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GAN(GAN) - 2022 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Presents GAN Limited's unaudited condensed consolidated financial statements for Q2 and H1 2022, including balance sheets, operations, and cash flows, with detailed accounting notes Condensed Consolidated Financial Statements Q2 2022 saw total assets decrease to $246.0 million, liabilities rise to $77.0 million, and a $28.9 million goodwill impairment led to a $38.3 million net loss Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $246,018 | $260,910 | | Cash | $49,075 | $39,477 | | Goodwill | $105,737 | $146,142 | | Total Liabilities | $77,012 | $36,873 | | Long-term debt | $27,670 | $— | | Total Shareholders' Equity | $169,006 | $224,037 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $34,967 | $34,350 | $72,461 | $61,468 | | Operating Loss | $(37,768) | $(2,767) | $(41,890) | $(7,715) | | Impairment | $28,861 | $— | $28,861 | $— | | Net Loss | $(38,349) | $(3,759) | $(42,848) | $(9,369) | | Loss per Share | $(0.91) | $(0.09) | $(1.01) | $(0.22) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash (used in) from operating activities | $(4,187) | $3,137 | | Net cash used in investing activities | $(12,510) | $(102,524) | | Net cash provided by (used in) financing activities | $26,965 | $(321) | | Net increase (decrease) in cash | $9,598 | $(100,568) | Notes to Condensed Consolidated Financial Statements Details B2B and B2C operations, a $28.9 million goodwill impairment, a new $30 million debt facility, and a $1.8 million workforce restructuring - The company operates in two segments: B2B, supplying its GameSTACK™ iGaming system to U.S. casinos, and B2C, operating the Coolbet online sports betting and casino platform internationally following its acquisition in January 20212526 - An amended content licensing agreement with Ainsworth Game Technology was accounted for as a business combination, with total consideration of $26.2 million, comprising future fixed payments, net assets, and contingent consideration8889 - A significant and sustained decline in the company's share price and market capitalization triggered an interim goodwill impairment test, resulting in a $28.9 million impairment charge to the B2B reporting unit9798 - In April 2022, a subsidiary entered into a $30.0 million secured term loan facility with a floating interest rate of 3-month SOFR + 9.5%, maturing in October 2026106 - In January 2022, the company implemented a workforce reduction to streamline its B2B segment, incurring restructuring charges of $1.8 million for the first six months of 2022147 Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses Q2 and H1 2022 financial performance, highlighting revenue growth, a significant net loss due to goodwill impairment, segment results, KPIs, and liquidity Consolidated Results of Operations Q2 2022 revenue grew 1.8% to $35.0 million, but a $28.9 million goodwill impairment led to a $38.3 million net loss, with similar trends for H1 Q2 2022 vs Q2 2021 Financial Performance (in thousands) | Metric | Q2 2022 | Q2 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $34,967 | $34,350 | 1.8% | | Total operating costs | $72,735 | $37,117 | 96.0% | | Impairment | $28,861 | $— | n.m. | | Net loss | $(38,349) | $(3,759) | n.m. | H1 2022 vs H1 2021 Financial Performance (in thousands) | Metric | H1 2022 | H1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $72,461 | $61,468 | 17.9% | | Total operating costs | $114,351 | $69,183 | 65.3% | | Impairment | $28,861 | $— | n.m. | | Net loss | $(42,848) | $(9,369) | n.m. | - The significant increase in net loss for both Q2 and H1 2022 was primarily caused by a $28.9 million goodwill impairment charge within the B2B segment, recognized due to a sustained decline in the company's market capitalization178191 Segment Operating Results Q2 2022 B2B revenue grew 36.5% to $14.2 million, while B2C revenue decreased 13.2% to $20.8 million due to lower sports margins Segment Performance - Q2 2022 vs Q2 2021 (in thousands) | Segment | Revenue (Q2 2022) | Revenue (Q2 2021) | Change (%) | Gross Profit (Q2 2022) | Gross Profit (Q2 2021) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | B2B | $14,150 | $10,368 | 36.5% | $11,211 | $8,061 | 39.1% | | B2C | $20,817 | $23,982 | (13.2)% | $13,293 | $15,933 | (16.6)% | Segment Performance - H1 2022 