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, 20222023

 

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)

 

BermudaNot Applicable

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification No.)

400 Spectrum Center Drive, Suite 1900, Irvine, California92618
(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 classTrading Symbol(s)Name of each exchange on which registered
Ordinary shares, par value $0.01GANThe 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☐
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 6, 2023, there were 44,714,448 ordinary shares outstanding.

 

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, 20222023 and December 31, 202120223
 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 20222023 and 202120224
 Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 20222023 and 202120225
 Condensed Consolidated Statements of Changes in Stockholders’Shareholders’ Equity for the three and nine months ended September 30, 20222023 and 202120226
 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 20222023 and 2021202287
 Notes to Condensed Consolidated Financial Statements98
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations3235
Item 3.Quantitative and Qualitative Disclosures about Market Risk4648
Item 4.Controls and Procedures4648
 PART II - OTHER INFORMATION 
Item 1.Legal Proceedings4850
Item 1A.Risk Factors4850
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds49
Item 6.Exhibits4951
 SIGNATURES5052

 

2
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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

GAN LIMITED

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share and per share amounts)

 

      September 30, December 31, 
 

September 30,

2022

 

December 31,

2021

  2023  2022 
ASSETS                
Current assets                
Cash $41,788  $39,477  $39,212  $45,920 
Accounts receivable, net of allowance for doubtful accounts of $81 and $120 at September 30, 2022 and December 2021, respectively  13,137   8,110 
Accounts receivable, net of allowance for doubtful accounts of $146 and $250 at September 30, 2023 and December 31, 2022, respectively  9,168   13,808 
Prepaid expenses  4,432   3,498   3,302   4,861 
Other current assets  3,503   3,337   4,086   3,041 
Total current assets  62,860   54,422   55,768   67,630 
                
Capitalized software development costs, net  16,089   14,430   7,972   6,749 
Goodwill  99,086   146,142 
Intangible assets, net  47,734   35,893   15,293   24,955 
Operating lease right-of-use assets  4,438   234 
Other assets  4,336   10,023   5,189   3,512 
Total assets $230,105  $260,910  $88,660  $103,080 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities                
Accounts payable $6,331  $5,268  $5,449  $6,437 
Accrued compensation and benefits  5,927   10,961   9,570   8,750 
Accrued expenses  2,674   4,669 
Accrued content license fees  1,577   2,214 
Liabilities to users  8,946   8,984   9,467   10,683 
Current operating lease liabilities  751   195 
Other current liabilities  2,793   3,151   5,659   4,253 
Total current liabilities  26,671   33,033   32,473   32,532 
                
Deferred income taxes  2,087   1,791   4,073   4,218 
Long-term debt  27,855   —   41,056   28,157 
Content licensing liabilities  19,612   —   2,800   15,280 
Non-current operating lease liabilities  3,730   — 
Other liabilities  1,517   2,049   2,508   2,125 
Total liabilities  77,742   36,873   86,640   82,312 
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 
Ordinary shares, $0.01 par value, 100,000,000 shares authorized, 44,698,931 and 42,894,211 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively  447   429 
Additional paid-in capital  327,327   319,551   335,321   328,998 
Accumulated deficit  (127,152)  (76,360)  (299,929)  (274,861)
Accumulated other comprehensive loss  (48,237)  (19,576)  (33,819)  (33,798)
Total shareholders’ equity  152,363   224,037   2,020   20,768 
Total liabilities and shareholders’ equity $230,105  $260,910  $88,660  $103,080 

 

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

 

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GAN LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except share and per share amounts)

 

 2023  2022  2023  2022 
 2022 2021 2022 2021  Three Months Ended Nine Months Ended 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		  September 30,  September 30, 
 2022 2021 2022 2021  2023  2022  2023  2022 
                  
Revenue $32,120  $32,268  $104,581  $93,736  $29,817  $32,120  $98,704  $104,581 
                                
Operating costs and expenses                                
Cost of revenue(1)  9,435   10,801   31,598   29,876   9,242   9,435   28,888   31,598 
Sales and marketing  6,757   5,657   20,122   15,238   7,196   6,781   21,704   20,292 
Product and technology  4,998   5,492   19,140   15,564   9,150   7,571   29,966   24,928 
General and administrative(1)  10,185   12,888   33,265   35,217   7,060   7,588   27,095   27,307 
Impairment  —   —   28,861   —   —   —   —   28,861 
Restructuring  —   —   1,771   —   —   —   —   1,771 
Depreciation and amortization  5,893   4,560   16,862   12,686   4,339   5,893   12,783   16,862 
Total operating costs and expenses  37,268   39,398   151,619   108,581   36,987   37,268   120,436   151,619 
Operating loss  (5,148)  (7,130)  (47,038)  (14,845)  (7,170)  (5,148)  (21,732)  (47,038)
Interest expense, net  1,450   —   2,521   1 
Other income  (13)  —   (283)  — 
Interest expense  1,264   1,450   3,885   2,521 
Other income, net  —   (13)  (934)  (283)
Loss before income taxes  (6,585)  (7,130)  (49,276)  (14,846)  (8,434)  (6,585)  (24,683)  (49,276)
Income tax expense  356   1,548   513   3,201 
Income tax (benefit) expense  (274)  356   385   513 
Net loss $(6,941) $(8,678) $(49,789) $(18,047) $(8,160) $(6,941) $(25,068) $(49,789)
                                
Loss per share, basic and diluted $(0.16) $(0.21) $(1.18) $(0.43) $(0.18) $(0.16) $(0.57) $(1.18)
                                
Weighted average ordinary shares outstanding, basic and diluted  42,237,226   42,061,396   42,263,462   41,962,535   44,699,951  42,237,226   43,949,594  42,263,462 

 

(1)Excludes depreciation and amortization expenseexpense.

 

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

 

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GAN LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(in thousands)

 

 2023  2022  2023  2022 
 2022 2021 2022 2021  Three Months Ended Nine Months Ended 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		  September 30,  September 30, 
 2022 2021 2022 2021  2023  2022  2023  2022 
                  
Net loss $(6,941) $(8,678) $(49,789) $(18,047) $(8,160) $(6,941) $(25,068) $(49,789)
Other comprehensive loss, net of tax                                
Foreign currency translation adjustments  (12,201)  (4,904)  (28,661)  (11,939)  (1,142)  (12,201)  (21)  (28,661)
Comprehensive loss $(19,142) $(13,582) $(78,450) $(29,986) $(9,302) $(19,142) $(25,089) $(78,450)

 

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

 

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GAN LIMITED

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

(in thousands, except share amounts)

 

 Shares Amount Capital Shares Deficit Loss Equity               Accumulated   
 Ordinary Shares  

Additional

Paid-in

  Treasury  

Accumulated

 

Accumulated

Other

Comprehensive

 

Total

Shareholders’

       Additional       Other Total 
 Shares Amount Capital Shares Deficit Loss Equity  Ordinary Shares  Paid-in  Treasury  Accumulated  Comprehensive  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)
               
Balance at January 1, 2023  42,894,211  $429  $328,998  $—  $(274,861) $(33,798) $20,768 
Net income  —   —   —   —   1,501   —   1,501 
Foreign currency translation adjustments  —   —   —   —   —   (4,264)  (4,264)  —   —   —   —   —   966   966 
Share-based compensation  —   —   1,316   —   —   —   1,316   —   —   1,382   —   —   —   1,382 
Accrued liability settled through issuance of shares  —   —   444   —   —   —   444 
Restricted share activity  2,365   —   —   —   —   —   —   377,944   4   —   —   —   —   4 
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 
Repurchase of restricted shares to pay tax liability (Note 7)  (49,157)  (1)  (78)  —   —   —   (79)
Issuance of ordinary shares upon ESPP purchases  57,960   1   64   —   —   —   65 
Balance at March 31, 2023  43,280,958  $433  $330,366  $—  $(273,360) $(32,832) $24,607 
Net loss  —   —   —   —   (6,941)  —   (6,941)  —   —   —   —   (18,409)  —   (18,409)
Foreign currency translation adjustments  —   —   —   —   —   (12,201)  (12,201)  —   —   —   —   —   155   155 
Share-based compensation  —   —   2,140   —   —   —   2,140   —   —   1,621   —   —   —   1,621 
Restricted share activity  159,859   2   (137)  —   —   —   (135)  148,080   1   1   —   —   —   2 
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 
Repurchase of restricted shares to pay tax liability (Note 7)  (952)  —   —   —   —   —   — 
Issuance of ordinary shares upon exercise of stock options  5,129   —   —   —   —   —   — 
Issuance of ordinary shares in connection with Content Provider Agreement  1,250,000   13   1,950   —   —   —   1,963 
Balance at June 30, 2023  44,683,215  447  333,938  —  (291,769) (32,677) $9,939 
Net loss  —   —   —   —   (8,160)  —   (8,160)
Foreign currency translation adjustments  —   —   —   —   —   (1,142)  (1,142)
Share-based compensation  —   —   1,386   —   —   —   1,386 
Restricted share activity  17,839   —   (3)  —   —   —   (3)
Repurchase of restricted shares to pay tax liability (Note 7)  (2,123)  —   —   —   —   —   — 
Balance at September 30, 2023 $44,698,931  $447  $335,321  $—  $(299,929) $(33,819) $2,020 

 Ordinary Shares  

Additional

Paid-in

  Treasury Accumulated Accumulated Other Comprehensive  

Total

Shareholders’

             Accumulated    
 Shares Amount Capital Shares Deficit Loss Equity       Additional       Other Total 
                             Ordinary Shares  Paid-in  Treasury  Accumulated  Comprehensive  Shareholders’ 
Balance at January 1, 2021  36,635,362  $365  $203,842  $—  $(45,766) $(2,877) $155,564 
 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  —   —   —   —   (5,610)  —   (5,610)  —   —   —   —   (4,499)  —   (4,499)
Foreign currency translation adjustments  —   —   —   —   —   (9,478)  (9,478)  —   —   —   —   —   (4,264)  (4,264)
Share-based compensation  —   —   1,632   —   —   —   1,632   —   —   1,316   —   —   —   1,316 
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 
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 
Repurchase 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  108,222   1   314   —   —   —   315   125,416   1   394   —   —   —   395 
Balance at March 31, 2021  42,004,100  $419  $312,715  $—  $(51,376) $(12,355) $249,403 
Balance at June 30, 2022  42,075,411  $420  $324,833  $—  $(120,211) $(36,036) $169,006 
Balance  42,075,411  $420  $324,833  $—  $(120,211) $(36,036) $169,006 
Net loss  —   —   —   —   (3,759)  —   (3,759)  —   —   —   —   (6,941)  —   (6,941)
Net income (loss)  —   —   —   —   (6,941)  —   (6,941)
Foreign currency translation adjustments  —   —   —   —   —   2,443   2,443   —   —   —   —   —   (12,201)  (12,201)
Share-based compensation  —   —   2,319   —   —   —   2,319   —   —   2,140   —   —   —   2,140 
Restricted share activity  5,178   1   (1)  —   —   —   —   159,859   2   (137)  —   —   —   (135)
Issuance of ordinary shares upon exercise of share options  6,396   —   22   —   —   —   22   250,000   2   323   —   —   —   325 
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 
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 
Balance  42,559,977  $425  $327,327  $—  $(127,152) $(48,237) $152,363 

 

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

 

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GAN LIMITED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

 2023  2022 
 2022  2021  Nine Months Ended 
 Nine Months Ended
September 30,		  September 30, 
 2022  2021  2023  2022 
Cash Flows From Operating Activities                
Net loss $(49,789) $(18,047) $(25,068) $(49,789)
Adjustments to reconcile net loss to net cash (used in) from operating activities:        
Adjustments to reconcile net loss to net cash used in operating activities:        
Amortization of software and intangible assets  15,837   11,888   11,594   15,837 
Depreciation on property and equipment and finance lease right-of-use assets  1,025   798   1,188   1,025 
Amortization of debt discount and debt issuance costs  280   — 
Non-cash interest and amortization of debt discount and debt issuance costs  2,845   280 
Share-based compensation expense  5,671   5,774   4,699   5,671 
Gain on extinguishment of content liability  (9,717)  — 
Loss on extinguishment of debt  8,784   — 
Impairment of goodwill  28,861   —   —   28,861 
Deferred income tax  541   —   (117)  541 
Change in fair value of synthetic equity  (288)  — 
Other  (22)  432   (102)  (22)
Changes in operating assets and liabilities, net of acquisitions:  ��     
Changes in operating assets and liabilities, net of acquisition:        
Accounts receivable  (5,189)  (483)  4,791   (5,189)
Prepaid expenses  (1,226)  272   1,560   (1,226)
Other current assets  (265)  226   (1,053)  (265)
Other assets  2,552   (9,123)  (4,452)  2,552 
Accounts payable  1,730   (1,255)  (996)  1,730 
Accrued compensation and benefits  (4,174)  3,370   859   (4,174)
Accrued expenses  (1,689)  3,906 
Accrued content license fees  (645)  (1,689)
Liabilities to users  1,296   2,847   (1,158)  1,296 
Other current liabilities  (387)  (460)  2,043   (387)
Other liabilities  1,389   1,205   1,593   1,389 
Net cash (used in) provided by operating activities  (3,559)  1,350 
Net cash used in operating activities  (3,640)  (3,559)
                
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)  (2,753)  (9,242)
Payments for content licensing arrangements  (5,500)  —   —   (5,500)
Purchases of gaming licenses  (1,115)  (215)  (412)  (1,115)
Purchases of property and equipment  (1,657)  (1,478)  (1,607)  (1,657)
Net cash used in investing activities  (17,514)  (102,630)  (4,772)  (17,514)
                
Cash Flows From Financing Activities                
Proceeds from issuance of long-term debt  30,000   —   —   30,000 
Payments of offering costs  —   (604)
Proceeds from exercise of share options  720   828   —   720 
Proceeds from issuance of ordinary shares upon ESPP purchase  169   — 
Principal payments on finance leases  —   (83)
Repurchases of ordinary shares  (1,006)  — 
Proceeds from issuance of ordinary shares under ESPP  66   169 
Repurchase of restricted shares to pay tax liability  (409)  — 
Repurchase of ordinary shares  —   (1,006)
Proceeds from issuance of long-term debt  4,733   — 
Payment of debt issuance costs  (2,425)  —   (3,137)  (2,425)
Net cash provided by financing activities  27,458   141   1,253   27,458 
                
Effect of foreign exchange rates on cash  (4,074)  (1,210)  451   (4,074)
                
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 
Net (decrease) increase in cash  (6,708)  2,311 
Cash, beginning of period  45,920   39,477 
Cash, end of period $39,212  $41,788 
                
Supplemental Disclosure of Noncash Investing and Financing Activities:        
Supplemental Cash Flow Information        
Cash paid for:        
Interest $1,068  $— 
Income taxes  184   690 
Intangible assets acquired in business acquisition included in current and long-term liabilities $26,244  $—   —   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 
Right-of-use asset obtained in exchange for new operating lease liability  4,471   — 
Contract asset and contingent liability related to synthetic equity  1,143   — 

 

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

 

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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 inby the U.S. land-based casino industry. For its B2B customers, GameSTACK is a turnkey technology solution for regulated real money internet gambling (“real money iGaming” or “RMiG”), online sports gaming, and virtual simulated gaming (“SIM”). In addition, the Company’s B2B segment offers GAN Sports, an in-house online and retail sports betting technology platform, through internet connected self-service kiosks deployed at casino properties and mobile solutions. The Company is also a business-to-consumer (“B2C”) developer and operator of an online sports betting and casino platform under its “Coolbet” brand, providing international users with access through www.coolbet.com to its sportsbook, casino games and poker products. The Company operates its B2C segment in two operating segments – B2Bmarkets across Northern Europe, Latin America, and B2C.Canada.

