Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Note
1. Nature of Operations
GAN
Limited (the “Parent”) 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. In May 2020, pursuant to a statutory Scheme
of Arrangement under Part 26 of U.K Companies Act of 2006 (“Scheme of Arrangement”) approved by the shareholders
of GAN plc, as further discussed below, the shareholders of GAN plc exchanged their shares in GAN plc for shares in the Parent
plus cash consideration thereby, migrating the jurisdiction of organization from the U.K. to Bermuda. Thereafter, GAN Limited
became the parent company of GAN plc. GAN plc was renamed GAN (UK) Limited (“GAN UK”).
On
May 7, 2020, the Company completed its U.S. initial public offering whereby 7,337,000 ordinary shares were issued and
sold at a public offering price of $8.50 per share. The Company received net proceeds of $55,289 after deducting the underwriters’
discounts and commissions of $4,920 and other offering expenses of $2,155.
GAN
Limited and its subsidiaries (collectively the “Company”) is a leading business-to-business (“B2B”) supplier
of Internet gambling Software-as-a-Service (“SaaS”) solutions predominately to the U.S. land-based casino industry.
The Company has developed a proprietary Internet gambling enterprise software system, GameSTACK™ (“GameSTACK”),
which it licenses to land-based casino operators as a turnkey technology solution for regulated real money Internet gambling (“RMiG”), Internet sports gaming, and virtual simulated gaming (“SIM”).
Note
2. Basis of Presentation
The
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“U.S. GAAP”).
On
May 5, 2020, GAN Limited completed a share exchange and reorganization pursuant to a Scheme of Arrangement, whereby the
shareholders of GAN plc agreed to exchange their shares, on a basis of four ordinary shares to one ordinary share, for
shares of GAN Limited, plus a pro rata portion of an aggregate $2,525 (£2,004
or 2.32 pence per share) (“Share Exchange”) in cash. Immediately subsequent
to the Share Exchange, the shareholders of GAN Limited held the same economic interest as they had in GAN plc prior to the Share
Exchange. Holders of share options in GAN plc also received reciprocal share options as applicable, in GAN Limited. After
the reorganization, GAN plc became a wholly-owned subsidiary of GAN Limited.
The
consolidated financial statements have been prepared as if GAN Limited had been the parent entity throughout the periods presented.
The consolidated financial statements for the periods prior to the share exchange and reorganization reflect the historical operations
of GAN plc. Additionally, all share and per share amounts prior to the date of the share exchange and reorganization in these
consolidated financial statements have been retroactively adjusted to give effect to the Share Exchange.
Note
3. Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of the 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 consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Due to the inherent uncertainty involved in making estimates, actual results reported in the future
periods may be based upon amounts that could differ from those estimates.
Principles
of Consolidation
The
consolidated financial statements include the
results of the Parent and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Foreign
Currency Translation and Transactions
The Company’s
foreign subsidiaries use their local currencies as their functional currencies. The
assets and liabilities of foreign subsidiaries that use the local currency as their functional currency 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 stockholders’ 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 consolidated statements of operations
as incurred. Foreign currency transaction and remeasurement gains and losses were a net gain of $207 and net loss of $414 for
the year ended December 31, 2020 and 2019, respectively.
Risks and Uncertainties – COVID-19
The
coronavirus disease 2019 (“COVID-19”) pandemic, which was declared a national emergency in the United States in March
2020, continues to create extensive disruptions to the United States and global economic conditions and financial markets
and to businesses and the lives of individuals throughout the world. Federal and state governments have taken, and continue to
take, unprecedented actions to contain the spread of the disease, including quarantines, travel bans, shelter-in-place orders,
closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief for businesses
and individuals impacted by the pandemic.
Although
the Company’s business has proven resilient during the pandemic (for example, with closures of land-based casinos
shifting increased revenue to the Company’s online iGaming offerings), it is uncertain whether this trend will continue,
as the economic disruption and uncertainty caused by COVID-19 may cause a general decline in iGaming and gambling in general
over time and therefore, the impact of COVID-19 on the Company’s business is ongoing. The cancellation of certain
sporting events has reduced sports betting transactions and it is uncertain when the number of live sporting events will return
to pre-pandemic levels. Any of these consequences may adversely impact player activity on the Company’s platforms,
which would negatively impact the business. As part of the preparation of these consolidated financial statements, the
Company has considered the impact of COVID-19 on the accounting policies and judgments and estimates.
Management
and the Board of Directors are monitoring the impacts of COVID-19 on the Company’s operations and have not
identified any major operational challenges through the date of issuance of these consolidated financial statements. The
Company has not experienced significant impacts to its liquidity to date. COVID-19 impacts the Company’s ability to
access capital to the extent it effects the U.S capital markets. The Company has assessed the extent to which the COVID-19
impacts events after the reporting date and have not identified additional items to disclose as a result. Currently,
significant uncertainties exist concerning the magnitude of impact and duration of the COVID-19 pandemic.
Revenue
Recognition
Platform
and Content Fees
The
Company’s revenues are generated primarily from its Internet gambling SaaS cloud-based platform, GameSTACK, that
its customers use to provide real money and simulated Internet gaming, and online sports betting. The Company enters into
service agreements with its customers, that generally range from 3 to 5 years, and includes renewal provisions, under which it
charges fees based on a percentage of the operator’s gross or net gaming revenue or net sports win at the time of settlement
of an event for real money gaming or at the time of purchase for in-game virtual credit for simulated gaming. Further,
the Company generates revenues from the licensing of proprietary and third-party branded games (collectively “content licensing
services”) hosted on the platform.
In
certain service agreements with SIM customers, the Company receives the fees for in-game virtual credit purchases made by end-user
players and remits payment to the SIM casino operator (customer) for their share of the SIM revenues generated from the Company’s
platform. At December 31, 2020 and 2019, the Company has recorded a liability of $2,520 and $561, respectively, for its
customers’ share of the fees within other current liabilities in the consolidated balance sheets.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
The
Company’s promise to provide the software-as-a service cloud-based 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 customer 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. The transaction price is considered variable consideration
and is generally due thirty days from the date of invoice.
The Company’s
RMiG and SIM enterprise software platform offerings include iGaming content licensing services. The GameSTACK platform is capable
of supporting, and is available to the customer, for both proprietary and third-party licensed gaming content. The customer, in
this case the casino operator, generally controls the determination of which gaming content will be offered in their online casinos.
A
customer can utilize the Company’s proprietary or licensed gaming content, or a customer can direct the Company to procure
third-party gaming content on its behalf. The Company has determined it acts as the principal for providing the content licensing
services when the Company controls the gaming content, and therefore presents the revenue on a gross basis in the consolidated
statements of operations. When the customer directs the Company to procure third-party gaming content, the Company determined
it is deemed an agent for providing the content licensing services, and therefore, records the revenue, net of licensing costs
paid to the suppliers of that gaming content, in the consolidated statements of operations.
Development
Services
Gaming
Development Services
Revenue
is generated from fees for development of games for use on its RMiG and SIM platforms. The development revenue is recognized
at the point in time when control of the game is transferred, typically the earlier of the customer’s acceptance or upon
receipt of the certification of the game.