vs H1 2021 (in thousands) | Segment | Revenue (H1 2022) | Revenue (H1 2021) | Change (%) | Gross Profit (H1 2022) | Gross Profit (H1 2021) | Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | B2B | $27,220 | $23,174 | 17.5% | $20,378 | $18,125 | 12.4% | | B2C | $45,241 | $38,294 | 18.1% | $29,920 | $24,268 | 23.3% | Non-GAAP Financial Measures Adjusted EBITDA for Q2 2022 was $1.3 million, a decrease from Q2 2021, while H1 2022 saw a slight increase to $4.3 million Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(38,349) | $(3,759) | $(42,848) | $(9,369) | | Impairment | $28,861 | $— | $28,861 | $— | | Depreciation and amortization | $6,556 | $4,132 | $10,969 | $8,126 | | Share-based compensation | $2,715 | $2,174 | $4,336 | $3,665 | | Adjusted EBITDA | $1,346 | $3,539 | $4,317 | $4,076 | Key Performance Indicators Q2 2022 B2B Gross Operator Revenue increased to $283.0 million, B2C Active Customers rose to 260,000, but B2C Sports Margin declined to 7.1% Key Performance Indicators Comparison | KPI | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--- | :--- | :--- | :--- | :--- | | B2B Gross Operator Revenue (in millions) | $283.0 | $221.4 | $580.8 | $435.6 | | B2B Take Rate | 5.0% | 4.7% | 4.7% | 5.3% | | B2C Active Customers (in thousands) | 260 | 187 | 347 | 225 | | B2C Sports Margin | 7.1% | 9.7% | 7.2% | 8.4% | Liquidity and Capital Resources As of June 30, 2022, cash was $49.1 million, supplemented by a new $30 million credit facility and an active share repurchase program - The company secured a new $30.0 million credit facility in April 2022 to provide additional flexibility for investments and its share repurchase program229232 - Cash and cash equivalents stood at $49.1 million as of June 30, 2022233 - During Q2 2022, the company repurchased $1.0 million of its own shares under its authorized share repurchase program229 Quantitative and Qualitative Disclosures about Market Risk GAN Limited is exempt from this disclosure requirement due to its status as a smaller reporting company - The company is exempt from this disclosure requirement due to its status as a smaller reporting company242 Controls and Procedures Management concluded disclosure controls were ineffective as of June 30, 2022, due to persistent material weaknesses in financial reporting and control environment - Management concluded that disclosure controls and procedures were not effective as of June 30, 2022, due to existing material weaknesses246 - Material weaknesses persist in controls over accounting for capitalized software development costs, revenue recognition, and the overall control environment (e.g., segregation of duties, user access rights)247248249250 - The company is continuing its remediation efforts, which include formalizing policies, enhancing management reviews, and implementing controls to segregate duties, but these efforts were not complete as of the reporting date251252 PART II - OTHER INFORMATION Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its financial position or operations - Management does not believe any current legal proceedings will have a material adverse effect on the company's business256 Risk Factors Significant B2C revenue from unregulated markets in Latin America and Northern Europe poses risks from evolving regulations and tax laws - A significant portion of B2C revenue comes from "unregulated" markets, primarily in Latin America and Northern Europe259260 - The company faces risks from potential changes in gaming regulations and evolving tax legislation in these key international markets, which could materially impact financial results260261262 Unregistered Sales of Equity Securities and Use of Proceeds The company re-authorized a $5.0 million share repurchase program, buying back 303,000 shares for $1.0 million in Q2 2022 - The Board of Directors re-authorized and extended the company's $5.0 million share repurchase program, which expires on November 3, 2022263 Share Repurchase Activity (Q2 2022) | Period | Total Shares Repurchased | Weighted Average Price Paid per Share | Total Value (in thousands) | | :--- | :--- | :--- | :--- | | April 2022 | — | $— | $— | | May 2022 | — | $— | $— | | June 2022 | 303,000 | $3.32 | ~$1,000 | | Total | 303,000 | $3.32 | ~$1,000 | Exhibits Lists all exhibits filed with the Form 10-Q, including corporate documents, a credit agreement, and CEO/CFO certifications