 

NOTE 2 — BASISSUMMARY OF PRESENTATIONSIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). and include the results of the Parent and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, in the opinion of management, of a normal recurring nature that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The financial data and other financial information disclosed in these notes to the condensed consolidated financial statements related to these periods are also unaudited. The results of operations for the three and nine months ended September 30, 20222023 are not necessarily indicative of the results that may be expected for the year ended December 31, 20222023 or for any future annual or interim period. The condensed consolidated balance sheet as of December 31, 20212022 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, 2021.2022.

 

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESDuring the second quarter of 2023, the Company completed a reorganization which resulted in the Company reclassifying its operating expenses between the sales and marketing, product and technology and general and administrative.

The Company’s significant accounting policies are included in “Note 3 – Summaryfollowing table provides the impact of Significant Accounting Policies”operating expense reclassification for the three months ended September 30, 2022.

SCHEDULE OF IMPACT OF OPERATING EXPENSE RECLASSIFICATION

  As previously  Impact of operating expense  As currently 
  Three Months Ended September 30, 2022 
  As previously  Impact of operating expense  As currently 
  reported  reclassification  reported 
Operating expenses                                
Sales and marketing $6,757  $24  $6,781 
Product and technology  4,998   2,573   7,571 
General and administrative (1)  10,185   (2,597)  7,588 
Total operating expenses $21,940  $—  $21,940 

(1)Excludes depreciation and amortization expense.

The following table provides the impact of its 2021 Form 10-K. In addition to repeating somethe reclassification of these significant accounting policies, the Company has added certain new significant accounting policies duringoperating expenses for the nine months ended September 30, 2022, as described below.2022.

  As previously  

Impact of operating

expense

  As currently 
  Nine Months Ended September 30, 2022 
  As previously  

Impact of operating

expense

  As currently 
  reported  reclassification  reported 
Operating expenses                                 
Sales and marketing $20,122  $170  $20,292 
Product and technology  19,140   5,788   24,928 
General and administrative (1)  33,265   (5,958)  27,307 
Total operating expenses $72,527  $—  $72,527 

(1)Excludes depreciation and amortization expense.

 

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GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

Liquidity

The accompanying condensed consolidated financial statements have been prepared on a going concern basis. As of September 30, 2023, the Company had an accumulated deficit of $299.9 million, with cash of $39.2 million and liabilities to users of $9.5 million. The Company has historically operated with net losses and has not generated positive cash flows. Additionally, the Company’s current financial condition, liquidity resources, and planned near-term cash flows from operations are sensitive to changes in macro-economic conditions and the substantial variability inherent in the Company’s wager-based revenues streams. These factors indicate uncertainty related to the ability of the Company to meet its current obligations as they come due.

In the fourth quarter of 2022, the Company initiated plans to address its liquidity needs and improve its operations and cash position primarily by (i) reducing and deferring personnel and operational costs for non-strategic initiatives, (ii) amending the Credit Facility to reduce cash interest obligations and amend financial covenants, (iii) identifying sources of additional capital, (iv) continuing investment in the growth areas of the Company’s consolidated operations, (v) continuing cost saving initiatives first implemented during the year ended December 31, 2022, and (vi) initiating a strategic review process to assess a range of strategic alternatives.

On April 13, 2023, a subsidiary of the Company executed agreements to amend its existing credit facility to waive all events of default, amend certain financial covenants, assign the rights to the credit facility from its existing lender to a third party, and increase the principal balance from $30.0 million to $42.0 million with accrued paid in-kind (“PIK”) interest of 8.0% per year (together, forming the “Amended Credit Facility”). The Amended Credit Facility became effective upon cash settlement of payments completed on April 14, 2023 and represented a cure of any events of default under the Credit Facility and thereby prevented any amounts from becoming due and payable under the Credit Facility’s subjective acceleration clause. The Amended Credit Facility contains a financial covenant, among other covenants, requiring minimum liquidity of $10.0 million. Refer to Note 6 – Debt for further detail. Management believes the executed Amended Credit Facility and intent and ability to complete the remaining cost mitigation plans alleviate uncertainty regarding the Company’s ability to meet its current obligations as they come due.

To the extent that the Company’s current resources, including its ability to generate operating cash flows, are insufficient to satisfy its cash requirements, the Company may seek additional equity or debt financing. The Company’s ability to do so depends on prevailing economic conditions and other factors, many of which are beyond management’s control. The Company does not currently have any such credit facilities or similar debt arrangements in place, outside of the Amended Credit Facility as described above, and cannot provide any assurance as to the availability or terms of any future financing that it may require to support its operations. If the needed financing is not available, or if the terms of financing are less desirable than expected, the Company may be forced to decrease its level of investment in new products and technologies, discontinue further expansion of the business, scale back its existing operations, or divest of assets, any of which could have an adverse impact on the Company and its financial prospects.

Use of Estimates

 

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Due to the inherent uncertainties involved in making estimates, actual results could differ from the original estimates, and may require significant adjustments to these reported balances in future periods.

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 $$(684155) and $(589)684 for the three months ended September 30, 20222023 and 2021,2022, respectively, and $$((494)1,169) and $(761)(494) for the nine months ended September 30, 20222023 and 2021,2022, 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, theThe Company heldholds cash deposits in foreign countries, primarily in Northern Europe and Latin America, of approximately $33.032.2 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.

 

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GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

Revenue Recognition

 

Revenue from B2B Operations

 

The Company’s revenue from its B2B operations are primarily from its internet gaming Software-as-a-Service platform (“SaaS”), GameSTACK, that its customers use to provide real money internet gambling (“RMiG”),RMiG, online sports gaming and simulated internet gaming (“SIM”)SIM services to its end users. The Company enters into contracts with its customers that generally range from three to five years and include renewal provisions. These contracts generally include provision of the internet gaming platform, content consisting of proprietary and third-party games, development services and support and marketing services. In certain cases, the contract may include computer hardware to be procured on behalf of the customer. The customers cannot take possession of the hosted GameSTACK software and the Company does not sell or license the GameSTACK software.

 

The Company charges fees as consideration for use of its internet gaming system, game content, support and marketing services based on a fixed percentage of the casino operator’s net gaming revenue or net sportsbook win, at the time of settlement of an event for RMiG contracts, considered usage-based fees, or at the time of purchase for in-game virtual credit for SIM contracts. The determination of the fee charged to its customers is negotiated and varies significantly. Certain of these RMiG contracts provide the Company with a minimum monthly revenue guarantee in relation to the Company’s share of the casino operator’s net gaming revenue or net sportsbook win. At September 30, 20222023 the remaining unsatisfied performance obligations related to fixed minimum guaranteed revenue totaled $0.58.9 million.

 

The Company’s promise to provide the RMiG SaaS platform and content licensing services on the hosted software is a single performance obligation. This performance obligation is recognized over time, as the Company provides services to its customers in its delivery of services to the player end user. The Company’s customers simultaneously receive and consume the benefits provided by the Company as it delivers services to its customers. Usage based fees are considered variable consideration as the service is to provide unlimited continuous access to its hosted application and usage of the hosted system is primarily controlled by the player end user. The transaction price includes fixed and variable consideration and is billed monthly with the amount due generally thirty days from the date of the invoice. Variable consideration is allocated entirely to the period in which consideration is earned as the variable amounts relate specifically to the customer’s usage of the platform that day and allocating the usage-based fees to each day is consistent with the allocation objective, primarily that the change in amounts reflect the changing value to the customer. The Company’s internet gaming system, game content, support and marketing services are provided equally throughout the term of the contract. These services are made up of a daily requirement to provide access and use of the internet gaming system and optional support and marketing services to the customer over athe same 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 fees collected by the Company receives feesfrom third-party payment processors for the purchases of in-game virtual creditcredits made by end-users include the SIM customer’s portion. The Company records the SIM customer’s portion as a liability as cash is collected and remits payment to the SIM customer for their share of the SIM revenues.revenues monthly. At September 30, 20222023 and December 31, 2021,2022, the Company has recorded a liability due to its customers for their share of the fees of $1,3621,427 and $2,1711,628, respectively, within other current liabilities in the condensed consolidated balance sheets.

 

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GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

The 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,content. Additionally, the customer can direct the Company to procure third-party game content on its behalf. The Company has determined it acts as the principal for providing the game content when the Company controls the game content, and therefore presents the revenue on a gross basis in the condensed consolidated statements of operations. When the customer directs the Company to procure third-party game content, the Company determined it is deemed an agent for providing such game content, and therefore, records the revenue, net of the costs of content license fees, in the condensed consolidated statements of operations.

The Company also provides ongoing development services involving updates to the RMiG platforms for enhanced functionality or customization. Ongoing development services are typically billed monthly, at a daily rate, for services performed. Revenue from RMiG platform development services that are identified as distinct performance obligations and relate either toenhance or create an asset the customer controls or from whichas the customer receives valueCompany performs the services are recognized over the period thetime as services are performed. This revenue is measured using an input method based on effort expended, which uses direct labor hours incurred. AsThese services have primarily related to post-launch development of third-party application integration software in the performance obligation relates tocustomer’s environment. Separately, 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 and the customer benefits from the integrated SaaS offering are deferred over the license service term. These services have primarily related to enhancements to the Company’s platforms that do not enhance or create an asset the customer controls. In customer contracts that require a portion of the consideration to be received in advance or at the commencement of the contract, such amounts are recorded as a contract liability.

 

Other services include the resale of 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 the cost of the computer hardware plus a markup. The Company charges a hardware deployment fee which is a one-time fee for installation, testing and certification of the computer hardware at the gaming hosting facility. Revenue is recognized at the point in time when control of the hardware transfers to the customer. Control is transferred after the hardware has been procured, delivered, installed at the customer’s premises and configured to allow for remote access.

 

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

 

The Company generates revenue from time to time from the licensing of its U.S. patent, which governs the linkage of on-property reward cards to their counterpart internet gaming accounts together with bilateral transmission of reward points between the internet gaming technology system and the land-based casino management system present in all U.S. casino properties. The nature of the promise in transferring the license is to provide a right to use the patent as it exists. The Company does not have to undertake activities to change the functionality of the patent during the license period and the license has significant stand-alone functionality. Therefore, the Company recognizes the revenue from the license of the patent at the point in time when control of the license is transferred to the customer. Control is determined to transfer at the point in time the customer is able to use and benefit from the license.

 

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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 obligationobligations 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 3,2005,700 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.

 

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GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

Cost of Revenue

Cost of revenue consists primarily of variable costs. These include mainly (i) content license fees, (ii) payment processing fees and chargebacks, (iii) platform technology, software, and connectivity costs directly associated with revenue generating activities, (iv) gaming duties, and (v) sportsbook feed / provider services. The Company incurs payment processing fees on B2C user deposits, withdrawals, and deposit reversals from payment processors. Cost of revenue excludes depreciation of the servers on which the Company’s gaming platforms reside as well as amortization of intangible assets including internally developed software.

Sales and Marketing

 

Sales and marketing expense primarily consists of general marketing and advertising costs, B2C user acquisition expenses and personnel costs within our sales and marketing functions. Sales and marketing costs are expensed as incurred.

Product and Technology

Product and technology expense consists primarily of personnel costs associated with development and maintenance activities that are not capitalized. These costs primarily represent employee expenses (including but not limited to, salaries, bonus, employee benefits, employer tax expenses, and share-based compensation) for personnel and contractors involved in the design, development, and project management of our proprietary technologies as well as developed and licensed content.

General and Administrative

General and administrative expense consists of costs, including gaming operations costs, not related to sales and marketing, product and technology or revenue. General and administrative costs include professional services (including legal, regulatory and compliance, audit, and consulting expenses), rent contingencies, insurance, allowance for credit losses, foreign currency transaction gains and losses, and costs related to the compensation of executive and non-executive personnel, including share-based compensation.

 

Content Licensing Fees

 

Content licensing fees are paid to third parties for gaming content which are expensed as incurred. Content licensing fees are calculated as a percentage of net gaming revenues in respect of the third-party games, as stipulated in the third-party agreements.

 

Share-based Compensation

 

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 periodperiod.

 

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.

 

LossEarnings Per Share, Basic and Diluted

 

Basic lossearnings per share is calculated by dividing the net lossearnings 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, 20222023 and December 31, 2021,2022, the related liabilities to users waswere $8,9469,467 and $8,98410,683, respectively.

 

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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.

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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 areis 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, 2022,2023, there was no triggering event that would cause the Company to believe the value of its long-lived assets should be impaired.

 

Liabilities to Users

 

The Company records liabilities for user account balances. User account balances consist of user deposits, promotional awards and user winnings less user withdrawals and user losses.

 

Legal Contingencies and Litigation Accruals

 

On a quarterly basis, the Company assesses potential losses in relation to pending or threatened legal matters. If a loss is considered probable and the amount can be reasonably estimated, the Company recognizes an expense for the estimated loss. Estimates of any such loss are subjective in nature and require the evaluation of numerous facts and assumptions as to future events, including the application of legal precedent which may be conflicting. To the extent these estimates are more or less than the actual liability resulting from the resolution of these matters, the Company’s financial results will increase or decrease accordingly.

