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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 September 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 November 7, 2022, there were 42,590,012 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 September 30, 2022 and December 31, 2021 3
  Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 4
  Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2022 and 2021 5
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 6
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 8
  Notes to Condensed Consolidated Financial Statements 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 46
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 49
  SIGNATURES 50

 

2
 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GAN LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share amounts)

 

         
  

September 30,

2022

  

December 31,

2021

 
ASSETS          
Current assets          
Cash  $41,788   $39,477 
Accounts receivable, net of allowance for doubtful accounts of $81 and $120 at September 30, 2022 and December 2021, respectively   13,137    8,110 
Prepaid expenses   4,432    3,498 
Other current assets   3,503    3,337 
Total current assets   62,860    54,422 
           
Capitalized software development costs, net   16,089    14,430 
Goodwill   99,086    146,142 
Intangible assets, net   47,734    35,893 
Other assets   4,336    10,023 
Total assets  $230,105   $260,910 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current liabilities          
Accounts payable  $6,331   $5,268 
Accrued compensation and benefits   5,927    10,961 
Accrued expenses   2,674    4,669 
Liabilities to users   8,946    8,984 
Other current liabilities   2,793    3,151 
Total current liabilities   26,671    33,033 
           
Deferred income taxes   2,087    1,791 
Long-term debt   27,855     
Content licensing liabilities   19,612     
Other liabilities   1,517    2,049 
Total liabilities   77,742    36,873 
Commitments and contingencies (Note 16)          
Shareholders’ equity          
Ordinary shares, $0.01 par value, 100,000,000 shares authorized, 42,559,977 and 42,250,743 shares issued and outstanding at September 30, 2022 and December 2021, respectively   425    422 
Additional paid-in capital   327,327    319,551 
Accumulated deficit   (127,152)   (76,360)
Accumulated other comprehensive loss   (48,237)   (19,576)
Total shareholders’ equity   152,363    224,037 
Total liabilities and shareholders’ equity  $230,105   $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)

 

   2022   2021   2022   2021 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
                 
Revenue  $32,120   $32,268   $104,581   $93,736 
                     
Operating costs and expenses                    
Cost of revenue(1)   9,435    10,801    31,598    29,876 
Sales and marketing   6,757    5,657    20,122    15,238 
Product and technology   4,998    5,492    19,140    15,564 
General and administrative(1)   10,185    12,888    33,265    35,217 
Impairment           28,861     
Restructuring           1,771     
Depreciation and amortization   5,893    4,560    16,862    12,686 
Total operating costs and expenses   37,268    39,398    151,619    108,581 
Operating loss   (5,148)   (7,130)   (47,038)   (14,845)
Interest expense, net   1,450        2,521    1 
Other income   (13)       (283)    
Loss before income taxes   (6,585)   (7,130)   (49,276)   (14,846)
Income tax expense   356    1,548    513    3,201 
Net loss  $(6,941)  $(8,678)  $(49,789)  $(18,047)
                     
Loss per share, basic and diluted  $(0.16)  $(0.21)  $(1.18)  $(0.43)
                     
Weighted average ordinary shares outstanding, basic and diluted   42,237,226    42,061,396    42,263,462    41,962,535 

 

(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)

 

   2022   2021   2022   2021 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
                 
Net loss  $(6,941)  $(8,678)  $(49,789)  $(18,047)
Other comprehensive loss, net of tax                    
Foreign currency translation adjustments   (12,201)   (4,904)   (28,661)   (11,939)
Comprehensive loss  $(19,142)  $(13,582)  $(78,450)  $(29,986)

 

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)

 

   Shares   Amount   Capital   Shares   Deficit   Loss   Equity 
   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 
Net loss                   (6,941)       (6,941)
Foreign currency translation adjustments                       (12,201)   (12,201)
Share-based compensation           2,140                2,140 
Restricted share activity   159,859    2    (137)               (135)
Issuance of ordinary shares upon exercise of share options   250,000    2    323                325 
Issuance of ordinary shares upon ESPP purchases   74,707    1    168                169 
Balance at September 30, 2022   42,559,977   $425   $327,327   $   $(127,152)  $(48,237)  $152,363 

