GAN(GAN) - 2023 Q4 - Annual Report

PART I Business Overview GAN Limited operates B2B SaaS for online gaming and B2C sports betting, currently undergoing acquisition by SEGA SAMMY CREATION INC - GAN Limited operates two main business segments: B2B (Software-as-a-Service for online casino gaming and sports betting, GameSTACK™ and GAN Sports) and B2C (online sports betting and casino platform 'Coolbet')[17] - The company entered into a Merger Agreement with SEGA SAMMY CREATION INC. on November 7, 2023, under which GAN will become a wholly-owned subsidiary of SEGA SAMMY CREATION[27] - The Merger consideration is $1.97 in cash per ordinary share, and the closing is anticipated for late 2024 or early 2025, subject to regulatory approvals[28][31] B2C Revenue Breakdown (2023) | Product Category | Percentage of Total B2C Revenue | | :--------------- | :------------------------------ | | Online Casino | 58.0% | | Online Sports Betting | 38.6% | | Online Peer-to-Peer Poker | 3.4% | - B2C revenue slightly decreased by 1.4% from $87.5 million in 2022 to $86.3 million in 2023, primarily due to a decline in active customers in Latin American markets[19] - As of December 31, 2023, Coolbet had over 1.6 million registered customers[19][72] - FanDuel accounted for 16.4% of total revenue in 2023 and 20.9% in 2022. The exclusivity period with FanDuel for casino gaming operations ended in January 2023, which could lead to a significant decline in future revenue[69][70][114] - As of December 31, 2023, GAN Limited had 677 total employees, with approximately 89% located outside the United States, and 88% working in operations[88][89] Risk Factors The company faces risks from net losses, intense competition, customer concentration, merger uncertainties, regulatory complexities, and internal control weaknesses - The company has incurred net losses and negative cash flows, with an accumulated deficit of $309.3 million as of December 31, 2023, and a net loss of $34.4 million for the year ended December 31, 2023[103] - The online gaming industry is highly competitive and rapidly evolving, requiring continuous adaptation to technological changes and new product development, with risks of price reductions, reduced margins, or loss of market share[104][107][108] - The proposed merger with SEGA SAMMY CREATION INC. is subject to various regulatory approvals, which may be delayed or impose conditions, and failure to complete the merger could negatively impact the stock price and business[147][148][149][151] - A material weakness in internal control over financial reporting was identified, specifically regarding 'super user' access, monitoring of elevated access, and segregation of duties in the B2C segment, which remains unresolved as of December 31, 2023[165][166][501] - B2C operations generate a significant portion of revenue from 'unregulated' markets, where changes in tax and licensing regulations could lead to loss of business or increased compliance costs[160][161] - The company's international operations expose it to risks such as currency fluctuations, varying tax regimes, and difficulties in enforcing judgments due to being a Bermuda company[167][169][178] Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments[185] Cybersecurity The company maintains ISO/NIST-aligned cybersecurity programs, overseen by the Board, with no material incidents reported - The company has implemented Information Security programs aligned to ISO and NIST cybersecurity frameworks to protect player data and IT systems[186] - The security program is managed by a dedicated Information Security team, led by a CISO with over 20 years of experience, and includes continuous risk assessments, vulnerability scans, and periodic penetration testing[187][188] - The Board of Directors provides oversight for cybersecurity and information technology matters[189] - No material cybersecurity incidents were identified in the last fiscal year, but ongoing risks are acknowledged[188] Properties Corporate headquarters are in Irvine, California, with leased regional offices in Bulgaria, Israel, and Estonia - Corporate headquarters are located in Irvine, California[190] - Regional offices are maintained in Bulgaria, Israel, and Estonia, all of which are leased[190] - Current facilities are deemed adequate, and additional space is expected to be available as needed[190] Legal Proceedings The company is subject to routine legal actions and claims but is not aware of any material adverse litigation - The Company is subject to routine legal actions and claims[191] - Management is not aware of any pending or threatened litigation that would have a material adverse effect on financial position, results of operations, or liquidity[191] Mine Safety Disclosures This item is not applicable to GAN Limited - Not applicable[192] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities GAN's ordinary shares trade on Nasdaq, with 118 holders as of March 2023; no dividends paid, future earnings retained - Ordinary shares are listed on The Nasdaq Capital Market under the symbol 'GAN' since May 7, 2020[193] - As of March 22, 2023, there were 118 holders of record for ordinary shares[194] - The company has never declared or paid any cash dividends and intends to retain future earnings for business operations and expansion[195] - No share repurchases were made during the quarter ended December 31, 2023[196] Item 6. [Reserved] This item is reserved and contains no information - This item is reserved[197] Management's Discussion and Analysis of Financial Condition and Results of Operations Net loss improved to $34.4 million in 2023, but revenue declined to $129.4 million due to B2B exclusivity expiration and B2C market shifts Consolidated Results of Operations (2023 vs 2022) | Metric (in thousands) | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Change Amount | Change Percent | | :-------------------- | :---------------------- | :---------------------- | :------------ | :------------- | | Revenue | $129,419 | $141,528 | $(12,109) | (8.6)% | | Operating Loss | $(30,314) | $(192,509) | $162,195 | (84.3)% | | Net Loss | $(34,444) | $(197,498) | $163,054 | (82.6)% | - The decrease in revenue was primarily due to a $10.8 million decrease in B2B revenues, driven by lower contractual revenue rates following the expiration of an exclusivity period with a B2B customer (FanDuel)[237][238][249] - B2C revenues decreased by $1.2 million, mainly attributable to a decline in active customers in Latin American