 

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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 onin the accompanying condensed consolidated statements of operations. The Company calculates amortization expense on capitalized debt issuance costs using the effective interest method in accordance with Accounting Standards Codification (“ASC”) 470, Debt.

Leases

The Company determines if an arrangement is a lease and classifies as operating or finance lease at the lease commencement date. A lease is defined as a contract, or part of contract, that conveys the right to control the use of an asset for a time period in exchange for consideration. In accordance with ASC 842, Leases, the Company recognizes for all leases, except short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company accounts for the lease and non-lease components of its leases as a single lease component. Operating leases are included in operating lease ROU assets and operating lease liabilities, current and noncurrent, on the condensed consolidated balance sheets. Lease expense is recognized on a straight-line basis based on the total contractually required lease payments, over the term of the lease.

 

Fair Value of Financial Instruments

 

The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures, which provides a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. Fair value represents the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company uses the following hierarchy in measuring the fair value of the Company’s assets and liabilities, focusing on the most observable inputs when available:

 

●Level 1 Quoted prices in active markets for identical assets or liabilities.
   
●Level 2 Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active for identical or similar assets and liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
   
●Level 3 Valuations are based on the inputs that are unobservable and significant to the overall fair value measurement of the assets or liabilities. Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

Valuation techniques used to measure the fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The following table summarizesCompany does not hold any significant Level 2 financial instruments. Level 3 financial instruments held by the Company include the synthetic equity liability due to a customer, refer to Note 16 — Commitments and Contingencies. The instrument includes level 3 inputs related to the contractual forecasts, in addition to observable inputs such as the stock volatility of the company, which are utilized in the Company’s assets and liabilities that are measured at fair value on a recurring basis as required by ASC 820, by level, withinMonte Carlo valuation. The valuation is not sensitive to significant movements in the fair value hierarchy as of September 30, 2022:forecast.

SCHEDULE OF FAIR VALUE OF ASSETS AND LIABILITIES ON RECURRING BASIS

  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 

 

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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, Estonia, Malta, and Malta.Mexico. The Company records an income tax expense for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The effect on deferred income tax of a change in tax rates are recorded in the period of the enactment. Deferred tax assets are reduced, through a valuation allowance, if necessary, by the amount of such benefits that are not expected to be realized based on current available evidence. In evaluating the Company’s ability to recover deferred tax assets in the jurisdiction from which they arise, all available positive and negative evidence is considered, including results of recent operations, scheduled reversals of deferred tax liabilities, projected future taxable income, and tax-planning strategies. The Company records a valuation allowance to reduce its deferred tax assets to the net amount that it believes is more likely than not to be realized.

 

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

 

Segments

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

Recently IssuedAdopted Accounting Pronouncements

 

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires an acquirer to measure and recognize contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers, rather than using fair value on the acquisition date. This amendment is effective for fiscal years beginning after December 15, 2022, including interim periods within those annual periods, and should be applied prospectively to business combinations occurring on or after the effective date. Early adoption is permitted. The Company will applyadopted the amended guidance on a prospective basis to business combinations that occur on or after January 1, 2023.2023, and such adoption did not materially impact the financial statements.

 

In July 2023, the FASB issued ASU 2023-03, Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock, which amends or supersedes various SEC paragraphs within the Accounting Standards Codification to conform to past SEC announcements and guidance issued by the SEC. The ASU does not provide any new guidance, and as such, there is no transition effective date. ASU 2023-03 did not have a material impact on our condensed consolidated financial statements.

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GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

NOTE 3 — PROPERTY AND EQUIPMENT, NET

Property and equipment, net is recorded in other assets in the condensed consolidated balance sheets at September 30, 2023 and December 31, 2022 and consisted of the following:

SCHEDULE OF PROPERTY AND EQUIPMENT

  Estimated Useful September 30,  December 31, 
  Life (in years) 2023  2022 
Fixtures, fittings and equipment 3 - 5 $5,615  $4,136 
Platform hardware 5  2,374   2,313 
Total property and equipment, cost    7,989   6,449 
Less: accumulated depreciation    (4,972)  (3,599)
Total   $3,017  $2,850 

Depreciation expense related to property and equipment was $453 and $312 for the three months ended September 30, 2023 and 2022, respectively, and $1,188 and $1,025 for the nine months ended September 30, 2023 and 2022, respectively.

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GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

NOTE 4 — CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET

Capitalized software development costs, net at September 30, 2023 and December 31, 2022 consisted of the following:

SCHEDULE OF CAPITALIZED COMPUTER SOFTWARE COSTS, NET

  September 30,  December 31, 
  2023  2022 
Capitalized software development costs $8,345  $6,857 
Development in progress  1,885   732 
Total capitalized software development, cost  10,230   7,589 
Less: accumulated amortization  (2,258)  (840)
Total $7,972  $6,749 

At September 30, 2023, development in progress primarily represents costs associated with GAN Sports, costs associated with its newer GameSTACK technology, and enhancements to the Company’s proprietary B2C software platform.

Amortization expense related to capitalized software development costs was $485 and $1,438 for the three months ended September 30, 2023 and 2022, respectively, and $1,461 and $4,552 for the nine months ended September 30, 2023 and 2022, respectively.

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GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 4 5 — ACQUISITIONINTANGIBLE ASSETS

Content licensing agreement with Ainsworth Game TechnologyIntangible Assets

 

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:

SUMMARY OF 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.

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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 ofDefinite-lived 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:

SUMMARY OF INTANGIBLE ASSETS ACQUIRED

  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:

SCHEDULE OF PROPERTY AND EQUIPMENTFINITE -LIVED INTANGIBLE ASSETS

  Period (in years)  Amount  Amortization  Amount 
  Weighted  September 30, 2023 
  Average  Gross       
  Amortization  Carrying  Accumulated  Net Carrying 
  Period (in years)  Amount  Amortization  Amount 
Developed technology  4.5  $33,203  $(24,984) $8,219 
Customer relationships  3.2   6,751   (5,057)  1,694 
Trade names and trademarks  10.0   5,315   (1,685)  3,630 
Gaming licenses  5.6   3,577   (1,827)  1,750 
      $48,846  $(33,553) $15,293 

 

  

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 
  Period (in years)  Amount  Amortization  Amount 
  Weighted  December 31, 2022 
  Average  Gross       
  Amortization  Carrying  Accumulated  Net Carrying 
  Period (in years)  Amount  Amortization  Amount 
Developed technology  3.9  $33,443  $(17,570) $15,873 
Customer relationships  3.1   6,788   (3,426)  3,362 
Trade names and trademarks  10.0   5,347   (1,312)  4,035 
Gaming licenses  6.7   3,149   (1,464)  1,685 
      $48,727  $(23,772) $24,955 

 

DepreciationAmortization expense related to property and equipmentintangible assets was $3123,401 and $2604,135 for the three months ended September 30, 20222023 and 2021,2022, respectively, and $92610,134 and $71711,285 for the nine months ended September 30, 20222023 and 2021,2022, respectively.

 

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

SCHEDULE OF FINITE -LIVED INTANGIBLE ASSETS, AMORTIZATION EXPENSE

  Amount 
Remainder of 2023 $3,403 
2024  2,989 
2025  2,967 
2026  2,512 
2027  1,820 
Thereafter  1,602 
Total $15,293 

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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:

SCHEDULE OF CAPITALIZED COMPUTER SOFTWARE COSTS, NET

  

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 ASSETSDEBT

 

GoodwillCredit Facility

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

SCHEDULE OF GOODWILL

  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.

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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:

SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS

  

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:

SCHEDULE OF FINITE-LIVED INTANGIBLE ASSETS, FUTURE AMORTIZATION EXPENSE

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

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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:

SCHEDULE OF ACCRUED EXPENSES

  

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.

 

TheDuring the year ended December 31, 2022, 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. On April 13, 2023, the Credit Facility was extinguished in connection with executing the Amended Credit Facility with a new lender. The Company incurred $7.3 in prepayment penalties and recorded a loss on extinguishment of $8.8 million in other loss, net in the condensed consolidated statement of operations.

 

Subsequent Amendments

On April 13, 2023, a subsidiary of the Company executed agreements to amend the Credit Facility to waive all events of default, amend certain financial covenants, assign the rights to the Credit Facility from its existing lender to a third party, and increase the principal balance from $30.0 million to $42.0 million with accrued paid in-kind (“PIK”) interest of 8.0% per year (together, forming the “Amended Credit Facility”). The Amended Credit Facility became effective upon cash settlement of payments completed on April 14, 2023, which occur on April 14, 2023, and represented a cure of any events of default under the Credit Facility and thereby prevent any amounts from becoming due and payable under the Credit Facility’s subjective acceleration clause.

The Amended Credit Facility matures on the third anniversary of its effective date and is fully guaranteed by the Company. There are no scheduled principal payments due under the Amended Credit Facility until maturity. The principal balance, accrued PIK interest, and an exit fee of 2.5% are due at maturity. The Amended Credit Facility stipulates that outstanding amounts will mature and be due and payable on the third anniversary of its effective date, or in the event of a change in control transaction. The Company incurred $3.1 million in debt issuance costs in connection with the Amended Credit Facility. The Amended Credit Facility contains customary negative covenants, a financial covenant requiring minimum liquidity of $10.0 million, as well as other financial covenants to be tested solely in the event the Company raises junior debt during the term of the Amended Credit Facility.

Debt Covenants

 

The Credit Facility containscontained affirmative and negative covenants, including certain financial covenants associated with the Company’s financial results. The negative covenants includeincluded 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 containscontained 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 occursoccurred and iswas not cured within any applicable grace period or iswas not waived, the administrative agent and the lender arewere 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:

SCHEDULE OF LONG TERM DEBT

 Effective Interest Rate  

As of

September 30, 2022

  Effective Interest Rate  As of
September 30, 2023		 
Credit Facility:        
Credit Facility        
Principal  13.28% $30,000   10.22% $43,754 
Less unamortized debt issuance costs      (2,145)      (2,698)
Long-term debt, net     $27,855      $41,056 

 

During the three and nine months ended September 30, 2022 theThe Company incurred $1,0711,281 and $1,7351,071, respectively, in of interest expense, of which $185240 and $280185, respectively, relates to the amortization of debt issuance costs.costs during the three months ended September 30, 2023 and 2022, respectively, and $3,587 and $1,735 in interest expense, of which $765 and $280 relates to the amortization of debt issuance costs during the nine months ended September 30, 2023 and 2022, respectively.

 

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GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

NOTE 10 7 — 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, 2022,2023, the 2020 Plan provided for grants of up to 7,559,5749,275,342 ordinary shares and there were 508,173796,689 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, 20222023 is as follows:

SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTION ACTIVITY

 Number of Shares  

Weighted

Average

Exercise

Price

 

Weighted Average Contractual

Term

  Aggregate Intrinsic Value     Weighted Weighted    
Outstanding at December 31, 2021  4,138,215  $13.05   8.05  $11,229 
    Average Average Aggregate 
 Number of Exercise Contractual Intrinsic 
 Shares  Price  Term  Value 
Outstanding at December 31, 2022  3,447,155  $9.12   6.59  $1,139 
Granted  947,002   0.03           612,081   0.01         
Exercised  (375,416)  1.93           (5,129)  0.01         
Forfeited/expired or cancelled  (998,942)  15.29           (530,714)  15.15         
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 
Outstanding at September 30, 2023  3,523,393  $6.65   5.37  $1,414 
Options exercisable at September 30, 2023  2,471,947  $8.05   3.86  $414 

 

The Company recorded share-based compensation expense related to share options of $948614 and $1,693948 for the three months ended September 30, 20222023 and 2021,2022, respectively and $2,5962,149 and $4,6392,596 for the nine months ended September 30, 20222023 and 2021,2022, respectively. Such share-based compensation expense was recorded net of capitalized software development costs of $8799 and $6587 for the three months ended September 30, 2023 and 2022, and 2021,respectively and $226157 and $170226 for the nine months ended September 30, 20222023 and 2021,2022, respectively. At September 30, 2022,2023, there was total unrecognized compensation cost of $11,4013,736 related to nonvested share options. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.72.8 years.

 

Share option awards generally vest 25% after one year and then monthly over the next 36 months thereafter and have a maximum term of ten years. During the nine months ended September 30, 2022,2023, the Board of Directors approved the issuance of options to purchase 947,002612,081 ordinary shares to employees under the 2020 Plan, including 944,002all of which were share options granted with an exercise price of $0.01per share to certain European-based employees in lieu of restricted share units. The value of these options are based on the market value of the Company’s ordinary shares at the date of the grant. As all of these options are in-the-money, the Company determined that utilizing an option pricing model to estimate the fair value of these options was not necessary. The weighted average grant date fair value of options granted was $0.130.74 and $8.000.13 for the three months ended September 30, 20222023 and 2021,2022, respectively and $4.131.76 and $11.494.13 for the nine months ended September 30, 2023 and 2022, respectively.

SCHEDULE OF SHARE-BASED COMPENSATION, FAIR VALUE ASSUMPTIONS

  2023  2022  2023  2022 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2023  2022  2023  2022 
Expected share price volatility  n.m.%  0.70%  n.m.%  0.51%
Expected term (in years)  n.m.   5.00   n.m.   0.04 
Risk-free interest rate  n.m.%  2.52%  n.m.%  1.49%
Dividend yield  0%  0%  0%  0%

For options granted during the nine months ended September 30, 2023, the fair value of each share option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted above. Estimating the grant date fair values for employee share options requires management to make assumptions regarding expected volatility of the value of those underlying shares, the risk-free rate of the expected life of the share options and 2021, respectively.the date on which share-based compensation is expected to be settled. Expected volatility is determined by reference to volatility of certain identified peer group share trading information and share prices on the Nasdaq stock exchange. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of the options is based on historical data and represents the period of time that options granted are expected to be outstanding. In the current year, volatility, term, and risk-free interest rate were not meaningful inputs as all options were $0.01 per share for the Company’s European based employees.

 

Restricted Share Units

Restricted share units are issued to non-employee directors and employees. For equity-classified restricted share units, the fair value of restricted share units is valued based on fair market value of the Company’s ordinary shares on the date of grant and is amortized on a straight-line basis over the vesting period.