 

   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 
Net loss                   (8,678)       (8,678)
Foreign currency translation adjustments                       (4,904)   (4,904)
Share-based compensation           1,823                1,823 
Restricted share activity   2,590                         
Issuance of ordinary shares upon exercise of share options   164,510    2    489                491 
Balance at September 30, 2021   42,182,774   $422   $317,367   $          $(63,813)  $(14,816)  $239,160 

 

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)

 

   2022   2021 
   Nine Months Ended
September 30,
 
   2022   2021 
Cash Flows From Operating Activities          
Net loss  $(49,789)  $(18,047)
Adjustments to reconcile net loss to net cash (used in) from operating activities:          
Amortization of software and intangible assets   15,837    11,888 
Depreciation on property and equipment and finance lease right-of-use assets   1,025    798 
Amortization of debt discount and debt issuance costs   280     
Share-based compensation expense   5,671    5,774 
Impairment of goodwill   28,861     
Deferred income tax   541     
Other   (22)   432 
Changes in operating assets and liabilities, net of acquisitions:          
Accounts receivable   (5,189)   (483)
Prepaid expenses   (1,226)   272 
Other current assets   (265)   226 
Other assets   2,552    (9,123)
Accounts payable   1,730    (1,255)
Accrued compensation and benefits   (4,174)   3,370 
Accrued expenses   (1,689)   3,906 
Liabilities to users   1,296    2,847 
Other current liabilities   (387)   (460)
Other liabilities   1,389    1,205 
Net cash (used in) provided by operating activities   (3,559)   1,350 
           
Cash Flows From Investing Activities          
Cash paid for acquisition, net of cash acquired       (92,454)
Expenditures for capitalized software development costs   (9,242)   (8,483)
Payments for content licensing arrangements   (5,500)    
Purchases of gaming licenses   (1,115)   (215)
Purchases of property and equipment   (1,657)   (1,478)
Net cash used in investing activities   (17,514)   (102,630)
           
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   720    828 
Proceeds from issuance of ordinary shares upon ESPP purchase   169     
Principal payments on finance leases       (83)
Repurchases of ordinary shares   (1,006)    
Payment of debt issuance costs   (2,425)    
Net cash provided by financing activities   27,458    141 
           
Effect of foreign exchange rates on cash   (4,074)   (1,210)
           
Net increase (decrease) in cash   2,311    (102,349)
Cash and cash equivalents, beginning of period   39,477    152,654 
Cash and cash equivalents, end of period  $41,788   $50,305 
           
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 nine months ended September 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 nine months ended September 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 gain (loss) of $684 and $(589) for the three months ended September 30, 2022 and 2021, respectively, and $(494) and $(761) for the nine months ended September 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 September 30, 2022, the Company held cash deposits in foreign countries, primarily in Northern Europe and Latin America, of approximately $33.0 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

 

Macroeconomic conditions can materially adversely affect the Company’s business, results of operations and financial condition. Recent adverse macroeconomic conditions, including inflation, higher interest rates, slower growth or recession, the strengthening of the U.S. dollar, and corresponding currency fluctuations can have an adverse material impact on the Company’s future results of operations, cash flows, and financial condition, particularly with respect to foreign currency adjustments relating to our international operations. Such conditions may also affect consumers’ willingness to make discretionary purchases, and therefore the Company, along with its casino operator customers, may experience a decline in wagering. A downturn in the economic environment can also lead to increased credit and collectibility risk on the Company’s trade receivables, limitations on the Company’s ability to issue new debt, and reduced liquidity.

