market capitalization since the Coolbet acquisition, an interim quantitative goodwill impairment test was performed.

 

The Company estimated the fair value of all reporting units utilizing both a market approach and an income approach (discounted cash flow) and the significant assumptions used to measure fair value include discount rate, terminal value factors, revenue and EBITDA multiples, and control premiums. The Company confirmed the reasonableness of the estimated reporting unit fair values by reconciling those fair values to its enterprise value and market capitalization. As a result of its interim impairment test, the Company recognized an impairment to goodwill of $28.9 million.

 

Intangible Assets

 

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

 

         1    2    3 
    Weighted    

June 30, 2022

 
    

Average

    

Gross

         Net  
    

Amortization

    

Carrying

    

Accumulated

    Carrying  
    

Period

    

Amount

    

Amortization

    Amount  
Developed technology   3.0 years   $25,228   $(12,614)  $12,614 
Third-party content licenses   4.6 years    22,938    (1,251)   21,687 
In-process technology       7,499        7,499 
Customer relationships   3.6 years    8,335    (2,721)   5,614 
Trade names and trademarks   10.0 years    5,243    (1,059)   4,184 
Gaming licenses   7.3 years    1,978    (1,206)   772 
        $71,221   $(18,851)  $52,370 

 

19
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts) 

 

    

Amortization

    

Carrying

    

Accumulated

    Carrying  
    Weighted    

December 31, 2021

 
    

Average

    

Gross

         Net  
    

Amortization

    

Carrying

    

Accumulated

    Carrying  
    

Period

    

Amount

    

Amortization

    Amount  
Developed technology   3.0 years   $27,390   $(9,130)  $18,260 
In-process technology       8,142        8,142 
Customer relationships   3.0 years    5,460    (1,820)   3,640 
Trade names and trademarks   10.0 years    5,699    (882)   4,817 
Gaming licenses   6.4 years    2,219    (1,185)   1,034 
        $48,910   $(13,017)  $35,893 

 

Amortization expense related to intangible assets was $4,230 and $2,968 for the three months ended June 30, 2022 and 2021, respectively, and $7,150 and $5,963 for the six months ended June 30, 2022 and 2021, respectively.

 

Estimated amortization expense for the next five years is as follows:

 

    Amount 
Remainder of 2022   $8,341 
2023    16,666 
2024    6,437 
2025    6,425 
2026    4,924 
Thereafter    9,577 

 

NOTE 8 — ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

  

June 30,

2022

  

December 31,

2021

 
Content license fees  $1,603   $2,402 
Sales taxes   838    1,400 
Income taxes   240    245 
Other   662    622 
Total  $3,343   $4,669 

 

NOTE 9 — OTHER CURRENT LIABILITIES

 

Other current liabilities consisted of the following:

 

  

June 30,

2022

  

December 31,

2021

 
Revenue share due to SIM customers  $968   $2,171 
Operating lease liabilities   415    472 
Contract liabilities   570    261 
Other   917    247 
Total  $2,870   $3,151 

 

20
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

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

 

NOTE 10 — DEBT

 

On April 26, 2022, a subsidiary of the Company entered into a fixed term credit facility (the “Credit Facility”) which provides for $30.0 million in aggregate principal amount of secured term loans with a floating interest rate of 3-month SOFR (subject to a 1% floor) + 9.5%. The Credit Facility matures on October 26, 2026 and is fully guaranteed by the Company. There are no scheduled principal payments due under the Credit Facility until maturity. Interest payments are payable in arrears on the last business day of each calendar quarter and at the maturity date.

 

The Company incurred $2.4 million in debt issuance costs during the three and six months ended June 30, 2022 in connection with the Credit Facility, which have been recorded as a direct reduction against the debt and amortized over the life of the associated debt as a component of interest expense using the effective interest method. The net funds received from the Credit Facility, after deducting debt issuance costs, was $27.6 million.

 

Debt Covenants

 

The Credit Facility contains affirmative and negative covenants, including certain financial covenants associated with the Company’s financial results. The negative covenants include 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 Company was in compliance with all financial covenants as of June 30, 2022.

 

The Credit Facility contains 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 occurs and is not cured within any applicable grace period or is not waived, the administrative agent and the lender are 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

June 30, 2022

 
Credit Facility:          
Principal   13.87%  $30,000 
Less unamortized debt issuance costs        (2,330)
Long-term debt, net       $27,670 

 

During the three and six months ended June 30, 2022 the Company incurred $664 in interest expense, of which $95 relates to the amortization of debt issuance costs.

 

21
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 11 — 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 Company’s shareholders. The 2020 Plan initially provides for grants of up to 4,400,000 ordinary shares, which 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 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 June 30, 2022, the 2020 Plan provided for grants of up to 7,559,574 ordinary shares and there were 404,069 ordinary shares available for future issuance under the 2020 Plan.

 

Share Options

 

A summary of the share option activity as of and for the six months ended June 30, 2022 is as follows:

 

   Number of Shares  

Weighted

Average

Exercise

Price

  

Weighted Average Contractual

Term

   Aggregate Intrinsic Value 
Outstanding at December 31, 2021   4,138,215   $13.05    8.05   $11,229 
Granted   910,563    0.03           
Exercised   (125,416)   3.29           
Forfeited/expired or cancelled   (763,061)   17.71           
Outstanding at June 30, 2022   4,160,301   $9.87    7.79   $3,203 
Options exercisable at June 30, 2022   2,370,373   $7.47    7.47   $1,565 

 

The Company recorded share-based compensation expense related to share options of $1,265 and $1,807 for the three months ended June 30, 2022 and 2021, respectively, and $1,648 and $2,946 for the six months ended June 30, 2022 and 2021, respectively. Such share-based compensation expense was recorded net of capitalized software development costs of $139 and $57 for the three months ended June 30, 2022 and 2021, and $139 and $105 for the six months ended June 30, 2022 and 2021, respectively. At June 30, 2022, there was total unrecognized compensation cost of $13,459 related to nonvested share options. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.8 years.

 

Share 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, 2022, the Board of Directors approved the issuance of options to purchase 910,563 ordinary shares to employees under the 2020 Plan, including 907,563 share options granted with an exercise price of $0.01 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. The weighted average grant date fair value of options granted was $3.89 and $9.17 for the three months ended June 30, 2022 and 2021, respectively, and $4.55 and $12.10 for the six months ended June 30, 2022 and 2021, respectively.

 

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 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 January 2022, the Board of Directors approved the issuance of 108,720 restricted share units to employees. The restricted share units vest over four years from the date of grant with 25% vesting per year on the anniversary of the grant date. The terms of the awards stipulate that the 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 March 2022, the Board of Directors approved the issuance of 1,117,437 restricted share units to its employees. The restricted share units vest over four years from the date of grant with 25% vesting per year on the anniversary of the grant date. The terms of the awards stipulate that the 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. Additionally, 73,446 restricted share units were granted to its non-employee directors which vest on December 31, 2022.

 

In June 2022, the Board of Directors approved the issuance of 28,754 restricted share units to its employees. The restricted share units vest over four years from the date of grant with 25% vesting per year on the anniversary of the grant date. The terms of the awards stipulate that the 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 non-employee directors upon vesting in order to remit a cash payment to the directors equal to their tax expense. At June 30, 2022, the Company recognized a liability for outstanding and nonvested restricted share units held by non-employee directors of $116. The liabilities are recorded in accrued compensation and benefits in the condensed consolidated balance sheets.