 

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GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

 

In January 2022,March 2023, the Board of Directors approved the issuance of 108,7201,009,086 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.grant. 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,During the second quarter of 2023, the Board of Directors approved the issuance of 1,117,437296,307 restricted share units to its non-employee directors and 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.grant. 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,August 2023, the Board of Directors approved the issuance of 28,754705,556 restricted share units to its non-employee directors and 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.grant. 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 officers and non-employee directors upon vesting in order to remit a cash payment to the officers and 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. During the nine months ended September 30, 2023, 50,104 restricted share units held by the Company’s officers and non-employee directors vested and the Company repurchased 50,104 of the shares to cover the tax expense incurred by the officers and non-employee directors.

 

The Company recorded share-based compensation expense related to restricted share units of $958994 and $65958 for the three months ended September 30, 20222023 and 2021,2022, respectively, and $3,1512,390 and $1953,151 for the nine months ended September 30, 20222023 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, 2022,2023, there was total unrecognized compensation cost of $6,7854,972 related to nonvestednon-vested restricted share units. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 3.22.95 years.

 

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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, 20222023 is as follows:

SCHEDULE OF SHARE BASED COMPENSATION, RESTRICTED STOCK UNIT ACTIVITY

  

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 
     Weighted 
     Average 
  Number of  Grant Date 
  Shares  Fair Value 
Outstanding at December 31, 2022  1,171,371  $5.43 
Granted  2,010,949   1.63 
Vested  (543,863)  3.20 
Forfeited/expired or cancelled  (313,490)  4.74 
Outstanding at September 30, 2023  2,324,967   2.75 

 

Restricted Share Awards

 

Restricted share awards are issued to non-employee directors and certain key employees. The value of a restricted stock award is based on the market value of the Company’s ordinary shares at the date of the grant.

 

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

The Company recorded share-based compensation expense related to the restricted share awards of $42 and $41for the three months ended September 30, 2023 and 2022, respectively, and $125and $770 125for the nine months ended September 30, 20222023 and 2021,2022, respectively. At September 30, 2022,2023, there was total unrecognized compensation cost of $194 28related to the nonvested shares granted. The cost is expected to be recognized over a weighted average period of 1.2 0.3years. There were no restricted share awards that vested during the ninethree months ended September 30, 2022.2023.

 

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 DirectorsDirectors..

 

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GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

The ESPP is designed to allow eligible employees to purchase ordinary shares, at quarterly intervals, with their accumulated payroll deductions. The participants are offered the option to purchase ordinary shares at a discount during a series of successive offering periods. The option purchase price may be the lower of 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,year, and 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 with2022. The Company suspended its first purchase occurring on August 31, 2022.ESPP in February 2023. The Company issued 74,70757,960 shares under the ESPP as of September 30, 2022. Duringduring the three and nine months ended September 30, 20222023. During the nine months ended September 30, 2023 the Company recognized share-based compensation expense of $6418 and $86, respectively, related to the ESPP.

 

Content Provider Issuance

On March 29, 2023, the Company amended and restated its commercial agreement with a content provider. In conjunction with this agreement, the Company entered into a Subscription Agreement with the content provider, under which the content provider has subscribed to 1,250,000 of the Company’s ordinary shares. These shares were issued on April 25, 2023. On May 8, 2023, the Company registered the shares in connection with an S-1 resale registration statement. Refer to Note 16 – Commitments and Contingencies for further details.

NOTE 11 8 — DEFINED CONTRIBUTION PLANS

U.S. employees and non-U.S. employees are eligible to participate in defined contribution plans by contributing a portion of their compensation, which provides for certain matching contributions by the Company. Matching contributions for the U.S. defined contribution plan are 50% of up to 4% of an employee’s salary contribution. Most often, non-U.S. matching contributions are statutory amounts required by law. The Company’s contributions to the retirement plans were $173 and $133 for the three months ended September 30, 2023 and 2022, respectively, and $528 and $454 for the nine months ended September 30, 2023 and 2022, respectively.

NOTE 9 — OTHER LOSS (INCOME), NET

Other loss (income), net consisted of the following:

SCHEDULE OF OTHER NON-OPERATING INCOME EXPENSE

  2023  2022  2023  2022 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2023  2022  2023  2022 
Other income (1) $—  $(13) $(9,718) $(283)
Other loss (2)  —   —   8,784   — 
Other income, net $—  $(13) $(934) $(283)

(1)Includes gain on extinguishment of $9.7 million related to the Company amending its agreement with a content provider in March 2023 to relieve $15.0 million in fixed payments. Refer to Note 16 – Commitments and Contingencies for further details.
(2)Includes loss on debt extinguishment of $8.8 million recognized during the second quarter of 2023 as a result of the Company entering into the Amended Credit Facility on April 13, 2023. Refer to Note 6 – Debt for further details.

NOTE 10 — LOSS PER SHARE

 

Loss per ordinary share, basic and diluted, areis 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:

SCHEDULE OF ANTI-DILUTIVE STOCK EXCLUDED FROM COMPUTATION OF DILUTED EARNINGS PER SHARE

 2023  2022  2023  2022 
 2022 2021 2022 2021  Three Months Ended Nine Months Ended 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		  September 30,  September 30, 
 2022 2021 2022 2021  2023  2022  2023  2022 
Share options  3,710,859   4,268,981   3,710,859   4,268,981   3,523,393   3,710,859   3,523,393   3,710,859 
Restricted shares  34,436   —   34,436   —   17,218   34,436   17,218   34,436 
Restricted share units  1,495,606   2,590   1,495,606   2,590   2,324,967   1,495,606   2,324,967   1,495,606 
Total  5,240,901   4,271,571   5,240,901   4,271,571   5,865,578   5,240,901   5,865,578   5,240,901 

 

NOTE 12 11 — REVENUE

 

The following table reflects revenue recognized for the three and nine months ended September 30, 20222023 and 20212022 in line with the timing of transfer of services:

SCHEDULE OF REVENUE RECOGNIZED IN LINE WITH THE TIMING OF TRANSFER OF SERVICES

  2023  2022  2023  2022 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2023  2022  2023  2022 
Revenue from services delivered at a point in time $19,639  $19,435  $67,402  $65,468 
Revenue from services delivered over time  10,178   12,685   31,302   39,113 
Total $29,817  $32,120  $98,704  $104,581 

 

  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.

 

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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:

SCHEDULE OF CONTRACT WITH CUSTOMERS

 2023  2022  2023  2022 
 2022 2021 2022 2021  Three Months Ended Nine Months Ended 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		  September 30,  September 30, 
 2022 2021 2022 2021  2023  2022  2023  2022 
Contract liabilities from advance customer payments, beginning of the period $459  $1,811  $1,874  $1,083  $2,607  $459  $2,117  $1,874 
Contract liabilities from advance customer payments, end of the period (1)  1,467   1,808   1,467   1,808   3,039   1,467   3,039   1,467 
Revenue recognized from amounts included in contract liabilities from advance customer payments at the beginning of the period  250   179   775   121   301   250   686   775 

 

(1)Contract liabilities from advance customer payments, end of period consisted of $4792,476 and $740478 recorded in other current liabilities in the condensed consolidated balance sheets at September 30, 20222023 and 2021,2022, respectively and $989563 and $1,067988 recorded in other liabilities in the condensed consolidated balance sheet at September 30, 20222023 and 2021,2022, respectively.

NOTE 13 12 — SEGMENT REPORTING

 

The Company’s reportable segments are B2B and B2C. The B2B segment develops, markets and sells instances of GameSTACK, GAN Sports, and iSight Back Office technology that incorporates comprehensive player registration, account funding and back-office accounting and management tools that enable the casino operators to efficiently, confidently and effectively extend their presence online in places that have permitted online real money gaming. The B2C segment, which includes the operations of Coolbet, 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.contribution. Segment gross profitcontribution represents the gross profitamounts 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, 20222023 and 20212022 is as follows:

SCHEDULE OF FINANCIAL INFORMATION FOR REPORTABLE SEGMENTS

  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 
  B2B  B2C  Total  B2B  B2C  Total 
  

Three Months Ended

September 30,

 
  2023  2022 
  B2B  B2C  Total  B2B  B2C  Total 
Revenue $10,178  $19,639  $29,817  $12,685  $19,435  $32,120 
Cost of revenue (1)  2,055   7,187   9,242   2,173   7,262   9,435 
Segment contribution $8,123  $12,452  $20,575  $10,512  $12,173  $22,685 

 

(1)Excludes depreciation and amortization expenseexpense.

 

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GAN LIMITED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

During the three months ended September 30, 20222023 and 2021,2022, one customer in the B2B segment individually accounted for 22.516.4% and 14.722.5% of total revenue, respectively.

 

Summarized financial information by reportable segments for the nine months ended September 30, 20222023 and 20212022 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 
  B2B  B2C  Total  B2B  B2C  Total 
  

Nine Months Ended

September 30,

 
  2023  2022 
  B2B  B2C  Total  B2B  B2C  Total 
Revenue $31,352  $67,352  $98,704  $39,905  $64,676  $104,581 
Cost of revenue (1)  6,129   22,759   28,888   9,015   22,583   31,598 
Segment contribution $25,223  $44,593  $69,816  $30,890  $42,093  $72,983 

 

(1)Excludes depreciation and amortization expense.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

During the nine months ended September 30, 20222023 and 2021,2022, one customer in the B2B segment individually accounted for 20.215.3% and 13.520.2% 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, 20222023 and 2021:2022:

SCHEDULE OF RECONCILIATION OF CONSOLIDATED SEGMENT PROFITCONTRIBUTION TO CONSOLIDATED INCOME (LOSS) BEFORE INCOME TAXES

 2022 2021 2022 2021  2023  2022  2023  2022 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		  Three Months Ended Nine Months Ended 
 2022 2021 2022 2021  September 30,  September 30, 
Segment gross profit (1) $22,685  $21,467  $72,983  $63,860 
 2023  2022  2023  2022 
Segment contribution (1) $20,575  $22,685  $69,816  $72,983 
Sales and marketing  6,757   5,657   20,122   15,238   7,196   6,781   21,704   20,292 
Product and technology  4,998   5,492   19,140   15,564   9,150   7,571   29,966   24,928 
General and administrative(1)  10,185   12,888   33,265   35,217   7,060   7,588   27,095   27,307 
Impairment  —   —   28,861   —   —   —   —   28,861 
Restructuring  —   —   1,771   —   —   —   —   1,771 
Depreciation and amortization  5,893   4,560   16,862   12,686   4,339   5,893   12,783   16,862 
Interest expense, net  1,450   —   2,521   1 
Other income  (13)  —   (283)  — 
Interest expense  1,264   1,450   3,885   2,521 
Other income, net  —   (13)  (934)  (283)
Loss before income taxes $(6,585) $(7,130) $(49,276) $(14,846) $(8,434) $(6,585) $(24,683) $(49,276)

 

(1)Excludes depreciation and amortization expenseexpense.

 

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.

 

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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:

SCHEDULE OF DISAGGREGATION OF REVENUE BY PRODUCTS AND SERVICES FOR EACH SEGMENT

 2023  2022  2023  2022 
 2022 2021 2022 2021  Three Months Ended Nine Months Ended 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		  September 30,  September 30, 
 2022 2021 2022 2021  2023  2022  2023  2022 
B2B:                  
Platform and content license fees $9,988  $8,743  $31,208  $27,252  $7,240  $9,988  $23,109  $31,208 
Development services and other  2,697   2,432   8,697   7,097   2,938   2,697   8,243   8,697 
Total B2B revenue $12,685  $11,175  $39,905  $34,349   10,178   12,685   31,352   39,905 
                                
B2C:                                
Sportsbook $7,763  $7,886  $28,023  $27,794   6,281   7,763   26,546   28,023 
Casino  11,093   12,323   34,924   29,306   12,577   11,093   38,738   34,924 
Poker  579   884   1,729   2,287   781   579   2,068   1,729 
Total B2C revenue  19,435   21,093   64,676   59,387   19,639   19,435   67,352   64,676 
Total revenue $32,120  $32,268  $104,581  $93,736  $29,817  $32,120  $98,704  $104,581 

 

Revenue by location of the customer for the three and nine months ended September 30, 20222023 and 20212022 is as follows:

SCHEDULE OF REVENUE BY LOCATION OF THE CUSTOMER

 2023  2022  2023  2022 
 2022 2021 2022 2021  Three Months Ended Nine Months Ended 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		  September 30,  September 30, 
 2022 2021 2022 2021  2023  2022  2023  2022 
United States $10,320  $9,107  $33,531  $28,186  $7,459  $10,320  $23,271  $33,531 
Europe  10,574   11,598   33,343   36,855   10,890   10,574   35,674   33,343 
Latin America  9,492   9,854   32,910   23,711   9,132   9,492   32,790   32,910 
Rest of the world  1,734   1,709   4,797   4,984   2,336   1,734   6,969   4,797 
Total revenue $32,120  $32,268  $104,581  $93,736 
 $29,817  $32,120  $98,704  $104,581 

 

NOTE 14 13 — INCOME TAXES

 

The Company’s effective income tax rate was (5.4)3.2% and (21.7)(5.4)% for the three months ended September 30, 20222023 and 2021,2022, respectively, and (1.0)(1.6)% and (21.6)(1.0)% for the nine months ended September 30, 20222023 and 2021,2022, respectively.

 

Our country of domicile is Bermuda, which effectively has a 0%0% statutory tax rate as it does not impose taxes on profits, income, dividends, or capital gains. The difference between this 0%0% tax rate and the effective income tax rate for the three and nine months ended September 30, 20222023 and 20212022 was due primarily to a mix of earnings in foreign jurisdictions that are subject to current or deferred tax and loss carryforwards in certain jurisdictions that are not expected to be recognized.realized.

 

NOTE 15 14 — RESTRUCTURING

 

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

NOTE 15 — LEASES

The Company determines if an arrangement is a lease and classifies as operating or finance lease at the lease commencement date. A lease is defined as a contract, or part of contract, that conveys the right to control the use of an asset for a time period in exchange for consideration. At September 30, 2023, the Company’s lease portfolio consists of operating leases related to office facilities in Estonia and Bulgaria. The lease terms for both leases are five years. Options to extend or terminate a lease are included in the lease term when it is reasonably certain that the Company will exercise such options. In some jurisdictions it is customary for lease contracts to provide for payments to increase each year by inflation, or to be reset periodically to market rental rates or the periodic rent is fixed over the lease term. Lease payments for operating leases, consisting of fixed payments for base rent, is recognized on a straight-line basis over the lease term.