 

9
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Revenue Recognition

 

Revenue from B2B Operations

 

The Company’s revenue from its B2B operations are primarily from its internet gaming Software-as-a-Service platform, 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 use of its internet gaming system, game content, support and marketing services based on a fixed percentage of the casino operator’s net gaming revenue or net sportsbook win, at the time of settlement of an event for RMiG contracts, considered usage-based fees, or at the time of purchase for in-game virtual credit for SIM contracts. The determination of the fee charged to its customers is negotiated and varies significantly. Certain of these RMiG contracts provide the Company with a minimum monthly revenue guarantee in relation to the Company’s share of the casino operator’s net gaming revenue or net sportsbook win. At September 30, 2022 the remaining unsatisfied performance obligations related to fixed minimum guaranteed revenue totaled $0.5 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 customers in its delivery of services to the player end user. The Company’s customers simultaneously receive and consume the benefits provided by the Company as it delivers services to its customers. Usage based fees are considered variable consideration as the service is to provide unlimited continuous access to its hosted application and usage of the hosted system is primarily controlled by the player end user. The transaction price includes fixed and variable consideration and is billed monthly with the amount due generally thirty days from the date of the invoice. Variable consideration is allocated entirely to the period in which consideration is earned as the variable amounts relate specifically to the customer’s usage of the platform that day and allocating the usage-based fees to each day is consistent with the allocation objective, primarily that the change in amounts reflect the changing value to the customer. The Company’s internet gaming system, game content, support and marketing services are provided equally throughout the term of the contract. These services are made up of a daily requirement to provide access and use of the internet gaming system and 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 September 30, 2022 and December 31, 2021, the Company has recorded a liability due to its customers for their share of the fees of $1,362 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 3,200 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 September 30, 2022 and December 31, 2021, the related liabilities to users was $8,946 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 and quantitative impairment test as of June 30, 2022 which resulted in an impairment to goodwill of $28.9 million. The Company performed an additional qualitative assessment as of September 30, 2022 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 current interim period; therefore, an interim quantitative impairment test was performed. The Company did not recognize an additional impairment to goodwill as a result of its interim impairment test as of September 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.

 

Gaming licenses include license applications fees and market access payments in connection with agreements that the Company enters into with strategic partners. The market access arrangements authorize the Company to offer online gaming and online sports betting in certain regulated markets. These costs are capitalized and amortized on a straight-line basis over their estimated useful lives, beginning with the commencement of operations.

 

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

 

Long-lived assets, except goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company compares the undiscounted cash flows expected to be generated by that asset or asset group to their carrying amount. If the carrying amount of the long-lived asset or asset group 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 and nine months ended September 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 September 30, 2022:

 

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

 

16
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

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 in April 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. Contingent consideration is revalued at each reporting period. There were no significant changes to the value through September 30, 2022. 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 expense for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The effect on deferred income tax of a change in tax rates are recorded in the period of the enactment. Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not expected to be realized based on current available evidence. In evaluating the Company’s ability to recover deferred tax assets in the jurisdiction from which they arise, all available positive and negative evidence is considered, including results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax-planning strategies. The Company records a valuation allowance to reduce its deferred tax assets to the net amount that it believes is more likely than not to be realized.

 

The Company recognizes tax benefits from uncertain tax positions only if management believes that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although the Company believes that it has adequately provided for uncertain tax positions, no assurance can be given that the final tax outcome of these matters would not be materially different. Adjustments are made when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences would affect the provision for income taxes in the period in which such determination is made and could have a material impact on the Company’s financial condition and operating results. The Company recognizes penalties and interest related to income tax matters in income tax expense.

 

Segments

 

The Company operates in two operating segments, B2B and B2C. Operating segments are defined as components of an enterprise where separate financial information is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and assess the Company’s performance. The Company’s CODM is the Chief Executive Officer. The CODM allocates resources and assesses performance based upon discrete financial information at the operating segment level.

 

Recently 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.

 

17
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

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 nine months ended September 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 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.