 

The Company recorded share-based compensation expense related to restricted share units of $1,269 and $105 for the three months ended June 30, 2022 and 2021, respectively, and $2,193 and $130 for the six months ended June 30, 2022 and 2021, respectively. At June 30, 2022, there was total unrecognized compensation cost of $7,810 related to nonvested restricted share units The unrecognized compensation cost is expected to be recognized over a weighted-average period of 3.3 years.

 

A summary of the restricted share unit activity as of and for the six months ended June 30, 2022 is as follows:

 

  

Number of

Shares

  

Weighted

Average

Grant Date

Fair Value

 
Outstanding at December 31, 2021   369,140   $10.78 
Granted   1,328,357    5.34 
Vested   (2,365)   9.53 
Forfeited or cancelled   (54,068)   8.75 
Outstanding at June 30, 2022   1,641,064   $6.48 

 

23
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

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.

 

In December 2021, the Company issued 51,654 restricted ordinary shares to the selling shareholders of Silverback Gaming. The restricted share awards vest one-third on the acquisition date and one-third on each the first and second anniversary dates. The restricted share awards were issued with a grant date fair value of $9.68 per share.

 

The Company recorded share-based compensation expense related to the restricted share awards of $42 and $350 for the three months ended June 30, 2022 and 2021, respectively, and $84 and $770 for the six months ended June 30, 2022 and 2021, respectively. At June 30, 2022, there was total unrecognized compensation cost of $236 related to the nonvested shares granted. The cost is expected to be recognized over a weighted average period of 1.7 years. There were no restricted share awards that vested during the six months ended June 30, 2022.

 

Employee Bonuses Issued in Shares

 

In 2021, the Company entered into agreements with certain executive employees which allowed for a portion, or all, of their annual bonus for the year ended December 31, 2021 to be paid in the form of the Company’s shares. During the six months ended June 30, 2022 the Company settled $913 of the total bonus by issuing 189,959 vested options with an exercise price of $0.01 per share.

 

The Company additionally expects to pay a portion, or all, of certain employee annual bonuses for the year ended December 31, 2022 in the form of the Company’s shares. The Company expects to settle these bonuses in the first quarter of 2023. The liability and related employer taxes of $658 are recorded in accrued compensation and benefits in the condensed consolidated balance sheet at June 30, 2022.

 

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. The ESPP provides initially for 300,000 ordinary shares to be sold and increases on February 1, 2022 and on each subsequent February 1 through and including February 1, 2030, equal to the lesser of (i) 0.25 percent of the number of ordinary shares issued and outstanding on the immediately preceding December 31, or (ii) 100,000 ordinary shares, or (iii) such number of ordinary shares as determined by the Board of Directors.

 

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 85% of the closing trading price per share of the Company’s ordinary shares on the first trading date of an offering period in which a participant is enrolled or 85% of the closing trading price per share on the purchase date, which will occur on the last trading day of each offering period. An offering period is defined as a three-month duration commencing on or about March, June, September and December of each year. Also, one purchase period is included within each offering period. The Company’s first offering period commenced on June 1, 2022 and will conclude on August 31, 2022 with its first purchase expected to occur on August 31, 2022. During the three and six months ended June 30, 2022 the Company recognized share-based compensation expenses of $22 related to the ESPP.

 

24
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts) 

 

NOTE 12 — LOSS PER SHARE

 

Loss per ordinary share, basic and diluted, are 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:

 

    2022   2021   2022   2021 
    Three Months Ended
June 30,
   Six Months Ended
June 30,
 
    2022   2021   2022   2021 
Share options    4,160,301    4,415,491    4,160,301    4,415,491 
Restricted shares    34,436        34,436     
Restricted share units    1,641,064    5,180    1,641,064    5,180 
Total    5,835,801    4,420,671    5,835,801    4,420,671 

 

NOTE 13 — REVENUE

 

The following table reflects revenue recognized for the three and six months ended June 30, 2022 and 2021 in line with the timing of transfer of services:

 

   2022   2021   2022   2021 
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2022   2021   2022   2021 
Revenue from services delivered at a point in time  $21,609   $24,097   $46,033   $41,409 
Revenue from services delivered over time   13,358    10,253    26,428    20,059 
Total  $34,967   $34,350   $72,461   $61,468 

 

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.

 

25
 

 

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:

 

   2022   2021   2022   2021 
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2022   2021   2022   2021 
Contract liabilities from advance customer payments, beginning of the period  $2,095   $1,840   $1,874   $1,083 
Contract liabilities from advance customer payments, end of the period (1)   1,421    1,811    1,421    1,811 
Revenue recognized from amounts included in contract liabilities from advance customer payments at the beginning of the period   459    103    635    89 

 

(1)Contract liabilities from advance customer payments, end of period consisted of $570 and $725 recorded in other current liabilities in the condensed consolidated balance sheets at June 30, 2022 and 2021, respectively and $851 and $1,086 recorded in other liabilities in the condensed consolidated balance sheet at June 30, 2022 and 2021, respectively.

 

NOTE 14 — SEGMENT REPORTING

 

The Company’s reportable segments are B2B and B2C. The B2B segment develops, markets and sells instances of iSight Back Office and GameSTACK 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 since January 1, 2021, 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 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.

 

Summarized financial information by reportable segments for the three months ended June 30, 2022 and 2021 is as follows:

 

   B2B   B2C   Total   B2B   B2C   Total 
   Three Months Ended June 30, 
   2022   2021 
   B2B   B2C   Total   B2B   B2C   Total 
Revenue  $14,150   $20,817   $34,967   $10,368   $23,982   $34,350 
Cost of revenue(1)   2,939    7,524    10,463    2,307    8,049    10,356 
Segment gross profit  $11,211   $13,293   $24,504   $8,061   $15,933   $23,994 

 

(1)Excludes depreciation and amortization expense

 

26
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

During the three months ended June 30, 2022 and 2021, one customer in the B2B segment individually accounted for 22.0% and 11.4% of total revenue, respectively.

 

Summarized financial information by reportable segments for the six months ended June 30, 2022 and 2021 is as follows:

 

   B2B   B2C   Total   B2B   B2C   Total 
   Six Months Ended June 30, 
   2022   2021 
   B2B   B2C   Total   B2B   B2C   Total 
Revenue  $27,220   $45,241   $72,461   $23,174   $38,294   $61,468 
Cost of revenue(1)   6,842    15,321    22,163    5,049    14,026    19,075 
Segment gross profit  $20,378   $29,920   $50,298   $18,125   $24,268   $42,393 

 

During the six months ended June 30, 2022 and 2021, one customer in the B2B segment individually accounted for 19.2% and 12.9% of total revenue, respectively.

 

The following table presents a reconciliation of segment gross profit to the consolidated loss before income taxes for the six months ended June 30, 2022 and 2021:

 

   2022   2021   2022   2021 
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2022   2021   2022   2021 
Segment gross profit (1)  $24,504   $23,994   $50,298   $42,393 
Sales and marketing   7,267    5,480    13,365    9,581 
Product and technology   5,188    4,829    14,142    10,072 
General and administrative(1)   13,688    12,320    23,080    22,329 
Impairment   

28,861

    

    

28,861

    

 
Restructuring   712        1,771     
Depreciation and amortization   6,556    4,132    10,969    8,126 
Interest expense, net   1,080        1,071    1 
Other income   

(270

)   

    (270)   

 
Loss before income taxes  $(38,578)  $(2,767)  $(42,691)  $(7,716)

 

(1)Excludes depreciation and amortization expense

 

Assets and liabilities are not separately analyzed or reported to the CODM and are not used to assist in decisions surrounding resource allocation and assessment of segment performance. As such, an analysis of segment assets and liabilities has not been included in this financial information.