Operating Leases - Lessee

The following table discloses the operating asset and liability balances at September 30, 2023 and December 31, 2022:

SCHEDULE OF OPERATING AND FINANCE LEASE ASSET AND LIABILITY

    As of 
    September 30, 2023  December 31, 2022 
Leases Classification      
Assets          
Total operating leased assets, net Operating lease right-of-use assets(1) $4,438  $234 
           
Liabilities          
Current Operating lease liabilities $751  $195 
Non-current Operating lease liabilities – non-current  3,730   — 
Total lease liabilities   $4,481  $195 

(1)Operating lease right-of-use assets are recorded, net of accumulated amortization of $909 and $1,033, at September 30, 2023 and December 31, 2022, respectively. Balances do not include certain right-of-use or lease liabilities related to premises that have not yet been obtained by the Company in accordance with its lease agreements.

The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The incremental borrowing rate is based on the Company’s credit rating based on its market valuation metrics and corporate yield curves observed for public companies with similar credit ratings.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

Operating lease costs were $266 and $98 for the three months ended September 30, 2023 and 2022, respectively, and $523 and $360 for the nine months ended September 30, 2023 and 2022, respectively.

Maturities of lease liabilities, including reconciliation to the lease liabilities, based on required contractual payments, are as follows:

SCHEDULE OF FUTURE MINIMUM MATURITIES OF OPERATING LEASE LIABILITIES

  Operating Leases 
    
Remainder of 2023 $281 
2024  1,134 
2025  1,143 
2026  1,154 
2027  1,165 
Thereafter  671 
Total lease payments  5,548 
Less: future interest costs  1,068 
Present value of lease liabilities $4,481 

Other information related to leases as of and for the nine months ended September 30, 2023 and 2022 was as follows:

SCHEDULE OF FINANCE AND OPERATING RELATED TO LEASES

  Nine Months Ended 
  September 30, 
  2023  2022 
Operating lease weighted-average remaining lease term (years)  4.8   0.8 
Operating lease weighted-average discount rate  9.0%  4.8%
         
Cash paid for the amounts included in the measurement of lease liabilities        
Operating cash flows from operating leases $432  $373 

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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 grantgranted 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 iswas 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 arewere to be paid systematically over the initial five-year terms. Additional payments could behave been required if the Company’s total revenue generated from the licensed content exceed certain stipulated annual and cumulative thresholds during the contract term.terms. Under the terms of the Agreements, the Content Providers arewere 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 2022, 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, 2021.2022.

 

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 induring the condensed consolidated statement of operations for the nine monthsyear ended September 30,December 31, 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share amounts)

The amended and restated Agreement iswas accounted for as a business combination. The consideration transferred in exchange for the identifiable intangible assets iswas 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 expectsexpected 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. TheIn December 2022, the Company revised its 2023 budget and long-term plan as a result of material reductions in its expected future cash flows from its B2B segment, which included a strategic decision not to pursue and invest further in its original content strategy. Based on this update, as of December 31, 2022, the Company determined that the intangible assets associated with the Agreement with a carrying amount of $18.4 million were no longer recoverable and wrote them off in full. Additionally, the Company determined that the related customer relationships intangible assets with a carrying amount of $2.3 million were no longer recoverable and wrote them down to their estimated fair value of $1.6 million. Fair value was based on the contingent liability is determinedexpected future cash flows 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 revenueunder ASC 820 as well as externalexpected contract term. The cash flows are those expected to be generated by the market factors. The contingent consideration was valued using a Monte Carlo simulation based on management’s anticipated annual games revenue forecasts. The fair valueparticipants, discounted at the risk-free rate of interest. Because negotiations have not yet concluded, it is reasonably possible that the estimate of the contingent consideration was initially recognized upon executionexpected future cash flows may change in the near term resulting in the need to adjust the determination 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.fair value.

 

At September 30, 2022On March 29, 2023, the present valueCompany amended and restated its Content Licensing Agreement (the “Amended Agreement”) with the other Content Provider which resulted in a reduced contract term ending March 31, 2024 and a reduction in the fixed fees payable under the arrangement by $15.0 million. Under the Amended Agreement, the fixed fee payment schedule was adjusted such that the remaining $4.0 million payable is due in equal installments of $0.2 million per calendar month, with the first installment due in April 2023. The remaining $1.6 million outstanding at the expiration of the remaining fixed fee payments remainingAmended Agreement will be reconciled against amounts payable by the Content Provider to the Company for revenue generated from the Company’s distribution of the content. In consideration for the execution of the Amended Agreement, in March 2023 the Company entered into a Subscription Agreement with the Content Provider, under which the agreementContent Provider subscribed to 1,250,000 of the Company’s ordinary shares. These shares were issued April 25, 2023. On May 8, 2023, the Company registered the shares in connection with an S-1 resale registration statement. The Company recorded a gain of $15.29.7 million andrelated to the contingent content liabilityextinguishment of $4.4 million are recordedthe fixed fees recognized in content licensing liabilities in the condensed consolidated balance sheet. The Company recognized imputed interest expense of $0.4 million and $0.8 millionother income, net during the three and nine months ended September 30, 2022, respectively, related to2023, net of the content licensing liabilities in other loss, net invalue associated with the condensed consolidated statementsettlement of operations.the stock subscription obligation.

 

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 AdministrationInternal Revenue Service (“CTA”SII”) for clarification on the basis to apply VAT. In December 2021, the CTASII 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 CTASII 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 CTASII issued a resolution stating that unregistered foreign digital service providers will be subject to 19%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 CTAThe SII issued the first non-compliantthis noncompliant list of unregistered foreign digital servicesservice providers to enact enforcement of this withholding; Coolbet was not namedwithholding on this list.a quarterly basis, with the most recent list issued on December 28, 2022. As of September 30, 20222023 and through the date of filing, the Company has not registered for the Chilean VAT but has not been listed on the SII’s list for which this withholding should be applied, and the Company has not received formal notification of any VAT liability due to the CTA.SII.

 

Comprehensive legislationOn March 14, 2023, the SII issued a resolution stating that, although the SII lacks the power to qualify an activity as legal or illegal (which had been noted in previous SII resolutions), the SII is not empowered to register taxpayers for the simplified VAT regime who carry out activities that have been declared illegal by other State authorities that do have the power to qualify an activity as legal or illegal. It then notes that the SII has been informed by the Superintendency of Gambling Casinos that the offering of games of chance is only expressly authorized in certain instances under Chilean law, and thus taxpayers without domicile or residence in Chile that offer them are doing so illegally. As a result, the SII has excluded these taxpayers from the simplified VAT regime, effectively contradicting past guidance that stated the digital VAT law must be applied to online gamblinggaming and betting platforms.

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On September 12, 2023, the Supreme Court of Chile issued a ruling requiring one telecommunication company to block 23 iGaming websites. The ruling relates specifically to one local internet service provider (“ISP”), and a state-owned land-based casino which holds the rights to offer online sports betting (“the Local Provider”). The order to block the websites only applied to the 23 specific URL addresses mentioned in the legal action. The Local Provider’s legal action was filed in draft formbased on a “protection recourse” filing, and asserted that the Local Provider’s constitutional right to maintain a legal monopoly over sports betting was infringed upon. The Supreme Court of Chile’s Chamberruling only affected the named parties of Deputies on March 7, 2022, which would allow for an unlimited number of licenses to be granted by Chile’s national casino gaming authoritythe case, 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 todid not establish legal entities within Chileprecedent. In response to the ruling, the Company modified the URL and would restrict foreign service providers from operating within the country.resumed operations.

 

Due toThe Company does not believe its activities in Chile are illegal based on external legal opinions obtained in previous years, and updated external legal opinions supporting the obligation being established byCompany’s assertions. The Company had previously not registered for the governing law, a liability appears to be probable. However,Chilean VAT on digital service providers as the Company believesbelieved the application of VAT on gross customer deposits, as previously clarified by the CTA, doesSII, prior to the March 2023 resolution, did not represent a reasonable application of the law to the economic substance of the Company’s services. VAT calculated as currently contemplatedservices; this previous application would result in liabilities far in excess of actual earned revenues and would resulthave resulted in a material loss to the Company. The Company believes that Chilean tax laws and regulations support that only the fees directly charged by the Company’s platform, primarily poker fees, should be the taxable base for the Chilean digital VAT and has engaged outside counselobtained an external legal opinion supporting this position, the application of which would not have a material impact to formally approach the CTA on behalfCompany’s financial statements. However, as a result of the SII excluding the Company’s activities from the digital VAT registration, we no longer believe a liability is probable for the past activities as of December 31, 2022 as the Company is now effectively prevented from complying with the digital VAT law. However, there is uncertainty as to attemptthe regulated environment, what amounts may be ultimately due on our previous activities and the ability to agree upon a more reasonable applicationoperate in the jurisdiction until the SII resolves the position. Resolution of this matter may result in fines, penalties, additional expenses or require us to exit the market. Revenues from Chile represented 28.4% and 26.2% of total consolidated revenue for the three months ended September 30, 2023 and 2022, respectively, and 30.2% and 28.6% for the nine months ended September 30, 2023 and 2022, respectively.

Synthetic Equity

Pursuant to the binding term sheet previously entered into with Red Rock Resorts, Inc., the Company entered into the Master Gaming Services Agreement with Station Casinos LLC (“Station”) on March 30, 2023, to launch GameSTACK and GAN Sports RMiG and sportsbook solutions at its properties through self-service kiosks as well as through on-premises and statewide mobile versions in Nevada, subject to applicable licensure. As an additional incentive for Station to support the commercial success of the VAT law, taking into accountlaunch in Nevada, the Master Gaming Services Agreement includes a Synthetic Equity Addendum which would require that the Company make a payment to Station in the event of a change of control in the Company (the “Change of Control Payment”), subject to certain conditions outlined in the Synthetic Equity Addendum. The Change of Control Payment is payable only in the event that a change of control occurs during the period as specified by the Synthetic Equity Addendum and that the Company’s specificmarket capitalization has increased during that time, calculated as proscribed by the Synthetic Equity Addendum, which the amount of such payment ranging from 2.5% to 5% of such increase in market capitalization over approximately $2.00 per share, depending on whether certain minimum revenue conditions are met over the next five years. The payment represents an equity-linked financial instrument containing service, performance and market conditions and is measured and classified in accordance with stock-based compensation guidance. The initial grant-date fair value represents an upfront payment to a customer for the maximum tranche which will be attributed as contra revenue over the estimated initial contract term as revenue is earned under the arrangement such that the recognition of the constraint is not probable to result in a material reversal of revenue. The initial grant date liability will be marked to market at each reporting period through operating income (loss). The Company valued the liability utilizing a Monte Carlo simulation and determined the value to be approximately $1.1 million at grant-date and recorded within other assets and other liabilities in the condensed consolidated balance sheet. A Monte Carlo simulation includes numerous scenarios, including assumptions of probability weighted likelihood of different outcomes. As facts and circumstances. If any agreementcircumstances become known or knowable at each reporting period, the probability of certain scenarios will change which will increase or decrease the value. The classification of the liability will be reassessed when a change of control event is reached withprobable. On September 30, 2023, the CTA, it is possible that the application wouldfair value was determined to be applied retroactively approximately $0.9 million. The change in value was charged as a reduction to Coolbet’s Chilean activity as of June 1, 2020.general and administrative expense. As of September 30, 2022,2023, the Companyunderlying revenue arrangement 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 Companycommenced, 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.asset is probable of recovery.

 

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NOTE 17 — SUBSEQUENT EVENTS

On November 7, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with SEGA SAMMY CREATION INC., a Japanese corporation (“Parent”), and Arc Bermuda Limited, a Bermuda exempted company limited by shares and a wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which, subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Parent (the “Merger”). Parent and Merger Sub are affiliates of SEGA SAMMY HOLDINGS, INC.

Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, at the effective time of the Merger, and as a result of the Merger (and without any action on the part of Parent, Merger Sub, the Company or any holder thereof):

●each of the Company’s ordinary shares issued immediately prior to the effective time of the Merger (other than shares held by Parent or Merger Sub, by the Company as a treasury share or by any person who properly asserts dissenters’ rights under Bermuda law) will be converted into the right to receive an amount in cash equal to $1.97 per share, without interest and subject to any applicable tax withholding (the “MergerConsideration”);

●each of the Company’s outstanding restricted shares (whether vested or unvested) at the effective time of the Merger will become vested in full and non-forfeitable and will be converted into the right to receive the Merger Consideration;

●each of the Company’s outstanding restricted share units (whether vested or unvested) at the effective time of the Merger will become vested in full and will be automatically cancelled in exchange for the right to receive a single lump sum cash payment, without interest and subject to any applicable tax withholding, equal to the product of (a) the Merger Consideration and (b) the number of Company ordinary shares subject to such restricted share unit; and

●each of the Company’s outstanding options to acquire the Company ordinary shares (whether vested or unvested) at the effective time of the Merger will become vested in full and will be automatically cancelled in exchange for the right to receive a single lump sum cash payment, without interest and subject to any applicable tax withholding, equal to the product of (a) the excess, if any, of the Merger Consideration over the exercise price per share of the option and (b) the number of Company ordinary shares issuable upon the exercise in full of such option.

Consummation of the Merger is not subject to a financing condition, but is subject to customary closing conditions, including (a) approval by the Company’s shareholders of the Merger Agreement, the Merger and the Statutory Merger Agreement, (b) receipt of applicable antitrust and CFIUS approvals or the expiration of applicable waiting periods, (c) absence of any order or injunction prohibiting the consummation of the Merger and (d) the accuracy of the Company’s representations and warranties contained in the Merger Agreement (subject to certain customary qualifications) and compliance by the Company with its agreements and covenants contained in the Merger Agreement. The closing of the Merger is also predicated upon receipt of approval of the Merger and change in control of the Company by all relevant gaming authorities. The Company anticipates that this will take some time, and that the closing of the Merger may not occur until late 2024 or early 2025.

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Item 2. Management’sManagement’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 20212022 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 20212022 Annual Report on Form 10-K. There have been no material changes during the periods covered by this Quarterly Report on Form 10-Q from the critical policies described in our Form 10-K.