Platform
Development Services
Platform
development services consist of fees charged for initial deployment of iGaming solutions, as well
as ongoing development services to provide updates to the software for enhanced functionality or customization. Development services
fees for the initial deployments of the iGaming solutions are typically charged at a fixed fee. Ongoing platform development services
are typically billed monthly, at a daily rate, for services performed. Revenue from platform development services is recognized
over time as the Company performs the services. For development services charged at a daily rate, revenue is measured using an
input method based on effort expended, which uses direct labor hours incurred. As the performance obligations in these instances
relate to the provision of development services over time, this method best reflects the transfer of control as the Company performs.
In contracts that require a portion of the consideration to be received in advance, at the commencement of the contract, such
advance payment is initially recorded as a contract liability.
Computer
Hardware Sales
The
Company resells third-party hardware, such as computing servers and other technical devices, upon which the GameSTACK software
platform 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. 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 client’s premises
and configured to allow for remote access.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
The
Company has determined that it is acting as the principal in these transactions as it takes responsibility for procuring, delivering,
installing and configuring the hardware at the customer’s location and takes control of the hardware. Revenue is presented
at the gross amount of consideration to which it is entitled from the customer in exchange for the hardware in development services
and other revenue in the consolidated statements of operations.
Patent
Licensing Revenue
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 gambling accounts together with bilateral transmission of reward points between the Internet
gambling 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.
In
2019, the Company licensed its U.S. patent to a major U.S. Internet gambling operator and their affiliated land-based U.S. casino
group. In this case, the license granted the operator the right to use the patent as it exists at the time the license was granted.
Accordingly, revenue from the license of the patent was recognized at the point in time that control of the license was transferred
to the customer. In 2019, patent licensing revenue totaled $4,000 and is recorded in development services and other revenue in
the consolidated statements of operations.
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. When a customer contract,
includes platform and content services, and development services, the variable consideration for platform and content services
of the transaction price is allocated entirely to the performance obligation for platform and content services.
In
situations when the stand-alone selling price is not directly observable and is either highly variable or uncertain, the transaction
price is allocated to the performance obligation based on the residual approach. During the year ended December 31, 2019, the
Company used the residual approach for a customer contract that included a license of a patent and, platform and content services.
The Company allocated the variable consideration for platform and content services of the transaction price entirely to the performance
obligation for platform and content services with the remainder of the transaction price allocated to the performance obligation
for the patent license.
Sales
and Marketing
Marketing costs include
user acquisition expenses to attract new players to the Company’s B2C operated online casino.
Sales and marketing expenses are expensed as incurred.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Royalty Expenses
Royalty expenses are
paid to third parties for gaming content which are expensed as incurred. Royalty expenses are calculated in accordance with agreements
on a monthly basis and are based on net online gaming revenues.
Share-based
Compensation
Share-based
compensation cost is recognized for equity-settled stock options and restricted stock awards issued to employees and non-employee
members of the Company’s Board of Directors based on the fair value of these awards on the date of grant. The fair
value of the stock options is estimated using a Black-Scholes option pricing model and the fair value of the restricted stock
awards is based on the market price of the Company’s stock at the date of grant.
Share-based
compensation cost 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.
Income
(Loss) Per Share, Basic and Diluted
Basic
income (loss) per share is calculated by dividing the net income (loss) by the weighted average number of ordinary shares outstanding
during the year. In periods of income, diluted income per share is calculated by dividing the net income by the weighted average
number of ordinary shares outstanding during the year plus the assumed conversion of all dilutive potential ordinary shares. In
periods of loss, basic and diluted per share information is the same.
Accounts
and Other Receivables, net
Accounts
and other receivables, net consisted of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Accounts receivables, net of allowance for doubtful accounts of $100 and $103, respectively
|
|
$
|
6,818
|
|
|
$
|
4,984
|
|
Other receivables
|
|
|
1,238
|
|
|
|
620
|
|
Total
|
|
$
|
8,056
|
|
|
$
|
5,604
|
|
Accounts
receivable are stated at invoiced amounts and are unsecured, non-interest bearing and generally have 30-day payment terms. Other
receivables at December 31, 2020 includes VAT recoverable of $510 and income tax receivable of $665. Other receivables at December
31, 2019 includes VAT recoverable of $98 and income tax receivable of $354.
The
Company maintains an allowance for doubtful accounts that reduces receivables to amounts expected to be collected. Management
estimates the allowance for doubtful accounts by assessing the probability of non-payment of the receivable. This probability
is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for
the account receivable. Balances are reviewed for collectability on an individual basis as well as by reference to the extent
that they become overdue. The Company considers factors such as delinquency in payment, financial difficulties, payment history
of the debtor as well as certain forward-looking macroeconomic indicators in the countries in which the Company and its customers
operate, including inflation, gross domestic product and unemployment, as well as the outbreak of COVID-19. On confirmation that
the account receivable will not be collected, the gross carrying value of the asset is written off against the related
allowance for doubtful accounts. The provision for credit losses on accounts receivable is recorded in general and administrative
expenses in the consolidated statements of operations. The Company adopted Accounting Standards Update (“ASU”) No.
2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,
on January 1, 2019. The impact of the new accounting standard was not significant.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
The
activity in the allowance for doubtful accounts was as follows:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
103
|
|
|
$
|
111
|
|
Provision for expected credit losses
|
|
|
(3
|
)
|
|
|
424
|
|
Write-offs, net of recoveries
|
|
|
-
|
|
|
|
(432
|
)
|
Ending balance
|
|
$
|
100
|
|
|
$
|
103
|
|
Inventory
The Company purchases
hardware to sell to their customers to support the platform developed. Inventory is stated at the lower of cost or net realizable
value, using the first-in, first out (“FIFO”) method. Inventory was $276 and $883 at December 31, 2020 and 2019, respectively,
and is included in other current assets in the consolidated balance sheets.
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 software platform 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 software platform.
Capitalized
software development costs are amortized on a straight-line basis over their estimated useful lives, which is generally three
years and are included within depreciation and amortization in the consolidated statements of operations.
Valuation
of Long-lived Assets
Long-lived
assets, such as property and equipment, and capitalized software development costs are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived
asset or asset group to be tested for possible impairment, the Company compares the undiscounted cash flows expected to be generated
by that asset or asset group to their carrying amount. If the carrying amount of the long-lived asset or asset group are not recoverable
on an undiscounted cash flow basis, an impairment charge is recognized to the extent that the carrying amount exceeds fair value.
Fair values of long-lived assets are determined through various techniques, such as applying probability weighted, expected present
value calculations to the estimated future cash flows using assumptions a market participant would utilize, or through the use
of a third-party independent appraiser or valuation specialist. Refer to Note 5 – Capitalized Software Development Costs
for a discussion of the 2019 impairment charge.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Deferred
Offering Costs
Deferred
offering costs, consisting primarily of legal, accounting and other direct and incremental fees and costs related to the Company’s
public offerings, are deferred in the period in which an offering is deemed probable. The costs are offset
against such proceeds received from the offerings (refer to Note 7 – Stockholders’ Equity). All costs incurred
until such event are expensed as incurred and are included in general and administrative expenses. Other indirect and non-incremental
costs incurred in connection with such offerings were expensed as incurred and included in general and administrative
expenses in the consolidated statements of operations.