 

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:

 

   2022   2021   2022   2021 
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2022   2021   2022   2021 
B2B:                    
Platform and content license fees  $10,518   $9,325   $21,220   $18,509 
Development services and other   3,632    1,043    6,000    4,665 
Total B2B revenue  $14,150   $10,368   $27,220   $23,174 
                     
B2C:                    
Sportsbook  $9,076   $12,757   $20,260   $19,908 
Casino   11,252    10,512    23,831    16,983 
Poker   489    713    1,150    1,403 
Total B2C revenue   20,817    23,982    45,241    38,294 
Total revenue  $34,967   $34,350   $72,461   $61,468 

 

Revenue by location of the customer for the three and six months ended June 30, 2022 and 2021 is as follows:

 

   2022   2021   2022   2021 
   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2022   2021   2022   2021 
United States  $11,720   $8,330   $23,211   $19,079 
Europe   10,205    14,193    22,769    25,257 
Latin America   11,193    10,254    23,418    13,857 
Rest of the world   1,849    1,573    3,063    3,275 
Total revenue  $34,967   $34,350   $72,461   $61,468 

 

NOTE 15 — INCOME TAXES

 

The Company’s effective income tax rate was 0.6% and (35.9)% for the three months ended June 30, 2022 and 2021, respectively, and (0.4)% and (21.4)% for the six months ended June 30, 2022 and 2021, respectively.

 

Our country of domicile is Bermuda, which effectively has a 0% statutory tax rate as it does not impose taxes on profits, income, dividends, or capital gains. The difference between this 0% tax rate and the effective income tax rate for the three and six months ended June 30, 2022 and 2021 was due primarily to a mix of earnings in foreign jurisdictions that are subject to current tax, taking into account foreign loss carryforwards in certain jurisdictions that are not expected to be recognized, and limitations on the deductibility of U.S. compensation under Internal Revenue Code Section 162(m).

 

NOTE 16 — RESTRUCTURING

 

In January 2022, we implemented a strategic reduction of our existing worldwide global workforce to simplify and streamline our organization and strengthen the overall competitiveness of our B2B segment. As a result of this initiative, we incurred $0.7 million and $1.8 million in restructuring charges related to this plan during the three and six months ended June 30, 2022, respectively, which are primarily related to employee severance pay and related costs. As of June 30, 2022, the Company had completed its restructuring plan and there were no unpaid restructuring charges.

 

28
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 17 — COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

The Company may be subject to legal actions and claims arising from contracts or other matters from time to time in the ordinary course of business. Management is not aware of any pending or threatened litigation, which are considered other than routine legal proceedings. The Company believes the ultimate disposition or resolution of its routine legal proceedings will not have a material adverse effect on its financial position, results of operations or liquidity.

 

Content Licensing Agreements

 

In the second quarter of 2021, the Company entered into Content Licensing Agreements (the “Agreements”) with two third-party gaming content providers (“Content Providers”) specializing in developing and licensing interactive games. The Agreements grant the Company exclusive rights to use and distribute the online gaming content in North America. Each of the Content Providers is committed to developing a minimum number of games for the Company’s exclusive use over the five-year term, subject to extensions, of the respective Agreement. In exchange, the Company is required to pay fixed fees, totaling $48.5 million, of which $8.5 million were due upon execution of the Agreements, and the remaining fixed fees are paid systematically over the initial five-year terms. Additional payments could be required if the Company’s total revenue generated from the licensed content exceed certain stipulated annual and cumulative thresholds during the contract term. Under the terms of the Agreements, the Content Providers are to remit the cash flows from the online gaming content with its existing customers to the Company during the exclusivity period.

 

On January 27, 2022, the Company served a termination notice, for cause, to a Content Provider as certain conditions precedent associated with the completion of contractual obligations had not been satisfied by the agreed upon period in 2021. In accordance with the agreement, termination for cause results in a return of the initial payment of $3.5 million. In response to the Company’s termination notice, the Content Provider responded in February 2022 alleging the Content Provider had met its contractual obligations, thereby obligating the Company to make an additional $3.0 million payment. In March, the Content Provider served the Company a demand letter notifying the Company of its alleged material breach of the agreement, and disputing the validity of the termination. On April 25, 2022, the Content Provider served formal notice of termination of the agreement, reaffirming the $3.0 million obligation. The Company asserts that all contractual obligations to the Content Provider have been relieved as a result of the Company’s termination notice and will vigorously defend any claims made by the Content Provider. The Company further recognized an impairment loss related to the initial payment of $3.5 million in the condensed statement of operations for the year ended December 31, 2021.

 

29
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

On April 5, 2022, the Agreement with the remaining Content Provider was amended and restated. Prior to the amendment, the Company accounted for the hosting arrangement as a service contract and expensed service fees of $1.5 million to cost of revenue in the condensed consolidated statement of operations for the six months ended June 30, 2022. In accordance with the restated arrangement, the Company amended certain commercial terms, which included obtaining the contractual right to lease the remote gaming servers, taking possession of the related software, and obtaining a service contract from the Content Provider for the duration of the arrangement. The total fixed fees remaining under the amended arrangement totaled $25.0 million, of which $5.5 million was paid during the six months ended June 30, 2022 with the remaining $4.5 million due in 2022, and $5.0 million in each of the years 2023 through 2025. Fixed fee payments are presented in the condensed consolidated statements of cash flows as payments for content licensing arrangements within cash flows from investing activities. Additional payments could be required if the Company’s total revenue generated from the arrangement exceed certain stipulated annual and cumulative thresholds during the contract term.

 

The amended and restated Agreement is accounted for as a business combination. The consideration transferred in exchange for the identifiable intangible assets is comprised of the present value of the Company’s total expected fixed payments under the Agreement, the net assets recognized under the original agreement, as well as a contingent consideration. The contingent consideration represents additional amounts which the Company expects to pay to the Content Provider if the Company’s total revenue generated from the arrangement exceeds certain stipulated annual and cumulative thresholds during the contract term. The fair value of the contingent liability is determined using Level 3 inputs, since estimating the fair value of this contingent liability requires the use of significant and subjective inputs that may and are likely to change over the duration of the liability with related changes in internally generated anticipated games revenue as well as external market factors. The contingent consideration was valued using a Monte Carlo simulation based on management’s anticipated annual games revenue forecasts. The fair value of the contingent consideration was initially recognized upon execution of the amendment to the Agreement and is recorded within content licensing liabilities within the condensed consolidated balance sheet at June 30, 2022. Refer to Note 4 – Acquisition for further detail.

 

At June 30, 2022 the present value of the remaining fixed fee payments remaining under the agreement of $14.8 million and the contingent content liability of $4.4 million are recorded in content licensing liabilities in the condensed consolidated balance sheet. During the three and six months ended June 30, 2022 the Company recognized imputed interest expense of $0.4 million related to the content licensing liabilities in other loss, net. in the condensed consolidated statement of operations.

 

Chile VAT

 

Coolbet’s B2C casino and sports-betting platform is accessible in Chile. Since June 1, 2020, foreign digital service suppliers that provide services to individuals in Chile have been required to register for value-added tax (“VAT”) purposes. On September 20, 2021, the Company submitted an inquiry to the Chilean Tax Administration (“CTA”) for clarification on the basis to apply VAT. In December 2021, the CTA issued a general resolution as a response to another iGaming platform operator stating the Tax Administration’s position that fees paid by users for entertainment services provided through online gaming and betting platforms are subject to VAT in Chile. The CTA clarified its interpretation that the VAT tax rate of 19% shall be applied to “fees paid by the users”, specifically gross customer deposits on the iGaming platform. This was further reiterated by the CTA in June 2022 through a public response to an unnamed ruling request on the matter.