 

Forward-Looking Statements

 

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

 

Although we believe that we have a reasonable basis for each forward-looking statement, forward-looking statements are not guarantees of future performance and our actual results could differ significantly from the results discussed or implied in these forward-looking statements. Factors that might cause such differences are described in “Item 1A. Risk Factors” in our 20212022 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$8.2 million and $8.7$6.9 million for the three months ended September 30, 20222023 and 2021,2022, respectively, and $49.8$25.1 million and $18.0$49.8 million for the nine months ended September 30, 20222023 and 2021,2022, 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, 20222023 Compared to Three Months Ended September 30, 20212022

 

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

 

 Three Months Ended      
 Three Months Ended
September 30,		 Change  September 30,  Change 
 2022 2021 Amount Percent  2023  2022  Amount  Percent 
(dollars in thousands)                  
Revenue $32,120  $32,268  $(148)  (0.5)% $29,817  $32,120  $(2,303)  (7.2)%
Operating costs and expenses                                
Cost of revenue(1)  9,435   10,801   (1,366)  (12.6)%  9,242   9,435   (193)  (2.0)%
Sales and marketing  6,757   5,657   1,100   19.4%  7,196   6,781   415   6.1%
Product and technology  4,998   5,492   (494)  (9.0)%  9,150   7,571   1,579   20.9%
General and administrative(1)  10,185   12,888   (2,703)  (21.0)%  7,060   7,588   (528)  (7.0)%
Depreciation and amortization  5,893   4,560   1,333   29.2%  4,339   5,893   (1,554)  (26.4)%
Total operating costs and expenses  37,268   39,398   (2,130)  (5.4)%  36,987   37,268   (281)  (0.8)%
Operating loss  (5,148)  (7,130)  1,982   (27.8)%  (7,170)  (5,148)  (2,022)  39.3%
Interest expense, net  1,450   —   1,450   n.m. 
Other income  (13)  —   (13)  n.m. 
Interest expense  1,264   1,450   (186)  (12.8)%
Other income, net  —   (13)  13   (100.0)%
Loss before income taxes  (6,585)  (7,130)  545   (7.6)%  (8,434)  (6,585)  (1,849)  28.1%
Income tax expense  356   1,548   (1,192)  (77.0)%
Income tax (benefit) expense  (274)  356   (630)  n.m. 
Net loss $(6,941) $(8,678) $1,737   (20.0)% $(8,160) $(6,941) $(1,219)  17.6%

(1) Excludes depreciation and amortization expenseexpense.

n.m. = not meaningful

Geographic Information

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

 Three Months Ended        
 Three Months Ended
September 30,		 Percentage of Revenue Change  September 30,  Percentage of Revenue  Change 
 2022 2021 2022 2021 Amount Percent  2023  2022  2023  2022  Amount  Percent 
(dollars in thousands)                          
United States $10,320  $9,107   32.1%  28.2% $1,213   13.3% $7,459  $10,320   25.0%  32.1% $(2,861)  (27.7)%
Europe  10,574   11,598   32.9%  35.9%  (1,024)  (8.8)%  10,890   10,574   36.5%  32.9%  316   3.0%
Latin America  9,492   9,854   29.6%  30.5%  (362)  (3.7)%  9,132   9,492   30.6%  29.6%  (360)  (3.8)%
Rest of the world  1,734   1,709   5.4%  5.4%  25   1.5%  2,336   1,734   7.9%  5.4%  602   34.7%
Total revenue $32,120  $32,268   100.0%  100.0% $(148)  (0.5)% $29,817  $32,120   100.0%  100.0% $(2,303)  (7.2)%

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Revenue

 

Revenue was $32.1$29.8 million for the three months ended September 30, 2022,2023, a decrease of $0.1$2.3 million from the comparable period in 2021.2022. The decrease was primarily attributable to decreases in B2C revenues of $1.7 million driven by unfavorable impacts of revenues derived from currencies which weakened relative to the U.S. Dollar. Thea decrease was offset by an increase in our contractual revenue rates pursuant to an agreement regarding the expiration of an exclusivity period with a B2B revenues of $1.5 million, driven by increases related to new content revenues and expansion into new markets, such as Ontario, Canada.customer.

 

Revenue fluctuations across our international markets are primarily a result of our B2C operations, which accounted for $0.6 million of the decreased revenues in Europe and the full $0.4 million increase in Latin America. The increase in revenue in the United States as compared to the prior period wasare the result of increaseddecreased RMiG revenues withinin our B2B operations. The fluctuations in Europe and Latin America were entirely attributable to our B2C operations. The increase in the rest of the world was driven primarily by growth in our Ontario operations in the B2B segment.

 

Cost of Revenue

Cost of revenue was $9.4$9.2 million for the three months ended September 30, 2022, a decrease of $1.42023, which was relatively consistent to the $9.4 million fromin the comparable period in 2021, which was primarily attributable to lower costs related to B2B hardware sales incurred in the prior period that did not recur in the current period.2022.

 

Sales and Marketing

Sales and marketing expense was $6.8$7.2 million for the three months ended September 30, 2022,2023, an increase of $1.1$0.4 million from the comparable period in 2021.2022. The increase was primarily attributable to increased sales and marketing activities within our B2C operations to attract additional end-users.within Latin America.

 

Product and Technology

Product and technology expense was $5.0$9.2 million for the three months ended September 30, 2022, a decrease2023, an increase of $0.5$1.6 million from the comparable period in 2021,2022, primarily due to the strengthening ofdecrease in capitalized development costs in our B2B segment. This increase was partially offset by decreases in personnel costs included in Product and Technology as the U.S. Dollar relativeCompany continues to compensation costs incurred in foreign currencies.optimize its cost structure.

 

General and Administrative

 

General and administrative expense decreased $2.7was $7.1 million for the three months ended September 30, 2023, a decrease of which $1.3$0.5 million was attributablefrom the comparable period in 2022. This decrease is due primarily to foreign exchange transaction gains primarily as a resultrevaluation of the strengthening of the U.S. Dollar relativecontingent liability related to the British Pound. Additionally, personnel and office costs decreased $0.9 million and professional fees decreased $0.4 million asCompany’s synthetic equity arrangement with a result of our restructuring efforts and cost saving initiatives executed during the year.customer.

Depreciation and Amortization

 

Depreciation and amortization expense was $5.9$4.3 million for three months ended September 30, 2022, an increase2023, a decrease of $1.3$1.6 million from the comparable period in 2021.2022. The increasedecrease was primarily due to the amortization expense recognized on acquired intangiblereduction of depreciable assets relatedthat were fully amortized or impaired compared to the Company’s content licensing arrangement.prior periods.

35

 

Income Tax Expense

 

We recorded income tax benefit of $0.3 million for the three months ended September 30, 2023, reflecting an effective tax rate of 3.2%, compared to income tax expense of $0.4 million for the three months ended September 30, 2022, reflecting an effective tax rate of (5.4)%, compared to income tax expense of $1.5 million for the three months ended September 30, 2021, reflecting an effective tax rate of (21.7)%. Our country of domicile is Bermuda, which effectively has a 0% statutory tax rate as it does not impose taxes on profits, income, dividends, or capital gains. The difference between this 0% tax rate and the effective income tax rate for three months ended September 30, 20222023 and 20212022 was due primarily to a mix of earnings in foreign jurisdictions that are subject to current or deferred tax and loss carryforwards in certain jurisdictions that are not expected to be recognized.realized.

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Nine Months Ended September 30, 20222023 Compared to Nine Months Ended September 30, 20212022

 

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

 

 Nine Months Ended      
 Nine Months Ended
September 30,		 Change  September 30,  Change 
 2022 2021 Amount Percent  2023  2022  Amount  Percent 
(dollars in thousands)                  
Revenue $104,581  $93,736  $10,845   11.6% $98,704  $104,581  $(5,877)  (5.6)%
Operating costs and expenses                                
Cost of revenue(1)  31,598   29,876   1,722   5.8%  28,888   31,598   (2,710)  (8.6)%
Sales and marketing  20,122   15,238   4,884   32.1%  21,704   20,292   1,412   7.0%
Product and technology  19,140   15,564   3,576   23.0%  29,966   24,928   5,038   20.2%
General and administrative(1)  33,265   35,217   (1,952)  (5.5)%  27,095   27,307   (212)  (0.8)%
Impairment  28,861   —   28,861   n.m.   —   28,861   (28,861)  (100.0)%
Restructuring  1,771   —   1,771   n.m.   —   1,771   (1,771)  (100.0)%
Depreciation and amortization  16,862   12,686   4,176   32.9%  12,783   16,862   (4,079)  (24.2)%
Total operating costs and expenses  151,619   108,581   43,038   39.6%  120,436   151,619   (31,183)  (20.6)%
Operating loss  (47,038)  (14,845)  (32,193)  n.m.   (21,732)  (47,038)  25,306   (53.8)%
Interest expense, net  2,521   1   2,520   n.m. 
Interest expense  3,885   2,521   1,364   54.1%
Other income  (283)  —   (283)  n.m.   (934)  (283)  (651)  n.m. 
Loss before income taxes  (49,276)  (14,846)  (34,430)  n.m.   (24,683)  (49,276)  24,593   (49.9)%
Income tax expense  513   3,201   (2,688)  (84.0)%  385   513   (128)  (25.0)%
Net loss $(49,789) $(18,047) $(31,742)  n.m.  $(25,068) $(49,789) $24,721   (49.7)%

 

(1) Excludes depreciation and amortization expenseexpense.

n.m. = not meaningful

36

Geographic Information

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

 

 Nine Months Ended          
 Nine Months Ended
September 30,		 Percentage of Revenue Change  September 30,  Percentage of Revenue  Change 
 2022 2021 2022 2021 Amount Percent  2023  2022  2023  2022  Amount  Percent 
(dollars in thousands)                          
United States $33,531  $28,186   32.1%  30.1% $5,345   19.0% $23,271  $33,531   23.6%  32.1% $(10,260)  (30.6)%
Europe  33,343   36,855   31.9%  39.3%  (3,512)  (9.5)%  35,674   33,343   36.1%  32.0%  2,331   7.0%
Latin America  32,910   23,711   31.5%  25.3%  9,199   38.8%  32,790   32,910   33.2%  31.5%  (120)  (0.4)%
Rest of the world  4,797   4,984   4.5%  5.3%  (187)  (3.8)%  6,969   4,797   7.1%  4.6%  2,172   45.3%
Total revenue $104,581  $93,736   100.0%  100.0% $10,845   11.6% $98,704  $104,581   100.0%  100.2% $(5,877)  (5.6)%

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Revenue

 

Revenue was $104.6$98.7 million for the nine months ended September 30, 2022, an increase2023, a decrease of $10.8$5.9 million from the comparable period in 2021.2022. The increasedecrease was primarily attributable to an increase of $5.6 milliona decrease in our contractual revenue rates pursuant to the agreement regarding the expiration of an exclusivity period with a B2B revenues, whichcustomer. This decrease was drivenpartially offset by theoverall growth in existing customers and an increase in development revenues, and an increase of $5.3 million in ourthe European market within the B2C revenues attributable to active customer growth in Latin America.segment.

 

In Europe, $3.6 million of the decreased revenue was attributable to our B2C revenues in Euros weakening relative to the U.S. Dollar, despite underlying increases in revenues denominated in Euros. The B2B segment further experienced declines in its RMiG business in Europe that resulted in an additional $1.6 million decrease in revenue.

The increase in revenueRevenue fluctuations in the United States as compared toare the prior periodresult of decreased RMiG revenues in our B2B operations. The increase in Europe was the result of increased RMiG revenues withinstrong performance in our B2C segment. The increase in the rest of the world was driven primarily by growth in our Ontario operations in the B2B segment.

 

Cost of Revenue

Cost of revenue was $31.6$28.9 million for the nine months ended September 30, 2022, an increase2023, a decrease of $1.7$2.7 million from the comparable period in 2021. Of this increase, $1.3 million2022. The decrease was primarily attributable to recognition of service expense related to our B2C operations’ cost of gaming revenues driven primarily by higher gaming duties of $0.3 million and content license fees costs of $0.6 millionlicensing arrangements that was accounted for as a result of increased revenues, and higher processing fees of $0.2 million due to increased deposit and withdrawal activity on www.coolbet.com. Within our B2B segment, the cost of revenue increase was primarily driven by a $1.5 million increase in service fees paid to a third-party content provider related to a content licensing agreement the Company entered intocontract in the second quarter of 2021, offset by a $0.6 million decreaseprior year, and decreased royalties resulting from declines in cost of hardware sales recognized during the prior period that did not recur during the current period. Other decreases of $0.5 million in B2B cost of revenues were primarily the result of decreased content license fees costs that were driven by decreased revenues in Europe and the U.S.our SIM business.revenues.

 

Sales and Marketing

Sales and marketing expense was $20.1$21.7 million for the nine months ended September 30, 2022,2023, an increase of $4.9$1.4 million from the comparable period in 2021. Of the2022. The increase $5.3 million was primarily attributable to increased sales and marketing activities within our B2C operations in order to attract additional end-users. This increase was partially offset by a decrease of $0.6 million in share-based compensation expense related to personnel in our sales and marketing functions.within Latin America.

37

 

Product and Technology

Product and technology expense was $19.1$30.0 million for the nine months ended September 30, 2022,2023, an increase of $3.6$5.0 million from the comparable period in 2021,2022, primarily due to higher net salaries and related employeethe decrease in capitalized development costs net of capitalized costs (which include an increase in related share-based compensation of $0.3 million), as we ramped up our development team and invested in both our B2B and B2C platforms to serve our new and existing customers.segment.

 

General and Administrative

 

General and administrative expense was $33.3$27.1 million for the nine months ended September 30, 2022, a decrease of $2.0 million from the comparable period in 2021. This decrease was due primarily to a decrease of $2.3 million attributable to a reduction in professional fees resulting in an ongoing effort to in-source our back-office and development functions, a decrease of $1.6 million in sales tax expense and2023, a decrease of $0.2 million, which related primarily to reductions in bad debt expense. These decreases were offset by an increase in softwaresalaries and technology costswages as the Company has continued to optimize its cost structure and revaluation of $1.0 million and office andthe contingent liability related expenses of $0.8 million as we made investments to streamline our operations.the Company’s synthetic equity arrangement with a customer.

 

Impairment

The stock trading price of our publicly traded shares and resulting market capitalization of our business has experienced a significant and sustained decline since our acquisition of Coolbet. As a result, we performed interim quantitative goodwill impairment assessments as of June 30, 2022 and September 30, 2022. As a result of our impairment test as of June 30, 2022 we recognized an impairment of $28.9 million to goodwill within our B2B reporting segment. The interim quantitative impairment assessment as of September 30, 2022 did not result in an additional impairment to goodwill.

