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GAN(GAN) - 2022 Q3 - Quarterly Report
GANGAN(US:GAN)2022-11-13 16:00

PART I - FINANCIAL INFORMATION Financial Statements Q3 2022 net loss narrowed, but a nine-month goodwill impairment widened losses, decreased assets, and increased liabilities Condensed Consolidated Balance Sheets Total assets decreased to $230.1 million due to goodwill impairment, while liabilities rose to $77.7 million, driven by new debt and content licensing obligations Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $230,105 | $260,910 | | Cash | $41,788 | $39,477 | | Goodwill | $99,086 | $146,142 | | Total Liabilities | $77,742 | $36,873 | | Long-term debt | $27,855 | $— | | Content licensing liabilities | $19,612 | $— | | Total Shareholders' Equity | $152,363 | $224,037 | Condensed Consolidated Statements of Operations Q3 2022 revenue was flat at $32.1 million with a reduced net loss, while the nine-month period saw revenue growth but a larger net loss due to a significant impairment charge Q3 Statement of Operations (in thousands) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Revenue | $32,120 | $32,268 | | Total operating costs and expenses | $37,268 | $39,398 | | Operating loss | $(5,148) | $(7,130) | | Net loss | $(6,941) | $(8,678) | | Loss per share, basic and diluted | $(0.16) | $(0.21) | Nine Months Statement of Operations (in thousands) | Metric | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Revenue | $104,581 | $93,736 | | Impairment | $28,861 | $— | | Total operating costs and expenses | $151,619 | $108,581 | | Operating loss | $(47,038) | $(14,845) | | Net loss | $(49,789) | $(18,047) | | Loss per share, basic and diluted | $(1.18) | $(0.43) | Condensed Consolidated Statements of Cash Flows For the nine months of 2022, cash from operations turned negative, while financing activities provided $27.5 million, resulting in a $2.3 million net increase in cash Nine Months Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(3,559) | $1,350 | | Net cash used in investing activities | $(17,514) | $(102,630) | | Net cash provided by financing activities | $27,458 | $141 | | Net increase (decrease) in cash | $2,311 | $(102,349) | | Cash and cash equivalents, end of period | $41,788 | $50,305 | - Financing activities were driven by $30.0 million in proceeds from the issuance of long-term debt, partially offset by $2.4 million in debt issuance costs and $1.0 million in share repurchases24 Notes to Condensed Consolidated Financial Statements Notes detail a content licensing business combination, a $28.9 million goodwill impairment, a new $30.0 million credit facility, and a potential VAT liability in Chile - The company operates in two segments: B2B (supplying gaming systems like GameSTACK™) and B2C (operating the Coolbet online sports betting and casino platform)28 - An amended content licensing agreement with Ainsworth Game Technology was accounted for as a business combination, with total consideration of $26.2 million, including a contingent consideration component valued at $4.4 million8889 - A goodwill impairment of $28.9 million was recognized in the B2B segment as of June 30, 2022, following a quantitative assessment triggered by a significant and sustained decline in the company's share price and market capitalization9697 - In April 2022, a subsidiary entered into a $30.0 million secured term loan facility with a floating interest rate, maturing in October 2026102 - The company faces a probable but not reasonably estimable VAT liability in Chile related to its Coolbet B2C operations, where the Chilean Tax Administration's position is that VAT applies to gross customer deposits150153 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Q3 2022 revenue slightly decreased to $32.1 million due to B2C currency headwinds, while Adjusted EBITDA improved to $2.1 million and a new loan supports growth Consolidated Results of Operations Q3 revenue was flat as B2B growth was offset by a B2C currency-driven decline, while nine-month operating loss widened due to a goodwill impairment Q3 2022 vs Q3 2021 Results (in thousands) | Metric | Q3 2022 | Q3 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $32,120 | $32,268 | (0.5)% | | Cost of revenue | $9,435 | $10,801 | (12.6)% | | General and administrative | $10,185 | $12,888 | (21.0)% | | Operating loss | $(5,148) | $(7,130) | (27.8)% | | Net loss | $(6,941) | $(8,678) | (20.0)% | Nine Months 2022 vs 2021 Results (in thousands) | Metric | Nine Months 2022 | Nine Months 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue | $104,581 | $93,736 | 11.6% | | Impairment | $28,861 | $— | n.m. | | Restructuring | $1,771 | $— | n.m. | | Operating loss | $(47,038) | $(14,845) | n.m. | | Net loss | $(49,789) | $(18,047) | n.m. | - The decrease in Q3 General and Administrative expense was primarily due to $1.3 million in foreign exchange transaction gains from the strengthening U.S. Dollar172 Segment Operating Results B2B segment revenue grew 13.5% in Q3 2022, while B2C revenue fell 7.9% due to unfavorable currency exchange rates Q3 Segment Performance (in thousands) | Segment | Metric | Q3 2022 | Q3 2021 | Change (%) | | :--- | :--- | :--- | :--- | :--- | | B2B | Revenue | $12,685 | $11,175 | 13.5% | | | Segment gross profit | $10,512 | $7,592 | 38.5% | | B2C | Revenue | $19,435 | $21,093 | (7.9)% | | | Segment gross profit | $12,173 | $13,875 | (12.3)% | Nine Months Segment Performance (in thousands) | Segment | Metric | Nine Months 2022 | Nine Months 2021 | Change (%) | | :--- | :--- | :--- | :--- | :--- | | B2B | Revenue | $39,905 | $34,349 | 16.2% | | | Segment gross profit | $30,890 | $25,717 | 20.1% | | B2C | Revenue | $64,676 | $59,387 | 8.9% | | | Segment gross profit | $42,093 | $38,143 | 10.4% | Non-GAAP Financial Measures Adjusted EBITDA improved to $2.1 million in Q3 2022 and doubled to $6.4 million for the nine-month period, reflecting better core operating performance Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net loss | $(6,941) | $(8,678) | $(49,789) | $(18,047) | | Adjustments | $9,034 | $7,808 | $56,199 | $21,253 | | Adjusted EBITDA | $2,093 | $(870) | $6,410 | $3,206 | Key Performance Indicators B2B Gross Operator Revenue and B2C Active Customers grew significantly in Q3 2022, though the B2B Take Rate declined Key Performance Indicators | KPI | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | B2B Gross Operator Revenue (in millions) | $277.8 | $214.8 | $858.6 | $650.5 | | B2B Take Rate | 4.6% | 5.2% | 4.6% | 5.3% | | B2C Active Customers (in thousands) | 261 | 199 | 435 | 306 | | B2C Marketing Spend Ratio | 23% | 15% | 21% | 14% | | B2C Sports Margin | 6.6% | 6.8% | 7.0% | 7.9% | - The increase in B2B Gross Operator Revenue was driven by the expansion of existing clients into new jurisdictions like Connecticut and Ontario, Canada, and new customer launches in Michigan211 - The number of B2C Active Customers grew primarily due to successful customer acquisition in Latin America and high customer retention217 Liquidity and Capital Resources Liquidity is supported by $41.8 million in cash and a new $30.0 million credit facility, which management deems sufficient for the next twelve months - In April 2022, the company secured a $30.0 million term loan, receiving net proceeds of $27.6 million to support its capital allocation plan226229 - During the nine months ended September 30, 2022, the company repurchased $1.0 million of its own shares under its share repurchase program226 Nine Months Cash Flow Summary (in thousands) | Cash Flow Activity | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(3,559) | $1,350 | | Net cash used in investing activities | $(17,514) | $(102,630) | | Net cash provided by financing activities | $27,458 | $141 | | Net increase (decrease) in cash | $2,311 | $(102,349) | Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, the company is not required to provide these disclosures - The company is classified as a smaller reporting company and is therefore not required to provide quantitative and qualitative disclosures about market risk240 Controls and Procedures Disclosure controls were deemed ineffective as of September 30, 2022, due to ongoing material weaknesses in internal control over financial reporting - Management concluded that disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2022243 - Material weaknesses persist in internal controls related to: - Accounting for capitalized software development costs246 - Revenue recognition for contracts with significant customization247 - Inadequate segregation of duties and user access controls in financial reporting systems248 - Remediation plans are ongoing and include formalizing policies, enhancing management review controls, and implementing proper segregation of duties249250 PART II - OTHER INFORMATION Legal Proceedings The company is not currently party to any litigation expected to have a material adverse effect on its business - The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business, financial condition, or operating results254 Risk Factors Key risks include reliance on unregulated B2C markets, evolving tax legislation, and adverse macroeconomic conditions impacting international operations - A significant portion of B2C revenue comes from markets without a local licensing scheme (e.g., Latin America), and the potential adoption of new regulations could increase costs or require cessation of operations257258 - Evolving tax legislation in key B2C markets could result in additional tax liabilities that materially affect financial results259260 - Adverse macroeconomic conditions, including inflation, rising interest rates, and the strengthening U.S. dollar, pose a material risk to the company's international operations, consumer spending, and financial condition261 Unregistered Sales of Equity Securities and Use of Proceeds A $5.0 million share repurchase program was extended, with no shares repurchased in Q3 2022 and $4.0 million remaining available - The company has a share repurchase program authorizing up to $5.0 million in purchases, which was extended and set to expire on November 3, 2022262 - No shares were repurchased during the three months ended September 30, 2022263 The remaining authorized amount for repurchase was $4.0 million as of the end of the quarter263 Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents and required certifications