 

On May 13, 2022, the CTA issued a resolution stating that unregistered foreign digital service providers will be subject to 19% withholding on payments through enforcement to issuers of credit cards, debit cards, and other forms of payment, effective August 1, 2022. On June 1, 2022 the CTA issued the first non-compliant list of unregistered foreign digital services providers to enact enforcement of this withholding; Coolbet was not named on this list. As of June 30, 2022 and through the date of filing, the Company has not received formal notification of any VAT liability due to the CTA.

 

Comprehensive legislation for online gambling was filed in draft form to Chile’s Chamber of Deputies on March 7, 2022, which would allow for an unlimited number of licenses to be granted by Chile’s national casino gaming authority and establish a tax with a rate of 20% applied over the gross income of an online betting platform. Registration as a licensee under the proposed legislation would require operators to establish legal entities within Chile and would restrict foreign service providers from operating within the country.

 

Due to the obligation being established by the governing law, a liability appears to be probable. However, the Company believes the application of VAT on gross customer deposits, as clarified by the CTA, does not represent a reasonable application of the law to the economic substance of the Company’s services. VAT calculated as currently contemplated would result in liabilities far in excess of actual earned revenues and would result in a material loss to the Company. The Company intends to engage outside counsel to formally approach the CTA on behalf of the Company in the second half of 2022 to attempt to agree upon a more reasonable application of the VAT law, taking into account the Company’s specific facts and circumstances. If any agreement is reached with the CTA, it is possible that the application would be applied retroactively to Coolbet’s Chilean activity as of June 1, 2020. As no formal discussions with the CTA occurred, and no agreement on a different application has been reached, as of June 30, 2022 the Company has determined that a liability is not reasonably estimable as of June 30, 2022. However, if the Company and the CTA are able to agree on an application other than deposits, this could result in a material loss when considering the retroactive application.

 

30
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements, related notes, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes included in our 2021 Form 10-K.

 

Critical Accounting Policies and Estimates

 

For a discussion of our critical accounting policies and the means by which we develop estimates, refer to “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations” on our 2021 Annual Report on Form 10-K. There have been no material changes during the periods covered by this Quarterly Report on Form 10-Q from the critical policies described in our Form 10-K.

 

Forward-Looking Statements

 

This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current expectations and views of future events based on certain assumptions, and include any statement that does not directly relate to a historical fact. For example, statements in this Quarterly Report on Form 10-Q may include the potential impact of the expected timing of government approvals or opening of new regulated markets for online gaming, our financial guidance and expectations or targets for our operations, anticipated revenue growth or operating synergies related to our acquisition of Coolbet, and expectations about our ability to effectively execute our business strategy and expansion goals. These forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “should,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” or other similar expressions.

 

Although we believe that we have a reasonable basis for each forward-looking statement, forward-looking statements are not guarantees of future performance and our actual results could differ significantly from the results discussed or implied in these forward-looking statements. Factors that might cause such differences are described in “Item 1A. Risk Factors” in our 2021 Form 10-K and in this Quarterly Report on Form 10-Q.

 

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. These forward-looking statements speak only as of the date on which they are made. We do not assume any obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

Overview

 

GAN Limited is a Bermuda exempted holding company and through its subsidiaries, operates in two lines of business. We are a business-to-business (“B2B”) supplier of enterprise Software-as-a-Service (“SaaS”) solutions for online casino gaming, commonly referred to as iGaming, and online sports betting applications. Beginning with our January 2021 acquisition of Vincent Group p.l.c., a Malta public limited company (“Coolbet”), we are also a business-to-consumer (“B2C”) developer and operator of an online sports betting and casino platform, which offers consumers in select markets in Northern Europe, Latin America and Canada a digital portal for engaging in sports betting, online casino games and poker. These two lines of business are also the Company’s reportable segments.

 

The B2B segment develops, markets and sells instances of and GameSTACK technology and iSight Back Office that incorporates comprehensive player registration, account funding and back-office accounting and management tools that enable casino operators to efficiently, confidently and effectively extend their online presence. In 2021, we won three prestigious industry awards from EGR North America – Best Freeplay Gaming Supplier, Best Full-Service Platform Provider and Best White Label Partner of the Year – in recognition of our expertise and commitment for delivering industry-leading gaming solutions to land-based casinos. GAN Sports, our newest product offering following the acquisition of Coolbet, aims to provide a best-in-class B2B sports betting product in the U.S. and Canada. In July 2022 GAN was named “Rising Star in Sports Betting” for the SBC North America Awards 2022.

 

The B2C segment includes the operations of Coolbet. Coolbet develops and operates an online sports betting and casino platform that is accessible through its website in markets across Northern Europe, Latin America and Canada. In April of 2022, Coolbet won a prestigious award at the International Gaming Awards in London – Mobile Operator of the Year – in recognition of our user-friendly mobile site and available innovative product features.

 

31
 

 

To meet this demand and serve our growing number of U.S. casino operator clients, we continue to invest in our software engineering capabilities and expand our operational support. The most significant component of our operating costs generally relate to our employee salary costs and benefits. Also, operating costs include technology and corporate infrastructure related-costs, as well as marketing expenditures with a focus on increasing and retaining B2C end-users.

 

Our net loss was $38.3 million and $3.8 million for the three months ended June 30, 2022 and 2021, respectively, and $42.8 million and $9.4 million for the six months ended June 30, 2022 and 2021, respectively.

 

We believe that our current technology is highly scalable and can support the launch of our product offerings for new customers and in new jurisdictions. We expect to achieve profitability through increased revenues from:

 

  organic growth of our existing casino operators,
  expansion into newly regulated jurisdictions with existing and new customers,
  margin expansion driven by the integration of Coolbet’s sports betting technology in our B2B product offerings,
  strategically reducing our existing worldwide global workforce to simplify and streamline our organization and strengthen the overall competitiveness of our B2B segment,
  revenue expansion from the roll-out of our Super RGS content offering to B2C operators who are not already clients, and
  organic growth of our B2C business in existing and new jurisdictions.

 

We hold a strategic U.S. patent, which governs the linkage of on-property reward cards to their counterpart internet gambling accounts together with bilateral transmission of reward points between the internet gaming technology system and the land-based casino management system present in all U.S. casino properties. In February 2021, we reached an agreement to license our U.S. patent to a second major U.S. casino operator group and we may license our patent to other major U.S. internet gaming operators in the future.

 

32
 

 

Consolidated Results of Operations

 

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

 

The following table sets forth our consolidated results of operations for the periods indicated:

 

   Three Months Ended
June 30,
   Change 
   2022   2021   Amount   Percent 
(dollars in thousands)                
Revenue  $34,967   $34,350   $617    1.8%
Operating costs and expenses                    
Cost of revenue(1)   10,463    10,356    107    1.0%
Sales and marketing   7,267    5,480    1,787    32.6%
Product and technology   5,188    4,829    359    7.4%
General and administrative(1)   13,688    12,320    1,368   11.1%
Impairment   28,861        28,861    n.m. 
Restructuring   712        712    n.m. 
Depreciation and amortization   6,556    4,132    2,424    58.7%
Total operating costs and expenses   72,735    37,117    35,618    96.0%
Operating loss   (37,768)   (2,767)   (35,001)   n.m. 
Interest expense, net   

1,080

    

    

1,080

    

n.m.