Restructuring Expenses

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

Depreciation and Amortization

 

Depreciation and amortization expense was $16.9$12.8 million for the nine months ended September 30, 2022, an increase2023, a decrease of $4.2$4.1 million from the comparable period in 2021. Of the increase, $2.9 million2022. The decrease was primarily due to the amortization expense recognized on acquired intangiblereduction of depreciable assets relatedthrough both fully amortized and impaired assets compared to the Company’s content licensing arrangement. The remaining increase was attributable to higher depreciation and amortization of new assets placed in-service as a result of product launches that occurred during the prior periods.period.

 

Income Tax Expense

 

We recorded income tax expense of $0.4 million for the nine months ended September 30, 2023, reflecting an effective tax rate of (1.6)%, compared to income tax expense of $0.5 million for the nine months ended September 30, 2022, reflecting an effective tax rate of (1.0)%, compared to income tax expense of $3.2 million for the nine months ended September 30, 2021, reflecting an effective tax rate of (21.6)%. Our country of domicile is Bermuda, which effectively has a 0% statutory tax rate as it does not impose taxes on profits, income, dividends, or capital gains. The difference between this 0% tax rate and the effective income tax rate for nine months ended September 30, 20222023 and 20212022 was due primarily to a mix of earnings in foreign jurisdictions that are subject to current or deferred tax and loss carryforwards in certain jurisdictions that are not expected to be recognized.realized.

 

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Segment Operating Results

 

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

 

Three Months Ended September 30, 20222023 Compared to Three Months Ended September 30, 20212022

 

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

 

 Three Months Ended Percentage of Segment      
 Three Months Ended
September 30,		 Percentage of Segment Revenue Change  September 30,  Revenue  Change 
 2022 2021 2022 2021 Amount Percent  2023  2022  2023  2022  Amount  Percent 
(dollars in thousands)                          
B2B                                                
Revenue $12,685  $11,175   100.0%  100.0% $1,510   13.5% $10,178  $12,685   100.0%  100.0% $(2,507)  (19.8)%
Cost of revenue(1)  2,173   3,583   17.1%  32.1%  (1,410)  (39.4)%  2,055   2,173   20.2%  17.1%  (118)  (5.4)%
B2B segment gross profit $10,512  $7,592   82.9%  67.9% $2,920   38.5%
B2B segment contribution $8,123  $10,512   79.8%  82.9% $(2,389)  (22.7)%
B2C                                                
Revenue $19,435  $21,093   100.0%  100.0% $(1,658)  (7.9)% $19,639  $19,435   100.0%  100.0% $204   1.0%
Cost of revenue(1)  7,262   7,218   37.4%  34.2%  44   0.6%  7,187   7,262   36.6%  37.4%  (75)  (1.0)%
B2C segment gross profit $12,173  $13,875   62.6%  65.8% $(1,702)  (12.3)%
B2C segment contribution $12,452  $12,173   63.4%  62.6% $279   2.3%

 

(1) Excludes depreciation and amortization expenseexpense.

 

B2B Segment

B2B revenue increased $1.5decreased $2.5 million primarily due to a decrease in our contractual revenue rates pursuant to an increaseagreement regarding the expiration of an exclusivity period with a B2B customer. This decrease was partially offset by overall growth in platform and content license feesgross operator revenue of $1.2 million resulting from new content andinthe B2B segment due to organic growth withinand the U.S. RMiG business. Development and other services revenue contributed $0.3 million to the increase as a resultstrong performance of expansion into new markets, such as Ontario, Canada.our B2B customers.

 

B2B cost of revenue decreased $1.4$0.1 million primarily related to hardware sales recognizeda decrease in the prior period which did not recurroyalties resulting from declines in the current period.our SIM revenues.

 

Segment gross profit margincontribution for B2B, which excludes depreciation and amortization expense, increaseddecreased by 38.5% primarily driven by an increase22.7% and was relatively consistent as the declines in platform and content license fees revenuerevenues described above were consistent with the decreases in cost of $1.2 million, related to organic growth within RMiG revenues and content license fees revenues related to an amended of a content licensing arrangement that did not have related costs of revenue in the current period and did not occur in the prior period.revenues.

 

B2C Segment

B2C revenue decreased $1.7increased $0.2 million primarily due to the weakening of the currencies in which we derive our B2C operations’ revenues relative to the U.S. Dollar.higher sports and casino margins.

 

B2C cost of revenue stayedwere relatively consistent aswith the increase in gaming duties of $0.3 million, due to entering into new jurisdictions, was offset by a decrease in content license fees costs of $0.3 million.prior comparable period.

 

Segment gross profitcontribution for B2C, which excludes depreciation and amortization expense, decreasedincreased by 12.3%2.3%. This decreaseincrease was primarily driven by a decreasethe increase in revenues as described above.

 

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Nine Months Ended September 30, 20222023 Compared to Nine Months Ended September 30, 20212022

 

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

 

 Nine Months Ended Percentage of Segment      
 Nine Months Ended
September 30,		 Percentage of Segment Revenue Change  September 30,  Revenue  Change 
 2022 2021 2022 2021 Amount Percent  2023  2022  2023  2022  Amount  Percent 
(dollars in thousands)                          
B2B                                                
Revenue $39,905  $34,349   100.0%  100.0% $5,556   16.2% $31,352  $39,905   100.0%  100.0% $(8,553)  (21.4)%
Cost of revenue(1)  9,015   8,632   22.6%  25.1%  383   4.4%  6,129   9,015   19.5%  22.6%  (2,886)  (32.0)%
B2B segment gross profit $30,890  $25,717   77.4%  74.9% $5,173   20.1%
B2B segment contribution $25,223  $30,890   80.5%  77.4% $(5,667)  (18.3)%
B2C                                                
Revenue $64,676  $59,387   100.0%  100.0% $5,289   8.9% $67,352  $64,676   100.0%  100.0% $2,676   4.1%
Cost of revenue(1)  22,583   21,244   34.9%  35.8%  1,339   6.3%  22,759   22,583   33.8%  34.9%  176   0.8%
B2C segment gross profit $42,093  $38,143   65.1%  64.2% $3,950   10.4%
B2C segment contribution $44,593  $42,093   66.2%  65.1% $2,500   5.9%

(1) Excludes depreciation and amortization expenseexpense.

 

B2B Segment

B2B revenue increased $5.6decreased $8.5 million primarily due to a decrease in our contractual revenue rates pursuant to an increaseagreement regarding the expiration of an exclusivity period with a B2B customer. This decrease was partially offset by overall growth in platform and content license fees revenue of $4.0 million resulting fromthe B2B segment due to organic growth in existing U.S.the B2B segment due to the strong performance of our B2B customers.

Additionally, B2B development services and other revenue increased $1.6 million, driven by expansion into new markets, such as Ontario, Canada.

 

B2B cost of revenue increased $0.4decreased $3.0 million primarily driven by aattributable to recognition of service expense of $1.5 million increase in service fees incurred related to the content licensing agreement the Company entered into in the second quarter of 2021 with a content provider. This increase was offset by a decrease of $0.6 million related to hardware salesour content licensing arrangements that occurred duringwas accounted for as a service contract in the prior period which did not recur during the current period, andyear. The additional decrease was primarily related to a decrease of $0.4 million in other B2B cost of revenue, primarily attributable to decreased content license fees costsroyalties resulting from lower RMiG revenuesdeclines in Italy.our SIM and Italy revenues.

 

Segment gross profit margincontribution for B2B, which excludes depreciation and amortization expense, increaseddecreased by 20.1%, which18.3% and was primarily driven by increased development and content license feesdue to the declines in revenues and decreased revenues and related cost of revenue related to hardware sales that occurred during the prior period which did not recur during the current period.described above.

 

B2C Segment

B2C revenue increased $5.3$2.7 million primarily due to growth in the number of active customers in our Latin American markets during the current period.higher sports and casino margins.

 

B2C cost of revenue increased $1.3 million driven by an increase in content license fees of $0.6 million and $0.3 million in gaming duties, both resulting from increased revenues, and higher processing fees of $0.2 million due to increased deposit and withdrawal activity on www.coolbet.com.was relatively consistent with the prior period.

 

Segment gross profitcontribution for B2C, which excludes depreciation and amortization expense, increased by 10.4%, which5.9%. This increase was primarily driven by anthe increase in gaming revenues and an increase in gross profit margin as a result of improved processing deals for the nine months ended September 30, 2022.described above.

 

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Non-GAAP Financial Measures

 

Adjusted EBITDA

 

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

 

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

 

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

 

 Three Months Ended Nine Months Ended 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		  September 30,  September 30, 
 2022 2021 2022 2021  2023  2022  2023  2022 
(in thousands)                  
Net loss $(6,941) $(8,678) $(49,789) $(18,047) $(8,160) $(6,941) $(25,068) $(49,789)
Income tax expense  356   1,548   513   3,201 
Interest expense, net  1,450   —   2,521   1 
Income tax (benefit) expense  (274)  356   385   513 
Interest expense  1,264   1,450   3,885   2,521 
Gain on amendment of Content Licensing Agreement  —   —   (9,718)  — 
Loss on debt extinguishment  —   —   8,784   — 
Revaluation of contingent liability  (509)  —   (288)  — 
Depreciation and amortization  5,893   4,560   16,862   12,686   4,339   5,893   12,783   16,862 
Share-based compensation and related expense(1)  1,335   1,700   5,671   5,365   818   1,335   4,726   5,671 
Impairment  —   —   28,861   —   —   —   —   28,861 
Restructuring  —   —   1,771   —   —   —   —   1,771 
Adjusted EBITDA $2,093  $(870) $6,410  $3,206  $(2,522) $2,093  $(4,511) $6,410 

 

(1) Includes $2.1$1.5 million and $1.8$2.1 million in equity-classified expense for the three months ended September 30, 20222023 and 2021,2022, respectively, and $6.1$4.5 million and $5.8$6.1 million for the nine months ended September 30, 2023 and 2022, respectively, and 2021, respectively, a benefitexpense (benefit) of $0.1$0.3 million and $(0.1) million from liability-classified awards for the three months ended September 30, 2021,2023 and a benefit of $0.22022 respectively, and $0.4 million and $0.2(0.2) million for the nine months ended September 30, 20222023 and 2021,2022, respectively. Such amounts excluded capitalized amounts. Additionally, share-based compensation and related expense is offset by a release of $1.0 million in short term incentive compensation that was to be settled in equity for the three months ended September 30, 2023. Refer to Note 10.7 Share-based Compensation for further details.

 

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Key Performance Indicators

 

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

 

 Three Months Ended Nine Months Ended 
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		  September 30,  September 30, 
 2022 2021 2022 2021  2023  2022  2023  2022 
B2B Gross Operator Revenue (in millions) $277.8  $214.8  $858.6  $650.5  $424.1  $277.8  $1,273.1  $858.6 
B2B Take Rate  4.6%  5.2%  4.6%  5.3%  2.4%  4.6%  2.5%  4.6%
B2C Active Customers (in thousands)  261   199   435   306   244   261   432   435 
B2C Marketing Spend Ratio  23%  15%  21%  14%  26%  23%  22%  21%
B2C Sports Margin  6.6%  6.8%  7.0%  7.9%  6.0%  6.6%  7.2%  7.0%

 

B2B Gross Operator Revenue

 

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

 

The increase in Gross Operator Revenue for the three and nine months ended September 30, 2022,2023, as compared to the three and nine months ended September 30, 2021,2022, was driven primarily by expansion of existing clients into new jurisdictions, such as Connecticut and Ontario, Canada, coupled with our launch of RMiG solutions for new customersorganic growth in existing jurisdictions, such as Michigan. Additionally, customer launches which occurred mid-2021 have now been fully included within the comparable periods of 2022 and increases inPennsylvania, Michigan, New Jersey and Pennsylvania were driven by organicConnecticut. Additionally, Ontario supplemented the growth from existing customers.through the achievement of greater market share.

 

B2B Take Rate

 

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

 

The decrease in B2B Take Rate for the three months ended September 30, 20222023 as compared to the three months ended September 30, 2021 was primarily driven by a growth in development services and other revenue of 11%, which are considered in addition to Gross Operator Revenue. Development and other services revenue increased as a result of expansion into new markets, such as Ontario, Canada. This increase in Take Rate was slightly offset by changes to the mix of revenues within our B2B segment during the three months ended September 30, 2022 compared to the three months ended September 30, 2021, including higher RMiG revenues relative to historical performance, which typically experience a lower Take Rate when compared to other revenue streams.

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The decrease in B2B Take Rate for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, was primarily driven by a growthdecrease in Gross Operator Revenue withoutour contractual revenue rates pursuant to an agreement regarding the expiration of an exclusivity period with a proportional growth in net segment revenue due to a larger portion of B2B revenues coming from lower Take Rate revenue streams which have outpaced historical performance. This was driven by patent revenue, which is earned based on the transfer of the patent and not derived from Gross Operator Revenue, recognized during the nine months ended September 30, 2021 that did not recur in the current period.customer.

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B2C Active Customers

 

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

 

The increasedecrease in B2C Active Customers for the three and nine months ended September 30, 20222023 was primarily driven by limited customer acquisition in Latin America and high customer retention during the current period.lower volume of sporting events. The decrease in the third quarter had a slight impact on the overall numbers for the nine months ended September 30, 2023.

 

B2C Marketing Spend Ratio

 

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

 

The increase in the B2C MarkingMarketing Spend Ratio for the three and nine months ended September 30, 20222023 was primarily driven by increased marketing spendlimited customer acquisition in Latin America, and Ontario, Canada and higher customer acquisition costs as a result of entering into the Ontario market, and several marketing and sponsorship in Latin American to develop greater brand awareness during the current period.America.

 

B2C Sports Margin

 

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

 

The decreasefluctuations in the B2C Sports Margin for the three and nine months ended September 30, 2022 was2023 were primarily attributable to more favorablethe outcomes in the prior period related to largeof individual sporting events such as the Copa America Championship and European Football Championship, which occurred in the prior period and did not recur during the current period..

Liquidity and Capital Resources

 

Material Cash Commitments

 

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

 

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During the year ended December 31, 2021, we entered into a Content Licensing Agreement (the “Agreement”“Content Licensing Agreement”) with a third-party gambling content provider specializing in developing and licensing interactive games which was amended and restated on April 5, 2022. The Agreement grants us exclusive right to use and distribute the online gaming content in North America. The content provider is committed to developing a minimum number of games for our exclusive use over the five-year term, subject to extensions. In exchange, we are required to pay fixed fees, totaling $30.0 million, of which $5.0 million was due upon execution of the Agreement, and the remaining fixed fees are paid systematically over the initial five-year term. Additional payments could be required if our total revenue generated from the licensed content exceeds certain stipulated annual and cumulative thresholds during the contract term. In March 2023, the event thatCompany amended and restated its Content Licensing Agreement with the Agreement is terminated, actual cash outlays could be less than currently contemplated.