Business
Combinations
Business
combinations are accounted for using the acquisition method at the acquisition date, which is the date on which control is transferred
to the Company. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition
date fair value. Identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree is recognized
at their acquisition-date fair values at the acquisition date. The excess of the consideration transferred over the fair value
of the net identifiable assets acquired is recorded as goodwill. Acquisition-related costs are expensed as incurred within general
and administrative expenses.
Legal
Contingencies and Litigation Accruals
On
a quarterly basis, the Company assess 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.
Income
Taxes
The
Company is subject to income taxes in the United States, U.K., Bulgaria and Israel. The Company records an income tax expense
(benefit) for the anticipate 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 will 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 will 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.
The Company benefits
from the U.K. research and development small or medium-sized tax credit regime and is able to surrender some of its trading losses
that arise from its research and development activities for a cash rebate of up to 33.35% of eligible research and development
expenditure. Research and development taxation relief is recognized once management considers it probable that any amount claimable
will be received.
Segment
Information
The
Company operates two operating segments, RMiG and SIM. 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 assessing 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 consolidated level.
Note
4. Property and Equipment, net
Property
and equipment, net at December 31, 2020 and 2019 consisted of the following:
|
|
Estimated
|
|
December 31,
|
|
|
|
Useful Life
|
|
2020
|
|
|
2019
|
|
Fixtures, fittings and equipment
|
|
3-5 years
|
|
$
|
1,294
|
|
|
$
|
731
|
|
Platform hardware
|
|
5 years
|
|
|
1,517
|
|
|
|
771
|
|
Total property and equipment, cost
|
|
|
|
|
2,811
|
|
|
|
1,502
|
|
Less: accumulated depreciation
|
|
|
|
|
(1,491
|
)
|
|
|
(1,199
|
)
|
Total
|
|
|
|
$
|
1,320
|
|
|
$
|
303
|
|
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Depreciation
expense related to property and equipment was $278 and $126 for the year ended December 31, 2020 and 2019, respectively.
Note
5. Capitalized Software Development Costs, net
Capitalized
software development costs, net at December 31, 2020 and 2019 consisted of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Capitalized software development costs
|
|
$
|
26,507
|
|
|
$
|
22,724
|
|
Development in progress
|
|
|
2,641
|
|
|
|
1,048
|
|
Total capitalized software development, cost
|
|
|
29,148
|
|
|
|
23,772
|
|
Less: accumulated amortization
|
|
|
(22,500
|
)
|
|
|
(18,988
|
)
|
Total
|
|
$
|
6,648
|
|
|
$
|
4,784
|
|
At December 31,
2020, development in progress primarily represents costs associated with new content and enhancements to the software platform,
as well as development projects related to new U.S. states which have regulated iGaming that are expected to be fully placed in
service by the end of 2021.
The
Company recorded an impairment charge of $626 during the year ended December 31, 2019 which related to capitalized software
costs for certain business-to-consumer technology that was being developed to provide online gaming for a particular customer
and became impaired as a result of the termination of the customer contract, effective December 31, 2019. This impairment charge
was recorded in the RMiG segment.
Amortization
expense related to capitalized software development costs was $2,729 and $3,893 for the year ended December 31, 2020 and 2019,
respectively.
Note
6. Intangible Assets
Definite-lived
intangible assets, net consisted of the following:
|
|
Weighted
|
|
|
December
31, 2020
|
|
|
|
Average Amortization Period
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
Tradenames
and trademarks
|
|
|
3.0
years
|
|
|
$
|
343
|
|
|
$
|
(343
|
)
|
|
$
|
—
|
|
Licenses
|
|
|
5.3
years
|
|
|
|
1,366
|
|
|
|
(898
|
)
|
|
|
468
|
|
|
|
|
|
|
|
$
|
1,709
|
|
|
$
|
(1,241
|
)
|
|
$
|
468
|
|
|
|
Weighted
|
|
|
December
31, 2019
|
|
|
|
Average Amortization Period
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
Tradenames
and trademarks
|
|
|
3.0
years
|
|
|
$
|
333
|
|
|
$
|
(333
|
)
|
|
$
|
—
|
|
Licenses
|
|
|
5.3
years
|
|
|
|
1,089
|
|
|
|
(741
|
)
|
|
|
348
|
|
|
|
|
|
|
|
$
|
1,422
|
|
|
$
|
(1,074
|
)
|
|
$
|
348
|
|
Amortization
expense of definite-lived intangible assets was $128 and $203 for the year ended December 31, 2020 and 2019, respectively. Estimated
amortization expense for the next five years is as follows: 2021: $138; 2022: $118; 2023: $98; 2024: $64;
2025: $50.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Note
7. Stockholders’ Equity
Incorporation
of GAN Limited and Share Exchange
GAN
Limited was incorporated in Bermuda on December 13, 2019. On December 18, 2019, GAN Limited issued and sold 10,000 ordinary
shares to the chief executive officer of the Parent for consideration of $100, which shares were repurchased for the same price
upon the completion of the Share Exchange as discussed below.
As
previously discussed in Note 1 - Nature of Operations and Note 2 - Basis of Presentation, each shareholder of GAN plc, agreed
to exchange four ordinary shares for issuance of one ordinary share of the Parent plus a pro rata portion of an aggregate $2,525
(£2,004 or 2.32 pence per share) in cash. Immediately subsequent to the Share Exchange, GAN Limited shareholders
held the same economic interest as they had in GAN plc prior to the Share Exchange. Holders of share options in GAN plc also received
reciprocal share options, as applicable, in GAN Limited. Refer to Note 8 – Share-based Compensation.
Also,
in connection with the Share Exchange, the Board of Directors adopted a bonus program, providing for additional fees to
all directors, in their capacities as such, upon the successful completion of the Share Exchange and an U.S. initial public offering.
The directors had the option to receive all or any portion of their awards in restricted stock or cash. The total award was paid
in cash in 2020, which totaled $608.
The
ordinary share capital and additional paid-in capital accounts have been retrospectively adjusted to give effect to the Share
Exchange and the remaining equity accounts reflect the historical activity of GAN plc prior to the Share Exchange. The cash disbursed
as part of the Share Exchange was accounted for as a dividend since the amounts paid to each shareholder were made to them in
their capacity of equity holders and in proportion of their respective interests.
Ordinary
Shares
GAN
Limited’s authorized share capital consists of 100 million ordinary shares, par value $0.01 per share. Holders of ordinary
shares are entitled to one vote per share on all matters submitted to a vote of holders of ordinary shares. In addition, the ordinary
shares have no right to redemption, conversion or sinking fund rights. Each ordinary share is entitled to dividends if, as and
when dividends are declared by the Board of Directors and subject to a resolution of members, subject to the rights of any other
class of shares (if any) and to the provisions of the Bermuda Companies Act. In the event of liquidation, dissolution or winding
up, the holders of ordinary shares are entitled to share equally and ratably in the assets, if any, remaining after the payment
of debt and liabilities.
On
December 21, 2020, GAN Limited issued and sold 6,790,956 of ordinary shares in a follow-on public offering. The public offering
price per share was $15.50 per share. The Company received proceeds of $98,541 from the offering, after deducting the underwriters’
discounts and commissions of $5,818 and other offering expenses of $901. The follow-on offering also included the sale of 383,500
ordinary shares by the selling stockholders, giving effect to the exercise of 163,500 options to purchase ordinary shares. The
Company did not receive any proceeds from the sale of ordinary shares by the selling stockholders other than the $214 in proceeds
from the exercise of stock options.