 
Other income   (270)       (270)   n.m. 
Loss before income taxes   (38,578)   (2,767)   (35,811)   n.m. 
Income tax (benefit) expense   (229)   992    (1,221)   n.m. 
Net loss  $(38,349)  $(3,759)  $(34,590)   n.m. 

 

(1) Excludes depreciation and amortization expense

n.m. = not meaningful

 

Geographic Information

 

The following table sets forth our consolidated revenue by geographic region, for the periods indicated:

 

   Three Months Ended
June 30,
   Percentage of Revenue   Change 
   2022   2021   2022   2021   Amount   Percent 
(dollars in thousands)                        
United States  $11,720   $8,330    33.5%   24.3%  $3,390    40.7%
Europe   10,205    14,193    29.2%   41.3%   (3,988)   (28.1)%
Latin America   11,193    10,254    32.0%   29.9%   939    9.2%
Rest of the world   1,849    1,573    5.3%   4.5%   

276

    17.5%
Total revenue  $34,967   $34,350    100.0%   100.0%  $617    1.8%

 

33
 

 

Revenue

 

Revenue was $35.0 million for the three months ended June 30, 2022, an increase of $0.6 million from the comparable period in 2021. The increase was primarily attributable to an increase in our B2B revenues of $3.8 million driven by a $2.1 million increase related to new content revenues, hardware sales, and expansion into new markets, such as Ontario, Canada. The remaining increase primarily relates to RMiG development revenues. These increases were offset by decreases in B2C revenues of $3.2 million driven by decreased sports and casino margins combined with unfavorable impacts of revenues derived from currencies which weakened relative to the U.S. Dollar.

 

Revenue fluctuations across our international markets are primarily a result of our B2C operations, which accounted for $4.0 million of the decreased revenues in Europe and the full $0.9 million increase in Latin America. The increase in revenue in the United States as compared to the prior period was the result of increased RMiG revenues within the B2B segment.

 

Cost of Revenue

 

Cost of revenue was $10.5 million for the three months ended June 30, 2022, an increase of $0.1 million from the comparable period in 2021. Of this increase, $0.6 million was attributable to B2B hardware sales, offset by lower costs in our B2C segment of $0.5 million as a result of lower revenues in the quarter.

 

Sales and Marketing

 

Sales and marketing expense was $7.3 million for the three months ended June 30, 2022, an increase of $1.8 million from the comparable period in 2021. The increase was primarily attributable to increased sales and marketing activities within our B2C operations in order to attract additional end-users.

 

Product and Technology

 

Product and technology expense was $5.2 million for the three months ended June 30, 2022, an increase of $0.4 million from the comparable period in 2021, primarily due to increases in net salaries and related employee costs of $0.3 million as we ramped up our team and invested in both our B2B and B2C platforms to serve our new and existing customers.

 

General and Administrative

 

General and administrative expense increased $1.4 million of which $1.5 million was attributable to increased personnel costs, including an increase of $0.7 million in share-based compensation expense. Software and related technology expenses increased $0.5 million and unfavorable foreign exchange transaction losses, primarily due to the movement of the British Pound relative to the U.S. Dollar, contributed $0.2 million towards this increase. These increases were partially offset by a reduction in professional fees of $0.9 million resulting in an ongoing effort to in-source our back-office and development functions.

 

34
 

 

Impairment

 

The stock trading price of our publicly traded shares and resulting market capitalization of our business has experienced a significant and sustained decline since our acquisition of Coolbet. As a result, we performed an interim quantitative impairment assessment of our goodwill as of June 30, 2022, which resulted in an impairment of $28.9 million to goodwill within our B2B reporting segment.

 

Restructuring Expenses

 

Restructuring expenses were $0.7 million for three months ended June 30, 2022 related to employee severance pay and related costs as a result of a restructuring plan we implemented in January 2022. The goal of the restructuring plan is to strategically reduce our existing B2B workforce to simplify and streamline our organization and strengthen the overall competitiveness of our B2B segment.

 

Depreciation and Amortization

 

Depreciation and amortization expense was $6.6 million for three months ended June 30, 2022, an increase of $2.4 million from the comparable period in 2021. The increase was due to the amortization expense recognized on acquired intangible assets related to the Company’s content licensing arrangement, and acceleration of amortization expense on capitalized development costs related to the expected exit of one of our customers in the B2B segment from the online casino and sports betting business in the third quarter of 2022.

 

Income Tax (Benefit) Expense

 

We recorded income tax benefit of $0.2 million for the three months ended June 30, 2022, reflecting an effective tax rate of 0.6%, compared to income tax expense of $1.0 million for the three months ended June 30, 2021, reflecting an effective tax rate of (35.9)%. Our country of domicile is Bermuda, which effectively has a 0% statutory tax rate as it does not impose taxes on profits, income, dividends, or capital gains. The difference between this 0% tax rate and the effective income tax rate for three months ended June 30, 2022 and 2021 was due primarily to a mix of earnings in foreign jurisdictions that are subject to current tax, taking into account foreign loss carryforwards in certain jurisdictions that are not expected to be recognized, and limitations on the deductibility of U.S. compensation under Internal Revenue Code Section 162(m).

 

35
 

 

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

 

The following table sets forth our consolidated results of operations for the periods indicated:

 

   Six Months Ended
June 30,
   Change 
   2022   2021   Amount   Percent 
(dollars in thousands)                
Revenue  $72,461   $61,468   $10,993    17.9%
Operating costs and expenses                    
Cost of revenue(1)   22,163    19,075    3,088    16.2%
Sales and marketing   13,365    9,581    3,784    39.5%
Product and technology   14,142    10,072    4,070    40.4%
General and administrative(1)   23,080    22,329    751   3.4%
Impairment   

28,861

    

    

28,861

    

n.m.

 
Restructuring   1,771        1,771    n.m. 
Depreciation and amortization   10,969    8,126    2,843    35.0%
Total operating costs and expenses   114,351    69,183    45,168    65.3%
Operating loss   (41,890)   (7,715)   (34,175)   n.m. 
Interest expense, net   1,071    1    1,070    n.m. 
Other income   

(270

)   

    (270)   

n.m.

 
Loss before income taxes   (42,691)   (7,716)   (34,975)   n.m. 
Income tax expense   157    1,653    (1,496)   (90.5)%
Net loss  $(42,848)  $(9,369)  $(33,479)   n.m. 

 

(1) Excludes depreciation and amortization expense

n.m. = not meaningful

 

Geographic Information

 

The following table sets forth our consolidated revenue by geographic region, for the periods indicated:

 

   Six Months Ended
June 30,
   Percentage of Revenue   Change 
   2022   2021   2022   2021   Amount   Percent 
(dollars in thousands)                        
United States  $23,211   $19,079    32.0%   31.0%  $4,132    21.7%
Europe   22,769    25,257    31.4%   41.1%   (2,488)   (9.9)%
Latin America   23,418    13,857    32.3%   22.5%   9,561    69.0%
Rest of the world   3,063    3,275    4.3%   5.4%   (212)   (6.5)%
Total revenue  $72,461   $61,468    100.0%   100.0%  $10,993    17.9%

 

Revenue

 

Revenue was $72.5 million for the six months ended June 30, 2022, an increase of $11.0 million from the comparable period in 2021. The increase was attributable to active customer growth in Latin America that contributed towards the increase in our B2C revenues of $6.9 million, as well as an increase in the B2B revenues attributable to the growth in existing customers and the increase in development revenues.