 

18
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

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, and liabilities assumed 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 entered into with the Content Provider valued at approximately $1.4 million which will be expensed over the service period of approximately five years.

 

NOTE 5 — PROPERTY AND EQUIPMENT, NET

 

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

 

  

Estimated

Useful Life

 

September 30,

2022

  

December 31,

2021

 
            
Fixtures, fittings and equipment  3-5 years  $3,791   $2,935 
Platform hardware  5 years   1,651    2,054 
Total property and equipment, cost      5,442    4,989 
Less: accumulated depreciation      (2,894)   (2,444)
Total     $2,548   $2,545 

 

Depreciation expense related to property and equipment was $312 and $260 for the three months ended September 30, 2022 and 2021, respectively, and $926 and $717 for the nine months ended September 30, 2022 and 2021, respectively.

 

19
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 6 — CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET

 

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

 

  

September 30,

2022

  

December 31,

2021

 
Capitalized software development costs  $32,059   $26,127 
Development in progress   2,528    5,910 
Total capitalized software development, cost   34,587    32,037 
Less: accumulated amortization   (18,498)   (17,607)
Total  $16,089   $14,430 

 

At September 30, 2022, development in progress primarily represents costs associated with new proprietary content and enhancements to the B2B software platform.

 

Amortization expense related to capitalized software development costs was $1,438 and $908 for the three months ended September 30, 2022 and 2021, respectively, and $4,552 and $2,569 for the nine months ended September 30, 2022 and 2021, respectively.

 

NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

The changes in the carrying amount of goodwill, by segment, for the nine months ended September 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   (8,082)   (10,113)   (18,195)
Balance at September 30, 2022  $35,287   $63,799   $99,086 

 

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 of the Company since the Coolbet acquisition, interim quantitative goodwill impairment assessments were performed as of June 30, 2022 and September 30, 2022.

 

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 performed as of June 30, 2022, the Company recognized an impairment to goodwill of $28.9 million. The Company did not recognize an additional impairment to goodwill as a result of its interim impairment test as of September 30, 2022.

 

20
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

Intangible Assets

 

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

 

  

Amortization Period

   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
   Weighted Average   September 30, 2022 
  

Amortization Period

   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
Developed technology   3.8 years   $30,671   $(13,792)  $16,879 
Third-party content licenses   4.6 years    22,938    (2,502)   20,436 
Customer relationships   3.6 years    8,019    (3,162)   4,857 
Trade names and trademarks   10.0 years    4,887    (1,089)   3,798 
Gaming licenses   7.3 years    3,008    (1,244)   1,764 
        $69,523   $(21,789)  $47,734 

 

  

Amortization Period

   Gross Carrying Amount   Accumulated Amortization   Net Carrying Amount 
   Weighted Average   December 31, 2021 
   Amortization Period   Gross Carrying Amount   Accumulated Amortization   Net Carrying 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 

 

Acquired in-process technology consisted of a proprietary technical platform which was under development at the time of acquisition up until its completion in September 2022. Following its completion and the launch of GAN Sports, the developed technology was placed in service and is currently being amortized over an estimated useful life of 5 years.

 

Amortization expense related to intangible assets was $4,135 and $3,356 for the three months ended September 30, 2022 and 2021, respectively, and $11,285 and $9,319 for the nine months ended September 30, 2022 and 2021, respectively.

 

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

 

   Amount 
Remainder of 2022  $4,369 
2023   17,611 
2024   8,005 
2025   7,996 
2026   2,330 
Thereafter   7,423 

 

21
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 8 — ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

  

September 30,

2022

  

December 31,

2021

 
Content license fees  $1,480   $2,402 
Other   1,194    2,267 
Total  $2,674   $4,669 

 

NOTE 9 — 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 nine months ended September 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 September 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

September 30, 2022

 
Credit Facility:          
Principal   13.28%  $30,000 
Less unamortized debt issuance costs        (2,145)
Long-term debt, net       $27,855 

 

During the three and nine months ended September 30, 2022 the Company incurred $1,071 and $1,735, respectively, in interest expense, of which $185 and $280, respectively, relates to the amortization of debt issuance costs.