During
2020, the Company issued an aggregate of 927,667 ordinary shares for the exercise of stock options for gross proceeds of $2,474.
During
2019, the Company issued an aggregate of 183,509 ordinary shares for the exercise of stock options for gross proceeds of $332.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Note
8. Share-based Compensation
Prior
to the Share Exchange, as discussed in Note 7 – Stockholders’ Equity, the following GAN UK options were
outstanding (“GAN UK Options”): 2,560,279 stock options pursuant to the 2017 GAN plc Share Option Plan; 19,750
stock options pursuant to the 2013 GAN plc Share Option Plan; and 292,500 stock options pursuant to the 2019 GAN plc Share
Option Plan. As part of the Share Exchange, all outstanding GAN UK Options in GAN plc were exchanged for stock options under
the GAN Limited 2020 Equity Incentive Plan (“2020 Plan”). However, for GAN UK Options that had been granted under
the UK Enterprise Management Incentive regime (“EMI Options”), in order to preserve the U.K. specific tax
advantages for those options, option holders could choose to retain the previously applicable vesting schedule. Due to an
administrative error, some of these option grants were not properly registered with the U.K. tax authority. The Company has
decided to cover the social taxes and income taxes related to these awards for the option holders. The Company is accounting
for the required cash payment as a cash-settled share-based compensation transaction. During the year ended December 31,
2020, the Company recognized related cash-settled expenses of $2,534 within its consolidated statements of operations.
The related liability for the future cash payment related to employee and employer taxes on outstanding unexercised
EMI Options of $826 at December 31, 2020 was recognized within accrued compensation and benefits. Excluding
these EMI Options, the Company records the liability for employer tax expenses in the period when the respective holder
exercises their options. The total employer tax expense recognized on exercises during the year ended December 31,
2020 was $830.
The
holders of outstanding GAN UK Options, except the EMI Options, received stock options on the same exchange ratio as the exchange
of ordinary shares disclosed in Note 7 – Stockholders’ Equity. To ensure the aggregate market value of the Company’s
ordinary shares subject to the stock options immediately following the exchange was materially the same as the aggregate market
value of the ordinary shares subject to the GAN UK Options immediately prior to the exchange, the exercise price for each Company’s
ordinary share was established to be four times the exercise price that would otherwise have been payable for each GAN plc ordinary
share. Then, the stock options issued were accelerated and became fully vested upon completion of the Share Exchange. In all other
respects, the terms of the exchanged stock options remained the same as the terms of GAN UK Options subject to the exchange. The
Company has discontinued issuing awards under the previous GAN plc plans.
Stock
Options
In
connection with the Share Exchange, the Board of Directors established the 2020 Plan in April 2020, which has been approved
by the shareholders. On July 2, 2020, the 2020 Plan was amended to clarify the definition of fair market value as applied therein.
The 2020 Plan provides for the grant of up to 4,400,000 shares then increases through 2029, by the lesser of 4% of the previous
year’s total outstanding shares on December 31st or as determined by the Board of Directors, for ordinary
shares, incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock grants, stock
units, and other equity awards for issuance to employees, consultant or non-employee directors. The share-based awards are issued
at no less than fair market value of an ordinary share on the date of grant. All stock option awards have a maximum term of ten
years and generally vest 25% after one year and then monthly over the next 36 months thereafter. At December 31, 2020, there
are 3,223,120 shares remaining available for future issuance under the 2020 Plan.
After
the Company’s initial public offering in May 2020, the Board of Directors approved the issuance of options to purchase
1,008,200 ordinary shares to employees under the 2020 Plan.
Activity
in the stock options outstanding and related information for the year ended December 31, 2020 and 2019 is as follows:
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at January 1, 2019
|
|
|
1,707,153
|
|
|
$
|
1.76
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,742,615
|
|
|
|
3.28
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(183,509
|
)
|
|
|
1.84
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
or cancelled
|
|
|
(526,322
|
)
|
|
|
2.63
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2019
|
|
|
2,739,937
|
|
|
|
2.55
|
|
|
|
8.74
|
|
|
$
|
19,258
|
|
Granted
|
|
|
1,350,700
|
|
|
|
15.51
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(927,717
|
)
|
|
|
2.72
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
or cancelled
|
|
|
(101,061
|
)
|
|
|
7.28
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2020
|
|
|
3,061,859
|
|
|
|
8.06
|
|
|
|
8.50
|
|
|
$
|
37,410
|
|
Options
exercisable at December 31, 2020
|
|
|
1,914,179
|
|
|
$
|
2.93
|
|
|
|
7.96
|
|
|
$
|
33,205
|
|
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
The
weighted average grant date fair value of the options granted was $9.47 and $1.67 for the year ended December 31, 2020 and 2019,
respectively. For the period prior to the Company’s initial public offering in May 2020, the grant-date fair value of each
stock option grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected stock price volatility
|
|
|
74.99
|
%
|
|
|
51.47
|
%
|
Expected term (in years)
|
|
|
5.00
|
|
|
|
5.00
|
|
Risk-free interest rate
|
|
|
0.33
|
%
|
|
|
0.47
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility was determined by reference to the historic volatility of GAN UK’s share price on the AIM, the London Stock Exchange.
The risk-free interest rate for the expected term of the option was based on the U.K. Gilt 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.
Subsequent
to the Company’s initial public offering, the grant-date fair value of each stock option grant was estimated using the Black-Scholes
option pricing model. Expected volatility is determined by reference to volatility of certain identified peer group share trading
information and stock prices on the Nasdaq. 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 grant-date fair value of each stock option grant was
determined using the following weighted average assumptions:
|
|
Year Ended
December
31, 2020
|
|
Expected stock price volatility
|
|
|
62.68
|
%
|
Expected term (in years)
|
|
|
4.86
|
|
Risk-free interest rate
|
|
|
0.31
|
%
|
Dividend yield
|
|
|
0
|
%
|
The
Company recorded equity-settled share-based compensation expense related to stock options of $5,883 (includes $3,881
from acceleration of vesting of awards) and $367 for the year ended December 31, 2020 and 2019, respectively. Such amounts
were recorded net of $56 and $80 in capitalized software development costs for the year ended December 31, 2020 and 2019, respectively.
At December 31, 2020, there was $9,511 of total unrecognized compensation cost related to nonvested stock options granted
under the 2020 Plan. The unrecognized cost related to nonvested stock options is expected to be recognized over a weighted
average period of 3.38 years.
Restricted
Stock Awards
On June 15, 2020, the
Board of Directors approved the issuance of 93,680 of restricted stock awards to the chief executive officer
and non-employee directors. The restricted stock awards vest one year after the grant date. The value of restricted stock
is based on the market value of the Company’s ordinary shares at the date of grant. The aforementioned restricted stock
awards were issued with a grant date fair value of $18.19 per share. The Company recorded share-based compensation expense related
to the restricted stock awards of $934 for the year ended December 31, 2020. At December 31, 2020, there was $770 of total
unrecognized compensation cost related to nonvested restricted stock awards granted under the 2020 Plan. The remaining
cost is expected to be recognized in 2021.