markets, partially offset by growth in Europe[237][238][251] Key Performance Indicators (2023 vs 2022) | KPI | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Change Amount | Change Percent | | :-------------------- | :---------------------- | :---------------------- | :------------ | :------------- | | B2B Gross Operator Revenue (in millions) | $1,657.8 | $1,224.4 | $433.4 | 35.4% | | B2B Take Rate | 2.6% | 4.4% | (1.8)% | (41.0)% | | B2C Active Customers (in hundreds) | 500 | 559 | (59) | (10.5)% | | B2C Marketing Spend Ratio | 23.6% | 21.0% | 2.6% | 12.2% | | B2C Sports Margin | 7.0% | 6.9% | 0.1% | 1.6% | - The B2B Take Rate decreased primarily due to lower contractual revenue rates related to the expiration of an exclusivity period with a B2B customer[265] - The company had an accumulated deficit of $309.3 million and cash on hand of $38.6 million as of December 31, 2023. Net cash used in operating activities was $3.6 million[272] - An Amended Credit Facility, effective April 14, 2023, increased the principal balance to $42.0 million and waived prior events of default, with management believing it provides sufficient liquidity for at least one year[277][278] Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, GAN Limited is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, GAN Limited is not required to provide quantitative and qualitative disclosures about market risk[288] Financial Statements and Supplementary Data Audited consolidated financial statements for 2023 and 2022 are presented, with an unqualified opinion and detailed notes - Grant Thornton LLP issued an unqualified opinion on the consolidated financial statements for the years ended December 31, 2023 and 2022[289] Consolidated Balance Sheet Highlights (in thousands) | Metric | December 31, 2023 | December 31, 2022 | | :---------------------- | :---------------- | :---------------- | | Total Assets | $87,504 | $103,080 | | Total Liabilities | $92,108 | $82,312 | | Total Shareholders' Equity (Deficit) | $(4,604) | $20,768 | Consolidated Statements of Operations Highlights (in thousands) | Metric | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :---------------------- | :---------------------- | :---------------------- | | Revenue | $129,419 | $141,528 | | Operating Loss | $(30,314) | $(192,509) | | Net Loss | $(34,444) | $(197,498) | | Loss per share, basic and diluted | $(0.78) | $(4.66) | Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :---------------------- | :---------------------- | :---------------------- | | Net cash used in operating activities | $(3,565) | $(1,249) | | Net cash used in investing activities | $(6,815) | $(19,103) | | Net cash provided by financing activities | $1,347 | $27,448 | | Cash, end of period | $38,578 | $45,920 | - Goodwill was fully impaired in 2022 with a total charge of $136.9 million, resulting in no goodwill balance as of December 31, 2022 and 2023[373][410] - Intangible assets, net, decreased from $24.9 million in 2022 to $12.4 million in 2023, partly due to a $19.1 million impairment recognized in 2022 related to content licensing arrangements[379][412] - The company's operations in Chile, which represented 28.1% of total consolidated revenue in 2023, face regulatory uncertainty regarding VAT application and legality of online gaming, potentially leading to fines or market exit[489] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure matters - No changes in or disagreements with accountants on accounting and financial disclosure[496] Controls and Procedures Disclosure controls were ineffective due to a material weakness in internal control over financial reporting, with ongoing remediation efforts - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023[499] - A material weakness in internal control over financial reporting was identified, specifically regarding improper segregation of duties, lack of user access review, and insufficient monitoring of finance users with elevated rights in financial reporting systems within the B2C segment[501] - Remediation plans include implementing controls to segregate journal entry preparation and approvals, actively monitoring finance users with elevated rights, and segregating the information technology administration function from the finance team[502] - Despite the material weakness, management concluded that the consolidated financial statements fairly present the financial position, results of operation, and cash flows in conformity with GAAP[499] Other Information There is no other information to report under this item - No other information to report[508] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to GAN Limited - Not applicable[509] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Shareholder Meeting - Information is incorporated by reference from the definitive Proxy Statement for the 2024 Annual Shareholder Meeting[511] Executive Compensation Information concerning executive compensation is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement[512] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Details on security ownership of certain beneficial owners and management, along with related stockholder matters, are incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement[512] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement[513] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement[513] PART IV Exhibits and Financial Statement Schedules This section lists consolidated financial statements, omits schedules, and provides a comprehensive list of exhibits - Lists the consolidated financial statements included in Item 8 of the report[514] - All financial statement schedules are omitted as they are not required[515] - Includes a comprehensive list of exhibits, such as the Agreement and Plan of Merger, Memorandum of Association, By-Laws, Equity Incentive Plan, and various employment agreements[517][518] Form 10-K Summary This item indicates that no Form 10-K Summary is provided - No Form 10-K Summary is provided[522] SIGNATURES The report is signed by the CEO, Interim CFO, and other directors as of March 13, 2024, with a Power of Attorney included - The report is signed by the Chief Executive Officer (Seamus McGill) and Interim Chief Financial Officer (Brian Chang) as principal executive and financial officers, respectively, along with other directors[526][529] - Signatures are dated March 13, 2024[526][529] - A Power of Attorney is included, authorizing the Certifying Officers to sign amendments to the Annual Report[527]