 

36
 

 

In Europe, $2.0 million of the decreased revenue was attributable to the B2C operations revenues in Euros weakening relative to the U.S. Dollar, despite underlying increases in revenues denominated in Euros. The B2B segment further experienced declines in its RMiG business in Europe that resulted in an additional $1.1 million decrease in revenue.

 

The increase in revenue in the United States as compared to the prior period was the result of increased RMiG revenues within the B2B segment.

 

Cost of Revenue

 

Cost of revenue was $22.2 million for the six months ended June 30, 2022, an increase of $3.1 million from the comparable period in 2021. Of this increase, $1.3 million was attributable to our B2C operations’ cost of gaming revenues driven primarily by higher content fees of $0.7 million as a result of increased revenues, and $0.4 million increase in processing fees due to increased deposit and withdrawal activity on www.coolbet.com. Within our B2B segment, the cost of revenue increase was driven by a $1.5 million increase in service fees paid to a third-party content provider related to a content licensing agreement the Company entered into in the second quarter of 2021 and costs of hardware sales recognized during the second quarter of 2022 of $0.7 million.

 

Sales and Marketing

 

Sales and marketing expense was $13.4 million for the six months ended June 30, 2022, an increase of $3.8 million from the comparable period in 2021. Of the increase, $4.0 million was attributable to increased sales and marketing activities within our B2C operations in order to attract additional end-users. This increase was partially offset by a decrease of $0.4 million in share-based compensation expense related to personnel in our sales and marketing functions.

 

Product and Technology

 

Product and technology expense was $14.1 million for the six months ended June 30, 2022, an increase of $4.1 million from the comparable period in 2021, due to higher net salaries and related employee costs of $3.8 million (excluding a decrease in related share-based compensation of $0.1 million) as we ramped up our team and invested in both our B2B and B2C platforms to serve our new and existing customers.

 

General and Administrative

 

General and administrative expense was $23.1 million for the six months ended June 30, 2022, an increase of $0.8 million from the comparable period in 2021, of which unfavorable foreign exchange transaction losses contributed $1.0 million primarily due to the movement of the British Pound relative to the U.S. Dollar. Office and related expenses contributed $0.8 million towards this increase and software and technology expenses additionally increased $0.8 million. Share-based compensation for personnel in our general and administrative functions increased $0.3 million. These increases were primarily offset by a decrease of $2.0 million attributable to a reduction in professional fees resulting in an ongoing effort to in-source our back-office and development functions and a decrease of $0.9 million in sales tax expense.

 

37
 

 

Impairment

 

The stock trading price of our publicly traded shares and resulting market capitalization of our business has experienced a significant and sustained decline since our acquisition of Coolbet. As a result, we performed an interim quantitative impairment assessment of our goodwill as of June 30, 2022, which resulted in an impairment of $28.9 million to goodwill within our B2B reporting segment.

 

Restructuring Expenses

 

Restructuring expenses were $1.8 million for six months ended June 30, 2022 related to employee severance pay and related costs as a result of a restructuring plan we implemented in January 2022. The goal of the restructuring plan is to strategically reduce our existing B2B workforce to simplify and streamline our organization and strengthen the overall competitiveness of our B2B segment.

 

Depreciation and Amortization

 

Depreciation and amortization expense was $11.0 million for six months ended June 30, 2022, an increase of $2.8 million from the comparable period in 2021. The increase was due to the amortization expense recognized on acquired intangible assets related to the Company’s content licensing arrangement, and acceleration of amortization expense on capitalized software development costs related to the expected exit of one of our customers in the B2B segment from the online casino and sports betting business in the third quarter of 2022.

 

Income Tax Expense

 

We recorded income tax expense of $0.2 million for the six months ended June 30, 2022, reflecting an effective tax rate of (0.4)%, compared to income tax expense of $1.7 million for the six months ended June 30, 2021, reflecting an effective tax rate of (21.4)%. Our country of domicile is Bermuda, which effectively has a 0% statutory tax rate as it does not impose taxes on profits, income, dividends, or capital gains. The difference between this 0% tax rate and the effective income tax rate for six months ended June 30, 2022 and 2021 was due primarily to a mix of earnings in foreign jurisdictions that are subject to current tax, taking into account foreign loss carryforwards in certain jurisdictions that are not expected to be recognized, and limitations on the deductibility of U.S. compensation under Internal Revenue Code Section 162(m).

 

Segment Operating Results

 

We report our operating results by segment in accordance with the “management approach.” The management approach designates the internal reporting used by our Chief Operating Decision Maker (“CODM”), who is our Chief Executive Officer, for making decisions and assessing performance of our reportable segments.

 

38
 

 

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

 

The following table sets forth our segment results for the periods indicated:

 

   Three Months Ended
June 30,
   Percentage of
Segment Revenue
   Change 
   2022   2021   2022   2021   Amount   Percent 
(dollars in thousands)                        
B2B                              
Revenue  $14,150   $10,368    100.0%   100.0%  $3,782    36.5%
Cost of revenue(1)   2,939    2,307    20.8%   22.3%   632    27.4%
B2B segment gross profit  $11,211   $8,061    79.2%   77.7%  $3,150    39.1%
B2C                              
Revenue  $20,817   $23,982    100.0%   100.0%  $(3,165)   (13.2)%
Cost of revenue(1)   7,524    8,049    36.1%   33.6%   (525)   (6.5)%
B2C segment gross profit  $13,293   $15,933    63.9%   66.4%  $(2,640)   (16.6)%

 

(1) Excludes depreciation and amortization expense

 

B2B Segment

 

B2B revenue increased $3.8 million primarily due to an increase in development services and other revenue of $2.6 million. Of this increase, development revenues contributed $1.9 million, hardware sales for new RMiG customer launches contributed $0.7 million. The remaining increase was primarily a result of organic growth within US RMiG revenues which increased $1.1 million.

 

B2B cost of revenue increased $0.6 million primarily related to hardware sales recognized in the current quarter which did not occur in the prior period.

 

Segment gross profit margin for B2B, which excludes depreciation and amortization expense, increased by 39.1% primarily driven by development revenues of $1.3 million, and $0.6 million of licensing revenues related to an amended of a content licensing arrangement that did not have related costs of revenue in the current period and did not occur in the prior period.

 

B2C Segment

 

B2C revenue decreased $3.2 million primarily due to lower sports and casino margins and the weakening of the currencies in which we derive our B2C operations’ revenues relative to the U.S. Dollar.

 

B2C cost of revenue decreased $0.5 million, which was primarily attributable decreased revenues and the mix of currencies in which we derive our B2C operations’ revenues which weakened relative to the U.S. Dollar.

 

Segment gross profit for B2C, which excludes depreciation and amortization expense, decreased by (16.6)%, which was primarily driven by a decrease in sports and casino margins for the three months ended June 30, 2022 and a decrease in revenues relative to certain fixed costs of revenue.