Note
9. 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 $345 and $175 for the year
ended December 31, 2020 and 2019, respectively.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Note
10. Interest Expense, net
Interest
expense, net consisted of the following:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Interest expense (1)
|
|
$
|
395
|
|
|
$
|
28
|
|
Interest income
|
|
|
(3
|
)
|
|
|
(15
|
)
|
Interest expense, net
|
|
$
|
392
|
|
|
$
|
13
|
|
|
(1)
|
Interest
expense includes interest on a related party loan during the year ended December 31, 2020 (refer to Note 16 – Related
Party Transactions). Also, interest expense includes interest on finance leases of $10 and $28 during the year ended December
31, 2020 and 2019, respectively.
|
Note
11. Income (Loss) Per Share
Basic
income (loss) per ordinary share is computed by dividing the net income (loss) by the weighted average number of ordinary shares
outstanding during the period. Diluted income per ordinary share further includes any ordinary shares available to be issued upon
the exercise of outstanding stock option and restricted stock awards if such inclusions would be dilutive. The Company determines
the potentially dilutive ordinary shares using the treasury stock method. In periods of a net loss, basic and diluted per share
information is the same because the potentially dilutive ordinary shares would be anti-dilutive. The following table sets forth
the computation of basic and diluted income (loss) per share for the year ended December 31, 2020 and 2019:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(20,217
|
)
|
|
$
|
2,004
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding, basic
|
|
|
27,006,058
|
|
|
|
21,367,948
|
|
Weighted average effect of potentially dilutive ordinary shares:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
—
|
|
|
|
2,052,413
|
|
Restricted stock
|
|
|
—
|
|
|
|
—
|
|
Weighted average ordinary shares outstanding, diluted
|
|
|
27,006,058
|
|
|
|
23,420,361
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.75
|
)
|
|
$
|
0.09
|
|
Diluted
|
|
$
|
(0.75
|
)
|
|
$
|
0.09
|
|
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Certain
stock options and nonvested restricted stock awards were excluded from the computation of diluted weighted average ordinary
shares outstanding, as inclusion would be anti-dilutive, are summarized as follows:
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
|
3,061,859
|
|
|
|
—
|
|
Restricted stock
|
|
|
93,680
|
|
|
|
—
|
|
Total
|
|
|
3,155,539
|
|
|
|
—
|
|
Note
12. Revenue
The
following table reflects revenue recognized for the year ended December 31, 2020 and 2019 in line with the timing of transfer
of services (i.e., revenue from services transferred to customers at a point in time and revenue from services transferred over
time):
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue from services delivered over time
|
|
$
|
31,715
|
|
|
$
|
25,067
|
|
Revenue from services delivered at a point in time
|
|
|
3,444
|
|
|
|
4,904
|
|
Total
|
|
$
|
35,159
|
|
|
$
|
29,971
|
|
Costs
to Obtain a Contract
The
Company defers contract costs that are recoverable and incremental to obtaining sales contracts with its customers. Contract costs,
consisting primarily of sales commissions, are amortized on a systemic basis that is consistent with the transfer to the customer
of the services to which the asset relates. Contract costs are periodically reviewed for impairment. An impairment exists if the
carrying amount of the asset exceeds the amount of the consideration the entity expects to receive in exchange for providing the
services, less the remaining costs that relate directly to providing those services. Deferred contract costs are recorded in other
current assets and other assets in the consolidated balance sheets. The following table reflects the activity in deferred contract
costs for the periods indicated:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Balance at beginning of year
|
|
$
|
86
|
|
|
$
|
—
|
|
Capitalized expenditures for the year
|
|
|
298
|
|
|
|
95
|
|
Amortization of contract costs
|
|
|
(40
|
)
|
|
|
(9
|
)
|
Effect of foreign currency translation
|
|
|
9
|
|
|
|
—
|
|
Balance at end of year
|
|
$
|
353
|
|
|
$
|
86
|
|
Contract
Liabilities
Contract
liabilities is mainly comprised of cash consideration received in advance from customers related to development services not yet
performed or hardware deliveries not yet completed and therefore revenue has not been recognized. This balance will be
recognized as revenue as the services are performed, which is generally expected to occur over a period up to a year. The following
table reflects the activity in contract liabilities for the periods indicated:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Contract liabilities balance, beginning of year
|
|
$
|
3,023
|
|
|
$
|
1,516
|
|
Liabilities recognized during the period
|
|
|
420
|
|
|
|
2,722
|
|
Revenue recognized from amounts included in contract liabilities at the beginning of the period
|
|
|
(2,360
|
)
|
|
|
(1,215
|
)
|
Contract liabilities balance, end of year
|
|
$
|
1,083
|
|
|
$
|
3,023
|
|
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Note
13. Segment Reporting
Information
reported to the Parent’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 Company’s reportable
segments are as follows:
|
●
|
RMiG
– This segment develops, markets and sells instances of GameSTACK that incorporate comprehensive player registration,
account funding and back-office accounting and management tools that enable the casino operator customers to efficiently,
confidently and effectively extend their presence online in places that permit online real money gambling.
|
|
|
|
|
●
|
SIM
– This segment develops, markets and sells instances of iSight Back Office and GameSTACK that incorporate comprehensive
player registration, account funding and back-office accounting and management tools that enable the casino operator customers
to efficiently, confidently and effectively extend their presence online in places that have not yet permitted any form of
online real money gambling.
|
The
CODM evaluates performance and allocates resources based on segment revenue and segment results. Segment results represent the
gross profit earned by each segment without allocation of each segment’s share of depreciation and amortization expense,
sales and marketing expense, product and technology expense, general and administrative expense, interest costs and income tax
expense. These results are not necessarily indicative of the results of operations that would have occurred had each segment been
an independent, stand-alone entity during the periods presented. The accounting policies of the reportable segments follow the
same policies as disclosed in Note 3.
Financial
information by reportable segments for the year ended December 31, 2020 and 2019 is included in the following summary:
|
|
Year
Ended
December
31, 2020
|
|
|
Year
Ended
December
31, 2019
|
|
|
|
RMiG
|
|
|
SIM
|
|
|
Total
|
|
|
RMiG
|
|
|
SIM
|
|
|
Total
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platform and content fees
|
|
$
|
18,030
|
|
|
$
|
8,178
|
|
|
$
|
26,208
|
|
|
$
|
15,396
|
|
|
$
|
4,615
|
|
|
$
|
20,011
|
|
Development services and other
|
|
|
7,580
|
|
|
|
1,371
|
|
|
|
8,951
|
|
|
|
8,832
|
|
|
|
1,128
|
|
|
|
9,960
|
|
Total revenue
|
|
|
25,610
|
|
|
|
9,549
|
|
|
|
35,159
|
|
|
|
24,228
|
|
|
|
5,743
|
|
|
|
29,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue(1)
|
|
|
7,486
|
|
|
|
2,985
|
|
|
|
10,471
|
|
|
|
4,833
|
|
|
|
2,270
|
|
|
|
7,103
|
|
Impairment of capitalized software
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
626
|
|
|
|
—
|
|
|
|
626
|
|
Total cost of revenue
|
|
|
7,486
|
|
|
|
2,985
|
|
|
|
10,471
|
|
|
|
5,459
|
|
|
|
2,270
|
|
|
|
7,729
|
|
Segment profit
|
|
$
|
18,124
|
|
|
$
|
6,564
|
|
|
$
|
24,688
|
|
|
$
|
18,769
|
|
|
$
|
3,473
|
|
|
$
|
22,242
|
|
|
(1)
|
Excludes
depreciation and amortization
|
During
the year ended December 31, 2020, the Company had revenue from one customer, which totaled $14,988 or 42.6% of total revenue,
all of which related to RMiG. During the year ended December 31, 2019, the Company had revenue from two customers, which totaled
$19,812 or 66.1%, of which $18,223 related to RMiG and $1,589 related to SIM.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
The
following table presents a reconciliation of consolidated segment profit to consolidated income (loss) before income taxes
for the year ended December 31, 2020 and 2019:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Segment profit
|
|
$
|
24,688
|
|
|
$
|
22,242
|
|
Sales and marketing
|
|
|
5,046
|
|
|
|
3,487
|
|
Product and technology
|
|
|
11,032
|
|
|
|
3,413
|
|
General and administration
|
|
|
24,825
|
|
|
|
8,435
|
|
Depreciation and amortization
|
|
|
3,257
|
|
|
|
4,316
|
|
Interest expense, net
|
|
|
392
|
|
|
|
13
|
|
Income (loss) before income taxes
|
|
$
|
(19,864
|
)
|
|
$
|
2,578
|
|
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.