 

22
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 10 — SHARE-BASED COMPENSATION

 

In April 2020, the Board of Directors established the GAN Limited 2020 Equity Incentive Plan (“2020 Plan”) which has been approved by the 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 September 30, 2022, the 2020 Plan provided for grants of up to 7,559,574 ordinary shares and there were 508,173 ordinary shares available for future issuance under the 2020 Plan.

 

Share Options

 

A summary of the share option activity as of and for the nine months ended September 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   947,002    0.03           
Exercised   (375,416)   1.93           
Forfeited/expired or cancelled   (998,942)   15.29           
Outstanding at September 30, 2022   3,710,859   $10.25    7.6   $1,756 
Options exercisable at September 30, 2022   2,271,058   $8.44    6.97   $672 

 

The Company recorded share-based compensation expense related to share options of $948 and $1,693 for the three months ended September 30, 2022 and 2021, respectively, and $2,596 and $4,639 for the nine months ended September 30, 2022 and 2021, respectively. Such share-based compensation expense was recorded net of capitalized software development costs of $87 and $65 for the three months ended September 30, 2022 and 2021, and $226 and $170 for the nine months ended September 30, 2022 and 2021, respectively. At September 30, 2022, there was total unrecognized compensation cost of $11,401 related to nonvested share options. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.7 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 nine months ended September 30, 2022, the Board of Directors approved the issuance of options to purchase 947,002 ordinary shares to employees under the 2020 Plan, including 944,002 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 $0.13 and $8.00 for the three months ended September 30, 2022 and 2021, respectively, and $4.13 and $11.49 for the nine months ended September 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.

 

23
 

 

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.

 

In August 2022, the Board of Directors approved the issuance of 34,659 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.

 

In September 2022, the Board of Directors approved the issuance of 50,317 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 September 30, 2022, the Company recognized a liability for outstanding and nonvested restricted share units held by non-employee directors of $148. 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 $958 and $65 for the three months ended September 30, 2022 and 2021, respectively, and $3,151 and $195 for the nine months ended September 30, 2022 and 2021, respectively. Such share-based compensation expense was recorded net of capitalized software development costs of $67 for the three and nine months ended September 30, 2022, respectively. At September 30, 2022, there was total unrecognized compensation cost of $6,785 related to nonvested restricted share units. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 3.2 years.

 

24
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

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

 

  

Number of

Shares

   Weighted Average Grant Date Fair Value 
Outstanding at December 31, 2021   369,140   $10.78 
Granted   1,413,333    5.23 
Vested   (213,245)   9.53 
Forfeited or cancelled   (73,622)   7.84 
Outstanding at September 30, 2022   1,495,606   $5.86 

 

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 $41 for the three months ended September 30, 2022, and $125 and $770 for the nine months ended September 30, 2022 and 2021, respectively. At September 30, 2022, there was total unrecognized compensation cost of $194 related to the nonvested shares granted. The cost is expected to be recognized over a weighted average period of 1.2 years. There were no restricted share awards that vested during the nine months ended September 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 nine months ended September 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.

 

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.

 

25
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

The ESPP is designed to allow eligible employees to purchase ordinary shares, at quarterly intervals, with their accumulated payroll deductions. The participants are offered the option to purchase ordinary shares at a discount during a series of successive offering periods. The option purchase price may be the lower of 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 concluded on August 31, 2022 with its first purchase occurring on August 31, 2022. The Company issued 74,707 shares under the ESPP as of September 30, 2022. During the three and nine months ended September 30, 2022 the Company recognized share-based compensation expense of $64 and $86, respectively, related to the ESPP.