 

39
 

 

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

 

The following table sets forth our segment results for the periods indicated:

 

   Six Months Ended
June 30,
   Percentage of
Segment Revenue
   Change 
   2022   2021   2022   2021   Amount   Percent 
(dollars in thousands)                        
B2B                              
Revenue  $27,220   $23,174    100.0%   100.0%  $4,046    17.5%
Cost of revenue(1)   6,842    5,049    25.1%   21.8%   1,793    35.5%
B2B segment gross profit  $20,378   $18,125    74.9%   78.2%  $2,253    12.4%
B2C                              
Revenue  $45,241   $38,294    100.0%   100.0%  $6,947    18.1%
Cost of revenue(1)   15,321    14,026    33.9%   36.6%   1,295    9.2%
B2C segment gross profit  $29,920   $24,268    66.1%   63.4%  $5,652    23.3%

 

(1) Excludes depreciation and amortization expense

 

B2B Segment

 

B2B revenue increased $4.0 million primarily due to an increase in platform and content fee revenue of $2.7 million. Of this increase, organic growth in existing U.S. customers contributed $3.7 million, partially offset by a decline in RMiG revenues in Italy and SIM revenues of $1.1 million and $0.5 million, respectively.

 

Additionally, B2B development services and other revenue increased $1.3 million, of which $2.5 million related to development and content licensing revenues, $1.1 million related to the accelerated recognition of deferred revenues related to expected exits of our customers, and $0.7 million recognized in connection with hardware sales. These increases were offset by a decrease of $3.0 million related to patent licensing fee revenue recognized during the six months ended June 30, 2021 which did not recur during the six months ended June 30, 2022.

 

B2B cost of revenue increased $1.8 million primarily related to a $2.7 million increase in platform and content license fees driven by a $1.5 million increase in service fees incurred related to the content licensing agreement the Company entered into in the second quarter of 2021 with a content provider, $0.7 million related to hardware sales, and a $0.3 million increase in game certification costs incurred in connection with launches of new RMiG customers in the year. This increase was partially offset by a $0.7 million decrease in royalties, primarily as a result of lower RMiG revenues in Italy.

 

Segment gross profit margin for B2B, which excludes depreciation and amortization expense, increased by 12.4% primarily driven by increased development and content licensing revenues.

 

40
 

 

B2C Segment

 

B2C revenue increased $6.9 million primarily due to growth in the number of active customers in our Latin American markets during the current period.

 

B2C cost of revenue increased $1.3 million driven by an increase in content fees of $0.7 million related to growth in casino revenues and higher processing fees of $0.4 million due to an increase in customer deposits of 29% and withdrawal activity on www.coolbet.com.

 

Segment gross profit for B2C, which excludes depreciation and amortization expense, increased by 23.3% primarily driven by an increase in gaming revenues and an increase in gross profit margin as a result of improved processing deals for the six months ended June 30, 2022.

 

Non-GAAP Financial Measures

 

Adjusted EBITDA

 

Management uses the non-GAAP measure of Adjusted EBITDA to measure its financial performance. Specifically, it uses Adjusted EBITDA (i) as a measure to compare our operating performance from period to period, as it removes the effect of items not directly resulting from our core operations, and (ii) as a means of assessing our core business performance against others in the industry, because it eliminates some of the effects that are generated by differences in capital structure, depreciation, tax effects and unusual and infrequent events.

 

We define Adjusted EBITDA as net income (loss) before interest expense (income), net, income tax (benefit) expense, depreciation and amortization, impairments, share-based compensation expense and related expense, restructuring costs and other items which our Board of Directors considers to be infrequent or unusual in nature. The presentation of Adjusted EBITDA is not intended to be used in isolation or as a substitute for any measure prepared in accordance with U.S. GAAP and Adjusted EBITDA may exclude financial information that some investors may consider important in evaluating our performance. Because Adjusted EBITDA is not a U.S. GAAP measure, the way we define Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in the industry.

 

Below is a reconciliation of Adjusted EBITDA to net loss, the most comparable U.S. GAAP measure, as presented in the condensed consolidated statements of operations for the periods specified:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2022   2021   2022   2021 
(in thousands)                
Net loss  $(38,349)  $(3,759)  $(42,848)  $(9,369)
Income tax (benefit) expense   (229)   992    157    1,653 
Interest expense, net   1,080        1,071    1 
Depreciation and amortization   6,556    4,132    10,969    8,126 
Share-based compensation and related expense(1)   2,715    2,174    4,336    3,665 
Impairment   28,861        28,861     
Restructuring   712        1,771     
Adjusted EBITDA  $1,346   $3,539   $4,317   $4,076 

 

(1) Includes $2.7 million and $2.3 million in equity-classified expense for the three months ended June 30, 2022 and 2021, respectively, and $4.0 million and $4.0 million for the six months ended June 30, 2022 and 2021, respectively, and a benefit of $0.1 million and $0.1 million from liability-classified awards, for the three months ended June 30, 2022 and 2021, respectively, and a benefit of $0.2 million and $0.2 million for the six months ended June 30, 2022 and 2021, respectively. Such amounts excluded capitalized amounts. Additionally, share-based compensation and related expense for the three and six months ended June 30, 2022 includes $0.3 million and $0.7 million of bonus expense, inclusive of employer taxes, respectively, which will be settled in equity. Refer to Note 11. Share-based Compensation for further details.

 

41
 

 

Key Performance Indicators

 

Our management uses the following key performance indicators (“KPIs”) as indicators of trends and results of the business. These KPIs give our management an indication of the level of engagement between the player and the Company’s platforms. No estimation is necessary in quantifying these KPIs, nor do they represent U.S. GAAP based measurements. These KPIs are subject to various risks such as customer concentration, competition, licensing and regulation, and macroeconomic conditions. Refer to “Item 1A. Risk Factors” for further risks associated with our business which would affect these KPIs.

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2022   2021   2022   2021 
B2B Gross Operator Revenue (in millions)  $283.0   $221.4   $580.8   $435.6 
B2B Take Rate   5.0%   4.7%   4.7%   5.3%
B2C Active Customers (in thousands)   260    187    347    225 
B2C Marketing Spend Ratio   22%   12%   20%   13%
B2C Sports Margin   7.1%   9.7%   7.2%   8.4%

 

n.m. = not meaningful

 

B2B Gross Operator Revenue

 

We define B2B Gross Operator Revenue as the sum of our B2B corporate customers’ gross revenue from SIM, gross gaming revenue from RMiG, and gross sports win from sportsbook offerings. B2B Gross Operator Revenue, which is not comparable to financial information presented in conformity with U.S. GAAP, gives management and users of our financial statements an indication of the extent of transactions processed through our B2B corporate customers’ platforms and allows management to understand the extent of activity that our platform is processing.

 

The increase in Gross Operator Revenue for the three and six months ended June 30, 2022, as compared to the three and six months ended June 30, 2021, was driven primarily by expansion of existing clients into new jurisdictions, such as Connecticut and Ontario, Canada, coupled with our launch of RMiG solutions for new customers in existing jurisdictions, such as Michigan. Additionally, customer launches which occurred mid-2021 have now been fully included within the comparable periods of 2022 and increases in Michigan, New Jersey, and Pennsylvania were driven by organic growth from existing customers.

 

B2B Take Rate

 

We define B2B Take Rate as a quotient of B2B segment revenue retained by the Company over the total Gross Operator Revenue generated by our B2B corporate customers. B2B Take Rate gives management and users of our financial statements an indication of the impact of the statutory terms and the efficiency of the commercial terms on the business.

 

The increase in B2B Take Rate for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021 was primarily driven by a growth in development services and other revenue of 248%, which are considered in addition to Gross Operator Revenue. Development services and other revenue increased as a result of content licensing revenues, acceleration to the recognition of deferred revenues related to expected exits of our customers, and hardware sales recognized in the three months ended June 30, 2022 that did not occur in the prior period. This increase in Take Rate was slightly offset by changes to the mix of revenues within our B2B segment during the three months ended June 30, 2022 compared to the three months ended June 30, 2021, including higher RMiG revenues relative to historical performance, which typically experience a lower Take Rate when compared to other revenue streams.