Revenue
by location of the customer for the year ended December 31, 2020 and 2019 was as follows:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
29,351
|
|
|
$
|
20,935
|
|
Italy
|
|
|
5,191
|
|
|
|
4,599
|
|
United Kingdom and Channel Islands
|
|
|
263
|
|
|
|
4,359
|
|
Rest of the world
|
|
|
354
|
|
|
|
78
|
|
Total
|
|
$
|
35,159
|
|
|
$
|
29,971
|
|
Long-Lived
Assets
The
Company attributes its long-lived assets, which primarily consist of property and equipment, and lease right-of-use
assets, to a country based on the physical location of the assets. Aggregate property and equipment, net, and lease right-of-use
assets, net, by geographic area were as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
United Kingdom and Channel Islands
|
|
$
|
1,334
|
|
|
$
|
773
|
|
United States
|
|
|
222
|
|
|
|
321
|
|
Bulgaria
|
|
|
532
|
|
|
|
534
|
|
Rest of the world
|
|
|
6
|
|
|
|
2
|
|
Total
|
|
$
|
2,094
|
|
|
$
|
1,630
|
|
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Note
14. Income Taxes
GAN Limited was incorporated
in Bermuda solely for the purpose of acting as the new group parent company and public vehicle for investors. GAN Limited completed
the Share Exchange by which it acquired GAN plc and, on May 7, 2020, GAN Limited completed its U.S. initial public offering. The
tax rate in Bermuda, the Company’s country of domicile as of December 31, 2020, is zero percent. The Company’s effective
tax rate for December 31, 2019 is reconciled to the U.K. statutory tax rate of 19% as that was the statutory rate of the Company’s
predecessor company GAN plc (a subsidiary domiciled in the U.K).
Income
(loss) before income taxes for the year ended December 31, 2020 and 2019 consisted of the following:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Domestic
|
|
$
|
(13,833
|
)
|
|
$
|
1,922
|
|
Foreign
|
|
|
(6,031
|
)
|
|
|
656
|
|
Income (loss) before income taxes
|
|
$
|
(19,864
|
)
|
|
$
|
2,578
|
|
The
components of the income tax expense for the year ended December 31, 2020 and 2019 consisted of the following:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
Domestic
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
Foreign
|
|
|
523
|
|
|
|
589
|
|
Total current taxes
|
|
|
523
|
|
|
|
574
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
—
|
|
|
|
—
|
|
Total deferred taxes
|
|
|
—
|
|
|
|
—
|
|
Tax expense (benefit) related to an increase (decrease) in UTBs:
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
—
|
|
|
|
—
|
|
Foreign
|
|
|
(170
|
)
|
|
|
—
|
|
Total tax expense (benefit)
|
|
|
(170
|
)
|
|
|
—
|
|
Domestic
|
|
|
—
|
|
|
|
(15
|
)
|
Foreign
|
|
|
353
|
|
|
|
589
|
|
Total income tax expense
|
|
$
|
353
|
|
|
$
|
574
|
|
The following is a reconciliation
of the income taxes computed at the statutory federal income tax rate to the income tax expense for the year ended
December 31, 2020 and 2019:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Income (loss) before income taxes multiplied by the statutory tax rate of 0% and 19% for the year ended December 31, 2020 and 2019, respectively
|
|
$
|
—
|
|
|
$
|
489
|
|
Other permanent and similar differences, including expenses not deductible for tax purposes
|
|
|
77
|
|
|
|
(71
|
)
|
Foreign-derived intangible income (FDII) deduction
|
|
|
(41
|
)
|
|
|
—
|
|
Other timing differences not recognized for deferred tax purposes
|
|
|
—
|
|
|
|
(88
|
)
|
Effects of tax rates in foreign jurisdictions
|
|
|
(1,102
|
)
|
|
|
(5
|
)
|
Share-based compensation
|
|
|
(1,463
|
)
|
|
|
(40
|
)
|
Valuation allowance
|
|
|
2,868
|
|
|
|
(111
|
)
|
Uncertain tax benefit
|
|
|
(170
|
)
|
|
|
210
|
|
Other
|
|
|
71
|
|
|
|
9
|
|
Foreign withholding tax
|
|
|
113
|
|
|
|
181
|
|
Total income tax expense
|
|
$
|
353
|
|
|
$
|
574
|
|
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The significant components of deferred tax assets and liabilities
at December 31, 2020 and 2019 are as follows:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loss carryforwards
|
|
$
|
5,049
|
|
|
$
|
3,478
|
|
Share-based compensation
|
|
|
1,383
|
|
|
|
93
|
|
Short-term timing differences
|
|
|
326
|
|
|
|
33
|
|
Deferred rent liability
|
|
|
90
|
|
|
|
—
|
|
Property
and equipment
|
|
|
9
|
|
|
|
—
|
|
Total deferred tax assets
|
|
|
6,857
|
|
|
|
3,604
|
|
Valuation allowance
|
|
|
(6,490
|
)
|
|
|
(3,245
|
)
|
Net deferred tax assets
|
|
|
367
|
|
|
|
359
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
—
|
|
|
|
(355
|
)
|
Right-of-use assets
|
|
|
(87
|
)
|
|
|
(4
|
)
|
Prepayments
|
|
|
(280
|
)
|
|
|
—
|
|
Total deferred tax liabilities
|
|
|
(367
|
)
|
|
|
(359
|
)
|
Net deferred tax
|
|
$
|
—
|
|
|
$
|
—
|
|
A
valuation allowance is recognized if, based on the weight of available evidence, it is more-likely-than-not that some portion,
or all, of the deferred tax asset will not be realized. Management must analyze all available positive and negative evidence regarding
realization of the deferred tax assets and make an assessment of the likelihood of sufficient future taxable income. The Company
has provided a valuation allowance on the domestic and foreign deferred tax assets that were not deemed realizable based upon
the weight of the objectively verifiable negative evidence of cumulative losses over the recent three-year period.