 

NOTE 11 — 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
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
Share options   3,710,859    4,268,981    3,710,859    4,268,981 
Restricted shares   34,436        34,436     
Restricted share units   1,495,606    2,590    1,495,606    2,590 
Total   5,240,901    4,271,571    5,240,901    4,271,571 

 

NOTE 12 — REVENUE

 

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

 

   2022   2021   2022   2021 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
Revenue from services delivered at a point in time  $19,435   $22,621   $65,468   $64,030 
Revenue from services delivered over time   12,685    9,647    39,113    29,706 
Total  $32,120   $32,268   $104,581   $93,736 

 

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.

 

26
 

 

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
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
Contract liabilities from advance customer payments, beginning of the period  $459   $1,811   $1,874   $1,083 
Contract liabilities from advance customer payments, end of the period (1)   1,467    1,808    1,467    1,808 
Revenue recognized from amounts included in contract liabilities from advance customer payments at the beginning of the period   250    179    775    121 

 

(1)Contract liabilities from advance customer payments, end of period consisted of $479 and $740 recorded in other current liabilities in the condensed consolidated balance sheets at September 30, 2022 and 2021, respectively and $989 and $1,067 recorded in other liabilities in the condensed consolidated balance sheet at September 30, 2022 and 2021, respectively.

 

NOTE 13 — SEGMENT REPORTING

 

The Company’s reportable segments are B2B and B2C. The B2B segment develops, markets and sells instances of GameSTACK, GAN Sports, and iSight Back Office technology that incorporates comprehensive player registration, account funding and back-office accounting and management tools that enable the casino operators to efficiently, confidently and effectively extend their presence online in places that have permitted online real money gaming. The B2C segment, which includes the operations of Coolbet 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 September 30, 2022 and 2021 is as follows:

 

   B2B   B2C   Total   B2B   B2C   Total 
   Three Months Ended September 30, 
   2022   2021 
   B2B   B2C   Total   B2B   B2C   Total 
Revenue  $12,685   $19,435   $32,120   $11,175   $21,093   $32,268 
Cost of revenue(1)   2,173    7,262    9,435    3,583    7,218    10,801 
Segment gross profit  $10,512   $12,173   $22,685   $7,592   $13,875   $21,467 

 

(1)Excludes depreciation and amortization expense

 

27
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

During the three months ended September 30, 2022 and 2021, one customer in the B2B segment individually accounted for 22.5% and 14.7% of total revenue, respectively.

 

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

 

   B2B   B2C   Total   B2B   B2C   Total 
   Nine Months Ended September 30, 
   2022   2021 
   B2B   B2C   Total   B2B   B2C   Total 
Revenue  $39,905   $64,676   $104,581   $34,349   $59,387   $93,736 
Cost of revenue(1)   9,015    22,583    31,598    8,632    21,244    29,876 
Segment gross profit  $30,890   $42,093   $72,983   $25,717   $38,143   $63,860 

 

During the nine months ended September 30, 2022 and 2021, one customer in the B2B segment individually accounted for 20.2% and 13.5% of total revenue, respectively.

 

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

 

   2022   2021   2022   2021 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
Segment gross profit (1)  $22,685   $21,467   $72,983   $63,860 
Sales and marketing   6,757    5,657    20,122    15,238 
Product and technology   4,998    5,492    19,140    15,564 
General and administrative(1)   10,185    12,888    33,265    35,217 
Impairment           28,861     
Restructuring           1,771     
Depreciation and amortization   5,893    4,560    16,862    12,686 
Interest expense, net   1,450        2,521    1 
Other income   (13)       (283)    
Loss before income taxes  $(6,585)  $(7,130)  $(49,276)  $(14,846)

 

(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.