 

The decrease in B2B Take Rate for the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, was driven by a growth in Gross Operator Revenue without a proportional growth in net segment revenue due to a larger portion of B2B revenues coming from lower Take Rate revenue streams which have outpaced historical performance. This was driven by patent revenue, which is earned based on the transfer of the patent and not derived from Gross Operator Revenue, recognized during the six months ended June 30, 2021 that did not recur in the current period.

 

42
 

 

B2C Active Customers

 

We define B2C Active Customers as a user that places a wager during the period. This metric allows management to monitor the customer segmentation, growth drivers, and ultimately creates opportunities to identify and add value to the user experience. This metric allows management and users of the financial statements to measure the platform traffic and track related trends.

 

The increase in B2C Active Customers for the three and six months ended June 30, 2022 was primarily driven by increased customer acquisition in Latin America and higher customer retention during the current period.

 

B2C Marketing Spend Ratio

 

We define B2C Marketing Spend Ratio as the total B2C direct marketing expense for the period divided by the total B2C revenues. This metric allows management to measure the success of marketing costs during a given period. Additionally, this metric allows management to compare across jurisdictions and other subsets, as an additional indication of return on marketing investment.

 

The increase in B2C Marking Spend Ratio for the three and six months ended June 30, 2022 was primarily driven by increased marketing spend in Latin America and higher customer acquisition costs as a result of entering into several brand building initiatives during the current period.

 

B2C Sports Margin

 

We define B2C Sports Margin as the ratio of wagers minus winnings to total amount wagered, adjusted for open wagers at period end. Sports betting involves a user placing a bet on the outcome of a sporting event with the chance to win a pre-determined amount, often referred to as fixed odds. Our B2C sportsbook revenue is generated by setting odds that are intended to provide a built-in theoretical margin in each sports bet offered to our users. This metric allows management to measure sportsbook performance against its expected outcome.

 

The decrease in B2C Sports Margin for three and six months ended June 30, 2022 was primarily attributable to more favorable outcomes in the prior period related to large sporting events, such as the Copa America Championship and European Football Championship, which occurred in the prior period and did not recur during the current period.

 

Liquidity and Capital Resources

 

Material Cash Commitments

 

Our primary uses of cash include funding our ongoing working capital needs, content licensing discussed below, developing and maintaining our proprietary software platforms. Such capital allocations are contemplated while considering other opportunities we may have to deploy our capital including share repurchases under our share repurchase program.

 

During the year ended December 31, 2021, we entered into a Content Licensing Agreement (the “Agreement”) with a third-party gambling content provider specializing in developing and licensing interactive games which was amended and restated on April 5, 2022. The Agreement grants us exclusive right to use and distribute the online gaming content in North America. The content provider is committed to developing a minimum number of games for our exclusive use over the five-year term, subject to extensions. In exchange, we are required to pay fixed fees, totaling $30.0 million, of which $5.0 million was due upon execution of the Agreement, and the remaining fixed fees are paid systematically over the initial five-year term. Additional payments could be required if our total revenue generated from the licensed content exceeds certain stipulated annual and cumulative thresholds during the contract term. In the event that the Agreement is terminated, actual cash outlays could be less than currently contemplated.

 

We expect our capital expenditures to continue to increase in the immediate future, as we seek to expand our business through organic growth and potential business acquisitions. Specifically, the key elements of our growth strategy include, but are not limited to, the expansion of our gaming content on our platform, primarily through the Agreements, our anticipated launch of the integrated B2B sportsbook technology solution in North America in the fourth quarter of 2022, the continued integration of Coolbet’s sports betting technology and international B2C operations, the launch of regulated gaming in new U.S. states and potential business acquisitions.

 

The execution of our growth strategy will require continued significant capital expenditures, and we expect to continue investing in our products and technologies as we seek to scale our business. In April 2022, we successfully completed a $30 million term loan with net proceeds, of which $27.6 million provides us additional flexibility to execute our balanced capital allocation plan centered around the aforementioned investments and our share repurchase program. During the three months ended June 30, 2022 we repurchased $1.0 million of our own shares as we believed our share price was undervalued and did not reflect the long-term opportunities ahead of us.

 

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We utilized cash in investing activities of $12.5 million and $102.5 million for the six months ended June 30, 2022 and 2021, respectively. Of these activities, $92.4 million related to the acquisition of Coolbet for the six months ended June 30, 2021. We made payments during the six months ended June 30, 2022 and 2021 related to content licensing fees of $5.5 million and $3.5 million, respectively. Expenditures related to internally developed capitalized software represented $6.3 million and $5.3 million, respectively, property and equipment (including licenses for internal use software) represented $0.7 million and $1 million, respectively.

 

Sources of Liquidity

 

We have primarily funded our operations through cash generated from operations, financing activities, and cash on hand. In May 2020, we completed our U.S. initial public offering under which we sold an aggregate of 7,337,000 ordinary shares for net proceeds of $57.4 million and in December 2020, we conducted a follow-on offering under which we sold 6,790,956 ordinary shares for net proceeds of $98.5 million. In January 2021, we completed the acquisition of Coolbet for a purchase price of $218.1 million, including the issuance of 5,260,516 ordinary shares, replacement equity-based awards valued at $0.3 million and cash of $111.1 million, which was funded from the follow-on offering proceeds and available cash on hand.

 

On April 26, 2022, a subsidiary of the Company entered into a fixed term credit facility (the “Credit Facility”) which provides for $30.0 million in aggregate principal amount of secured term loans with a floating interest rate of 3-month SOFR (subject to a 1% floor) + 9.5%. The Credit Facility matures on October 26, 2026 and is fully guaranteed by the Company. There are no scheduled principal payments due under the Credit Facility. The Company incurred $2.4 million in debt issuance costs in connection with the Credit Facility.

 

Our primary source of liquidity for our working capital is cash flows generated from operations and our cash on hand of $49.1 million at June 30, 2022, including the funds received in relation to the Credit Facility.

 

We believe cash generated from operations and cash on hand will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. We may also seek to enhance our competitive position through additional complementary acquisitions in both existing and new markets. Therefore, from time to time, we may access the equity or debt markets to raise additional funds to finance potential acquisitions.

 

In the longer term, to the extent that our current resources, including our ability to generate operating cash flows, are insufficient to satisfy our cash requirements, we may seek additional equity or debt financing. Our ability to do so depends on prevailing economic conditions and other factors, many of which are beyond our control.

 

We cannot provide any assurance as to the availability or terms of any additional future financing that we may require to support our operations. If the needed financing is not available, or if the terms of financing are less desirable than we expect, we may be forced to decrease our level of investment in new products and technologies, discontinue further expansion of our business, or scale back our existing operations, any of which could have an adverse impact on our business and financial prospects.

 

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Cash Flow Analysis

 

A summary of our operating, investing and financing activities is shown in the following table:

 

   Six Months Ended
June 30,
   Change 
(dollars in thousands)  2022   2021   Amount   Percent 
Net cash (used in) from operating activities  $(4,187)  $3,137   $(7,324)   (233.5)%
Net cash used in investing activities   (12,510)   (102,524)   90,014    (87.8)%
Net cash provided by (used in) financing activities   26,965    (321)   27,286    n.m. 
Effect of foreign exchange rates on cash   (670)   (860)   190    (22.1)%
Net increase (decrease) in cash  $9,598