On the basis of this
evaluation, a valuation allowance of $6,490 and $3,245 has been recorded as of December 31, 2020 and December 31,
2019, respectively, to recognize only the portion of the deferred tax assets that is more likely than not to be realized.
The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income
during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is
no longer present and additional weight is given to subjective evidence, such as the Company’s forecast for growth.
Tax
Attributes
At
December 31, 2020, and 2019, the Company has cumulative carryforward tax losses generated of $26,575 and $20,143, respectively,
which have been generated in the U.K. Subject to any relevant restrictions, the Company expects to be able to carry forward the tax losses
and offset against future operating profits. The net operating losses can be carryforward indefinitely.
As
an entity that carries out development activities, the Company benefits from the U.K. research and development small or medium-sized
enterprise tax credit regime and are able to surrender some of its trading losses that arise from research and development activities
for a cash rebate of up to 33.35% of eligible research and development expenditure. If the Company were to no longer qualify as
a small or medium-sized company, the Company may instead be eligible for a research and development expenditure credit under the
U.K. large company regime, worth up to approximately 10% of the eligible research and development expenditure (after tax). Research
and development taxation relief is recorded once management considers it probable that any amount claimable will be realized.
During the year ended December 31, 2018, the Company recorded a research and development tax credit receivable of $1,079 and further
increased it by $48 in 2019 to $1,127. The cash rebate was received in 2020.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Unrecognized tax benefits – January 1
|
|
$
|
210
|
|
|
$
|
—
|
|
Additions for tax positions taken in current year
|
|
|
39
|
|
|
|
210
|
|
Other reductions for tax positions taken in the prior year
|
|
|
(210
|
)
|
|
|
—
|
|
Unrecognized tax benefits – December 31
|
|
$
|
39
|
|
|
$
|
210
|
|
The
liability for uncertain tax liabilities, including potential interest and penalties, were recorded within other noncurrent liabilities
in the consolidated balance sheets.
The
Company, including its subsidiaries, files tax returns with domestic and foreign jurisdictions. The Company is no longer subject
to U.K. examinations by tax authorities for years before 2018 and U.S. examinations by federal and state tax authorities for years
before 2016. The tax returns in Israel and Bulgaria are still within the examination window of the local tax authorities. The
Company believes that it is reasonably possible that the unrecognized tax benefits will not significantly change within the next
12 months. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. Although the Company believes
that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could
have an adverse effect on the Company’s earnings.
Note
15. Leases
The
Company has adopted ASU No. 2016-02, Leases (Topic 842) as of January 1, 2019. ASC 842 requires a lessee to recognize the
following 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 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. ASC 842
also expanded the disclosure requirements.
The
Company adopted ASC 842 as of January 1, 2019 using the transition method, which allows entities to apply the new guidance at
the adoption date and record a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption.
The adoption of the standard resulted in the recognition of operating lease right-of-use assets of $1,335 and operating lease
liabilities of $1,261, and financing lease right-of-use assets of $349 and financing lease liabilities of $390.
The adoption of the standard had no effect on retained earnings at January 1, 2019 and did not have a significant impact on the
consolidated statements of operations and statements of cash flows in 2019.
The
Company elected to apply the package of practical expedients upon transition, which includes no reassessment of whether existing
contracts are or contain leases and allowed for the lease classification for existing leases to be retained. The Company did not
elect the practical expedient to use hindsight in determining the lease term. The Company elected the practical expedient to not
separate non-lease components from the lease components contained in the lease agreements but instead combine them and account
for them as a single lease component and will continue to do so for its real estate operating leases and finance leases
of equipment hosting of the Company’s platform software. The Company has also elected not to recognize leases with
original lease terms of 12 months or less (i.e., short-term leases) on the consolidated balance sheets.
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 December 31, 2020, the Company’s lease portfolio consists of operating leases
related to office facilities in Nevada and Bulgaria and finance leases for equipment in hosting its software platform. At
December 31, 2019, the Company’s lease portfolio additionally consisted of operating leases related to office facilities
in the U.K. and New Jersey. The lease terms range from one to 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.
The
following table discloses the operating and finance asset and liability balances at December 31, 2020 and 2019:
|
|
|
|
Year
Ended
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Leases
|
|
Classification
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Operating lease
right-of-use assets(1)
|
|
$
|
577
|
|
|
$
|
1,051
|
|
Finance leases
|
|
Other assets(2)
|
|
|
197
|
|
|
|
276
|
|
Total leased assets, net
|
|
|
|
$
|
774
|
|
|
$
|
1,327
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Operating lease liabilities
|
|
$
|
262
|
|
|
$
|
289
|
|
Finance leases
|
|
Other current liabilities
|
|
|
55
|
|
|
|
173
|
|
Non-current:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Operating lease liabilities – non-current
|
|
|
313
|
|
|
|
693
|
|
Finance leases
|
|
Other noncurrent liabilities
|
|
|
—
|
|
|
|
55
|
|
Total lease liabilities
|
|
|
|
$
|
630
|
|
|
$
|
1,210
|
|
|
(1)
|
Operating
lease right-of-use assets are recorded, net of accumulated amortization of $620 and $740, at December 31, 2020 and 2019,
respectively.
|
|
(2)
|
Finance
lease right-of-use assets are recorded net of accumulated amortization of $300 and $208, at December 31, 2020 and 2019,
respectively.
|
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
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.
The
components of lease cost for the year ended December 31, 2020 and 2019 were as follows:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Finance lease cost (including amortization of finance lease right-of-use assets,
recorded in depreciation and amortization, of $82 and $85 in 2020 and 2019, respectively, and interest on finance
lease liabilities, recorded in interest expense, net, of $10 and $28 in 2020 and 2019, respectively)
|
|
$
|
92
|
|
|
$
|
113
|
|
Operating lease cost (included in general and administrative)
|
|
|
566
|
|
|
|
506
|
|
Total lease cost
|
|
$
|
658
|
|
|
$
|
619
|
|
Maturities
of lease liabilities, including reconciliation to the lease liabilities, based on required contractual payments, are as follows:
|
|
Operating Leases
|
|
|
Finance Leases
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
276
|
|
|
$
|
56
|
|
2022
|
|
|
216
|
|
|
|
—
|
|
2023
|
|
|
107
|
|
|
|
—
|
|
2024
|
|
|
—
|
|
|
|
—
|
|
2025
|
|
|
—
|
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
Total lease payments
|
|
|
599
|
|
|
|
56
|
|
Less: future interest costs
|
|
|
24
|
|
|
|
1
|
|
Present value of lease liabilities
|
|
$
|
575
|
|
|
$
|
55
|
|
Other
information related to leases as of and for the year ended December 31, 2020 and 2019 was as follows:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Finance lease weighted-average remaining lease term (years)
|
|
|
0.67
|
|
|
|
1.67
|
|
Finance lease weighted-average discount rate
|
|
|
9.36
|
%
|
|
|
9.77
|
%
|
|
|
|
|
|
|
|
|
|
Operating lease weighted-average remaining lease term (years)
|
|
|
2.34
|
|
|
|
2.68
|
|
Operating lease weighted-average discount rate
|
|
|
4.60
|
%
|
|
|
4.57
|
%
|
|
|
|
|
|
|
|
|
|
Cash paid for the amounts included in the measurement of lease liabilities
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
464
|
|
|
$
|
601
|
|
Operating cash flow from finance leases
|
|
$
|
10
|
|
|
$
|
28
|
|
Financing cash flows from finance leases
|
|
$
|
154
|
|
|
$
|
86
|
|
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
Note
16. Related Party Transactions
The
Board of Directors adopted a bonus program, providing for additional fees to all directors, in their capacities as such, in connection
with the Share Exchange. The Board of Directors received payment of additional fees of $608. Refer to Note 7 –
Stockholders’ Equity.