 

28
 

 

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
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
B2B:                
Platform and content license fees  $9,988   $8,743   $31,208   $27,252 
Development services and other   2,697    2,432    8,697    7,097 
Total B2B revenue  $12,685   $11,175   $39,905   $34,349 
                     
B2C:                    
Sportsbook  $7,763   $7,886   $28,023   $27,794 
Casino   11,093    12,323    34,924    29,306 
Poker   579    884    1,729    2,287 
Total B2C revenue   19,435    21,093    64,676    59,387 
Total revenue  $32,120   $32,268   $104,581   $93,736 

 

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

 

   2022   2021   2022   2021 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2022   2021   2022   2021 
United States  $10,320   $9,107   $33,531   $28,186 
Europe   10,574    11,598    33,343    36,855 
Latin America   9,492    9,854    32,910    23,711 
Rest of the world   1,734    1,709    4,797    4,984 
Total revenue  $32,120   $32,268   $104,581   $93,736 

 

NOTE 14 — INCOME TAXES

 

The Company’s effective income tax rate was (5.4)% and (21.7)% for the three months ended September 30, 2022 and 2021, respectively, and (1.0)% and (21.6)% for the nine months ended September 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 nine months ended September 30, 2022 and 2021 was due primarily to a mix of earnings in foreign jurisdictions that are subject to current tax and loss carryforwards in certain jurisdictions that are not expected to be recognized.

 

NOTE 15 — 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 $1.8 million in restructuring charges related to this plan during the nine months ended September 30, 2022, which are primarily related to employee severance pay and related costs. As of September 30, 2022, the Company had completed its restructuring plan and there were no unpaid restructuring charges.

 

29
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 16 — COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

The Company may be subject to legal actions and claims arising from contracts or other matters 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 by alleging the Content Provider had met its contractual obligations, thereby obligating the Company to make the next, scheduled $3.0 million payment. In March, the Content Provider served the Company a notice of default letter notifying the Company of its alleged material breach of the agreement, and disputing the validity of the termination. On April 25, 2022, the Content Provider attempted to serve formal notice of termination of the agreement, reaffirming the $3.0 million obligation. The Company continues to assert that all contractual obligations to the Content Provider have been relieved as a result of the Company’s initial termination notice and will vigorously defend any claims made by the Content Provider. The Company further recognized an impairment loss related to the initial payment of $3.5 million in the condensed statement of operations for the year ended December 31, 2021.

 

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 nine months ended September 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 nine months ended September 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.

 

30
 

 

GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

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 September 30, 2022. Refer to Note 4 – Acquisition for further detail.

 

At September 30, 2022 the present value of the remaining fixed fee payments remaining under the agreement of $15.2 million and the contingent content liability of $4.4 million are recorded in content licensing liabilities in the condensed consolidated balance sheet. The Company recognized imputed interest expense of $0.4 million and $0.8 million during the three and nine months ended September 30, 2022, respectively, 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 September 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 has engaged outside counsel to formally approach the CTA on behalf of the Company 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 of September 30, 2022, the Company has not yet formally agreed on any application of the VAT law with the CTA. As a result, the Company has determined that a liability is not reasonably estimable as of September 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.

 

31
 

 

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 GameSTACK, GAN Sports, and iSight Back Office technology that incorporates comprehensive player registration, account funding and back-office accounting and management tools that enable casino operators to efficiently, confidently and effectively extend their online presence. In 2022, we won a prestigious industry award from EGR North America – Best Customer Onboarding Partner – 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, launched in September 2022 and aims to provide a best-in-class B2B sports betting product in the U.S. and Canada. In July 2022, GAN was named a “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. In September 2022, Coolbet won the Northern European Operator of the Year award at the SBC Awards 2022 in Barcelona.

 

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To meet 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 and benefits costs. Also, operating costs include technology and corporate infrastructure related-costs, as well as marketing expenditures with a focus on increasing and retaining B2C end-users.

 

Our net loss was $6.9 million and $8.7 million for the three months ended September 30, 2022 and 2021, respectively, and $49.8 million and $18.0 million for the nine months ended September 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.

 

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Consolidated Results of Operations

 

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

 

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

 

   Three Months Ended
September 30,
   Change 
   2022   2021   Amount   Percent 
(dollars in thousands)