We expect our capital expenditures to continue to increaseContent Provider, which resulted in a reduced contract term and a reduction in the immediate future, as we seek to expand our business through organic growth and potential business acquisitions. Specifically,fixed fees payable under the key elements of our growth strategy include, but are not limited to, the expansion of our gaming content on our platform, primarily through the Agreements, our launch of the integrated B2B sportsbook technology solution in North America in September 2022, the continued integration of Coolbet’s sports betting technology and international B2C operations, the launch of regulated gaming in new U.S. states, and potential business acquisitions.arrangement by $15 million.

 

The execution of our growth strategy will require continued significant capital expenditures, and we expect to continue investing in our products and technologies as we seek to scale our business. In April 2022, we successfully completed a $30.0 million term loan with net proceeds, of which $27.6 million provides us additional flexibility to execute our balanced capital allocation plan centered around the aforementioned investments and our share repurchase program. During the nine months ended September 30, 2022 we repurchased $1.0 million of our own shares as we believed our share price was undervalued and did not reflect the long-term opportunities ahead of us.

 

We utilized cash in investing activities of $17.5$4.8 million and $102.6$17.5 million for the nine months ended September 30, 20222023 and 2021,2022, respectively. Of these activities, $92.4 million related to the acquisition of Coolbet for the nine months ended September 30, 2021. We made payments during the nine months ended September 30, 2022 related to content licensing fees of $5.5 million. Expendituresexpenditures related to internally developed capitalized software represented $2.8 million and $9.2 million, respectively, and $8.5 million, respectively, property and equipment (including licenses for internal use software) represented $1.6 million and $1.7 million, and $1.5respectively. Additionally, the Company utilized $5.5 million respectively.to pay fees related to the Content Licensing Agreement in the prior year.

 

Sources of Liquidity

 

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

 

OnIn April 26, 2022, a subsidiary of the Companywe entered into a fixed$30.0 million term credit facility with net proceeds of $27.6 million (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 maturescontained affirmative and negative covenants, including certain financial covenants associated with our financial results. The financial covenants test periods began on October 26, 2026March 31, 2023. We obtained waivers for all financial covenants as of March 31, 2023, and is fully guaranteed by the Company. There are no scheduled principal payments due under the Credit Facility. The Company incurred $2.4 millionwere in debt issuance costs in connection with the Credit Facility.compliance as of September 30, 2023.

 

Our primary sourceOn April 13, 2023, we executed agreements to amend the Credit Facility to waive all events of liquidity for our working capital is cash flows generated from operations and our cash on hand of $41.8 million at September 30, 2022, includingdefault, amend certain financial covenants, assign the funds received in relationrights to the Credit Facility from our existing lender to a third party, extinguish the Credit Facility and increase the principal balance from $30.0 million to $42.0 million with accrued paid in-kind (“PIK”) interest of 8.0% per year with the new lenders facility arrangement (together, forming the “Amended Credit Facility”). The Amended Credit Facility became effective upon cash settlement of payments completed on April 14, 2023. The Amended Credit Facility contains a financial covenant, among other covenants, requiring minimum liquidity of $10.0 million. Refer to Note 6 – Debt in the accompanying condensed consolidated financial statements for further detail with respect to the Amended Credit Facility.

 

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We believe cash generated from operations and cash on hand will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. We may also seekare actively addressing internal costs to enhanceconserve cash and executing these programs will be critical to our competitive position through additional complementary acquisitions in both existing and new markets. Therefore, from timeability to time, we may accesscontinue funding our operations for at least the equity or debt markets to raise additional funds to finance potential acquisitions.next twelve months.

 

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

 

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

 

Cash Flow Analysis

 

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

 

 Nine Months Ended      
 Nine Months Ended
September 30,		 Change  September 30,  Change 
(dollars in thousands) 2022 2021 Amount Percent  2023  2022  Amount  Percent 
Net cash (used in) provided by operating activities $(3,559) $1,350  $(4,909)  

n.m.

Net cash used in operating activities $(3,640) $(3,559)  (81)  2.3%
Net cash used in investing activities  (17,514)  (102,630)  85,116   (82.9)%  (4,772)  (17,514)  12,742   (72.8)%
Net cash provided by financing activities  27,458   141   27,317   n.m.   1,253   27,458   (26,205)  (95.4)%
Effect of foreign exchange rates on cash  (4,074)  (1,210)  (2,864)  n.m.   451   (4,074)  4,525   n.m. 
Net increase (decrease) in cash $2,311  $(102,349) $104,660   

n.m.

Net (decrease) increase in cash $(6,708) $2,311  $(9,019)  n.m. 

 

n.m. = not meaningful

 

Operating Activities

 

Net cash used in operating activities increased $4.9 million, primarily resulting from an unfavorable fluctuation in working capital of $6.5 million. These amounts were offset by a decrease in net loss after adjustments to reconcile net loss to cash flows from operations of $1.6 million.was relatively consistent with the comparable prior period.

 

Investing Activities

 

Net cash used in investing activities decreased $85.1$12.7 million primarily asdue to a resultreduction of $92.5 million cash paid forspend related to the acquisition of Coolbet during the nine months ended September 30, 2021, net of cash acquired. This decrease was primarily offset by increasesContent Licensing Agreement of $5.5 million, in cash payments to third-party gambling content providers for the rights to use and distribute their online gaming content in North America, and an increaseas well as a reduction of $0.9capitalized development of $6.5 million in cash payments for gaming licenses in anticipation of new jurisdictional launches, and $0.8 million in spend for capitalized software development costs primarily related to product enhancements, and new features for both the B2B and B2C platforms.segment.

 

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Financing Activities

 

Net cash provided by financing activities increaseddecreased by $27.3$26.2 million primarily duerelated to $27.6the $30.0 million net cash proceeds associated with the Credit Facility, net of issuance costs, as well as $0.6 million in offering cost payments madecredit facility obtained in the prior period related to our acquisition of Coolbet which did not occur in the current period. These amounts were partially offset by our use of $1.0 million related to our share repurchase program during the current period.year.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

As a smaller reporting company, we are not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer (together, the “Certifying Officers”), as appropriate, to allow for timely decisions regarding required disclosure.

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance, not absolute assurance, of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements will not occur or that all control issues, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errorerrors or mistake.mistakes. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including the Certifying Officers, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Certifying Officers concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2022.2023. The Certifying Officers based their conclusion on the fact that the Company has identified material weaknesses in controls over financial reporting, detailed below. In light of this fact, our management has performed additional analyses, reconciliations, and other procedures and have concluded that, notwithstanding the material weaknesses in our internal control over financial reporting, the condensed consolidated financial statements for the periods covered by and included in this Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

 

Material Weakness in Internal Control Over Financial Reporting

 

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021,2022, material weaknesses were identified in the Company’s internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim or annual condensed consolidated financial statements will not be prevented or detected on a timely basis.

 

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During the course of management’s prior year-end procedures, the Company examined employee costs attributed to capitalized software development costs, netCompany’s management and concluded that certain time previously evaluated as capitalizable was not a direct cost of software development and accounted for inconsistently with applicable accounting principles. In addition, the Company evaluated the accounting for revenue from contracts with customers that include significant customization services, previously recognized upon launch, that only the Company can perform and are necessary for the set-up of instancesaudit committee of the RMiG platform, concluding the services are not distinct and the related contract consideration should be allocated to the single performance obligation consistingboard of the right to access the SaaS platform, recognized over time during the estimated term of the arrangement. The Company alsodirectors identified deficiencies in the design of the control environment whereby certain finance users were granted “super user” access and security administration rights to the financial reporting systems, the activity of these users with elevated access were not actively monitored, and no segregation of duties over journal entry preparation and approval within the B2C segment existed.

The Company’s managementexisted and audit committee of the board of directors determined that material weaknesses exist related to the design and operating effectiveness of internal controls over the completeness and accuracy of accounting for, and disclosure of, capitalized software development costs, net and revenue recognition. Specifically, the Company did not (i) design appropriate management review controls to properly identify the appropriate costs of employee time allocated to capitalized software development costs, net, and (ii) did not have sufficiently formalized policies and procedures with respect to the capitalized software development process. In addition, the Company (i) did not design adequate procedures for customer contract reviews, (ii) had inadequate controls to appropriately apply the revenue recognition policy and (iii) had inadequate resources to properly evaluate technical aspects of revenue recognition, in each case with respect to contracts with customers.

The Company’s management and audit committee of the board of directors also determined that the fact that the Company did not design appropriate controls to evaluate risks to the entity from improper segregation of duties, review user access rights, monitor activities of finance users with elevated rights within the financial reporting system, and maintain manual controls atthese deficiencies constituted a level of precision to mitigate potential misstatements that could be present through the lack of segregation of journal entry preparation and approval within certain financial reporting systems constituted an additional material weakness. While the Company has actively begun to implement controls to remediate the material weaknesses, these weaknesses haveweakness, this material weakness has not been resolved as of September 30, 2022.2023.

 

Remediation Plans

 

We continue to evaluate measures to remediate the identified material weaknesses. These measures include formalizing and documenting its policies and procedures surrounding capitalized software development costs and revenue recognition, designing and implementing training for the employees whose roles and activities may qualify for capitalization, instituting monthly meetings with the development leadership team to assess the status of all projects, formalizing the customer contract review process and enhancing the scrutiny and precision of the management review controls over the capitalization of software development and revenue recognition process. We also have begun to implement appropriate controls to segregate journal entry preparation and approvals and to actively monitor finance users with elevated rights.

 

We intend to continue to take steps to remediate the material weakness described above and further evolving our accounting processes, controls, and reviews. The Company plans to continue to assess its internal controls and procedures and intends to take further action as necessary or appropriate to address any other matters it identifies or are brought to its attention. We will not be able to fully remediate this material weakness until these steps have been completed and have been operating effectively for a sufficient period of time.

 

The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will fully remediate the material weakness in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weakness in our internal control over financial reporting, which may necessitate further action.

 

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Changes in Internal Controls Over Financial Reporting

 

Except for the remediation efforts described above, there was no change in our internal control over financial reporting that occurred during the quarter covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are subject to legal proceedings that have not been fully resolved and that have arisen in the ordinary course of business. We are not currently a party to any legal proceedings that, in the opinion of our management, are likely to have a material adverse effect on our business.

 

The outcome of litigation is inherently uncertain. If one or more matters were resolved against the Company in a reporting period for amounts above management’s expectations, the Company’s financial condition and operating results for that reporting period could be materially adversely affected. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

Item 1A. Risk Factors

 

Our business, financial condition and operating results can be affected by a number of factors, both known and unknown, including those described below and in Part I, Item 1A of our 20212022 Form 10-K under the heading “Risk Factors,” any of which, alone or in combination with other, could cause our actual operating results and financial condition to vary materially from past, or from anticipated future operating results or financial condition.

 

Our B2C operations generate a significant portion of its revenues from “unregulated” “unregulated” markets and changes in regulation in those markets could result in us losing business in those markets or incurring additional expenses in order to comply with any new regulatory scheme.

 

Our B2C operations currently generate a significant portion of its revenues in markets that currently do not have a local licensing scheme, including Latin America and Northern Europe. Certain of those markets, or other markets where we may operate in the future, are in the process of developing regulations that require registration and regulatory compliance or could do so in the near term. The adoption of regulations and licensing requirements may increase costs, reduce net gaming revenue or require us to cease operations depending on the range of unforeseen developments in proposed rules and regulations governing online gaming in the international markets in which we currently operate.

 

Our B2C operations generate a significant portion of our revenue in markets where tax regulations are evolving and could result in additional tax liabilities that could materially affect our financial condition and results of operations.

 

Our B2C operations currently generate a significant portion of its revenues in markets that have evolving tax legislation, including Latin America and Canada. Those markets, or other markets where we may operate in the future are actively considering or could adopt regulations that adversely affect our operations. The adoption of tax regulations may increase costs, reduce net gaming revenue or require us to cease operations depending on the range of unforeseen possible changes to the statutes governing online gaming in the international markets in which we currently operate.

 

Macroeconomic conditions can materially adversely affect the Company’sCompany’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.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On May 31, 2022, the Board of Directors re-authorized and extended the share repurchase program initially authorized on November 30, 2021, which permits the Company to purchase up to $5.0 million of the Company’s outstanding ordinary shares on the Nasdaq Stock Market. The extension was publicly announced on June 13, 2022. Repurchases are executed through open market purchases or privately negotiated transactions. The Company may purchase the ordinary shares at the prevailing market price at the time of purchase. The Company is not obligated to acquire any particular number of shares and repurchases may be suspended or terminated at any time. The share repurchase program expires on November 3, 2022.

During the three months ended September 30, 2022, the Company had no share repurchases under this program. The approximate dollar value of shares that may yet be purchased under the plan was $4.0 million as of September 30, 2022.

Item 6. Exhibits

 

Exhibit Number Description of Document Form Exhibit Number Date Filed
3.1 Memorandum of Association of GAN Limited F-1 3.1 April 17, 2020
3.2 By-Laws of GAN Limited F-1 3.2 April 17, 2020
31.1* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      
31.2* Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      
32.1** Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *      
32.2** Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *      
101* Inline XBRL Document set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of the Quarterly Report on Form 10-Q.      
104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).      
* Filed herewith.      
** Furnished herewith.
+ Indicates management contract or compensatory plan or arrangement      
Exhibit Number Description of Document Form Exhibit Number Date Filed
3.1 Memorandum of Association of GAN Limited F-1 3.1 April 17, 2020
3.2 By-Laws of GAN Limited F-1 3.2 April 17, 2020
31.1* Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      
31.2* Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002      
32.1** Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *      
32.2** Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *      
101* Inline XBRL Document set for the condensed consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” of the Quarterly Report on Form 10-Q.      
104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).      
* Filed herewith.      
** Furnished herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 GAN Limited
   
Date: November 14, 20229, 2023By:/s/ DERMOT S. SMURFITSEAMUS MCGILL
  Dermot S. SmurfitSeamus McGill
  Interim Chief Executive Officer
  (Principal Executive Officer)
 
  /s/ KAREN E. FLORESBRIAN CHANG
  Karen E. FloresBrian Chang
  Interim Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

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