Also,
in connection with the Share Exchange, the Company arranged funding of the cash consideration of the Share Exchange through
a loan facility provided by the Parent’s chief executive officer and his father. The loan facility provided for a minimum
interest charge of £300, and any funds borrowed thereunder would have been unsecured and borne interest at 15% per annum.
Such facility was available for a term of six months. Ultimately, the facility was not used, and the cash consideration of the
Share Exchange was paid from the Company’s operating cash. The minimum interest charge of $385 (or £300) was
paid in May 2020 and recorded in interest expense, net, in the consolidated statements of operations.
At
December 31, 2019, included within accounts and other receivables of the consolidated balance sheet, is $138 inclusive of interest,
due from the Parent’s chief executive officer. The amount due was paid in March 2020. The interest earned on the amount
due is included in interest expense, net in the consolidated statements of operations.
Note
17. 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, except as described below, which are considered
other than routine legal proceedings. The Company believes that 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.
The
Company is a party to a wrongful termination claim made by a former employee and director to the U.K. Employment Tribunal
in 2019. Currently, the parties are communicating regarding key parts of the claim and responses to requests for particular details
of the claim. Subsequent to December 31, 2020, the Company reached an agreement in principle to settle the matter. Based upon
the terms of the settlement agreement, the Company has recorded a liability of $412 within other accrued expenses in the consolidated
balance sheet at December 31, 2020. Refer to Note 18 – Subsequent Events for further discussion.
Note
18. Subsequent Events
Acquisition
of Vincent Group p.l.c.
On
January 1, 2021, the Company completed the acquisition of all outstanding shares of Vincent Group p.l.c., a Malta public limited
company doing business as “Coolbet.” Coolbet is a developer and operator of a legal online sports betting and casino
platform. Coolbet operates a B2C casino and sports-betting platform that is accessible via its website in eight national markets
across Northern Europe (Estonia, Finland, Iceland, Norway and Sweden), Latin America (Chile and Peru) and North America (Canada).
The Company acquired Coolbet to take advantage of Coolbet’s user interface and proprietary technical platform, to quickly
integrate and offer a proprietary sportsbook offering to the Company’s land-based casino operators in the United States.
The Company intends to continue to operate in the United States solely as a B2B provider to casinos and other operators. The addition
of a proprietary sports betting engine will give the Company the ability to offer a “one-stop” solution to the Company’s
U.S. retail casino operators, while at the same time preserving the flexibility to incorporate third party solutions when specified.
The Company expects that its technology platform and expansive library of proprietary and third-party gaming content will to add
additional casino gaming content and platform support for Coolbet’s B2C offering in Europe and Latin America.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
The
following table summarizes the consideration transferred:
Cash paid to Vincent Group shareholders
|
|
$
|
111,620
|
|
Value of restricted
ordinary shares issued to Vincent Group shareholders(1)
|
|
|
106,683
|
|
Value of replacement equity-based awards to holders of Vincent Group equity-based awards(2)
|
|
|
297
|
|
Total
|
|
$
|
218,600
|
|
|
(1)
|
The
share consideration represents 5,260,516 ordinary shares issued to Vincent Group shareholders multiplied by the Company’s
share price of $20.28 on the acquisition date. Each former Coolbet shareholder has agreed to a contractual lock-up of ninety
(90) days before these ordinary shares can be transferred or sold. For certain executive management personnel of Coolbet,
the lock-up period is 180 days.
|
|
(2)
|
In
accordance with applicable accounting guidance, the fair value of replacement equity-based awards attributable to pre-combination
service is recorded as part of the consideration transferred in the acquisition, while the fair value of replacement equity-based
awards attributable to post-combination service is recorded separately from the business combination and recognized as compensation
cost in the post-acquisition period over the remaining service period. The fair value of the replacement stock options was
estimated using the Black-Scholes valuation model utilizing various assumptions.
|
The
following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the acquisition:
Cash and cash equivalents
|
|
$
|
18,633
|
|
Accounts receivable
|
|
|
457
|
|
Other current assets
|
|
|
1,055
|
|
Property, plant and equipment
|
|
|
343
|
|
Operating lease right-of-use assets
|
|
|
416
|
|
Other noncurrent assets
|
|
|
73
|
|
Accounts payable
|
|
|
(883
|
)
|
Other current liabilities
|
|
|
(7,570
|
)
|
Noncurrent operating lease liabilities
|
|
|
(231
|
)
|
Total identifiable net assets
|
|
|
12,293
|
|
Goodwill
|
|
|
206,307
|
|
Total purchase price
|
|
$
|
218,600
|
|
The Company has
not finalized the purchase price allocation, which is pending further analysis of the net assets acquired, particularly in regard
to the valuation of the intangible assets. As a consequence, intangible assets have been subsumed into goodwill in this preliminary
purchase price allocation. Additionally, the Company is continuing to evaluate the tax impacts related to the acquisition. Accordingly,
the purchase price allocation shown above could change materially as the Company finalizes its assessment of the allocation and
the fair value of the net tangible and intangible assets acquired, some of which are dependent on the finalization of valuations
being performed by independent valuation specialists and further analysis by tax specialists. Additionally, the above cash
consideration is subject to adjustment for the final working capital adjustment.
GAN
Limited
Notes
to the Consolidated Financial Statements
(in
thousands, except share and per share amounts)
The
goodwill is primarily attributable to the expected incremental revenue and profit to be derived from the Company’s introduction
of Coolbet’s sports betting engine technology and intellectual technology to B2B customers in the United States.
The Company intends to offer the Coolbet sports betting engine and associated capability to existing and new customers alongside
its existing platform and Internet casino capability, as a complete turnkey solution or as an alternative sports betting engine
to those currently relied upon by customers. The Company accounted for the acquisition of Coolbet using the acquisition method.
The acquisition is treated as a stock purchase for accounting purposes. Goodwill is not amortized, but is reviewed for impairment
at least annually or if an event occurs or circumstances change that would more likely than not indicate the goodwill could
be impaired. Goodwill recognized in the acquisition is expected to be deductible for tax purposes.
The
operating results of Coolbet will be included in the Company’s consolidated financial statements beginning January 1, 2021.
The Company incurred $1,019 of acquisition-related costs, which were included in general and administrative expense for the year
ended December 31, 2020.
Share-Based
Compensation
On
February 26, 2021, the Board of Directors approved the issuance of options to purchase 1,155,110 ordinary shares with an exercise
price of $25.33 to executives and certain key employees. The options vest 25% after one year and then monthly over the next 36
months thereafter.
On
March 9, 2021, the Board of Directors approved the issuance
of 15,537 restricted stock awards to non-executive Directors. The restricted stock awards vest over one year
after the grant date with 25% vesting per quarter. The restricted stock awards were issued with
a fair value of $25.10 per share.
Legal
Proceedings
In
January 2021, the Company entered into a settlement agreement with respect to the wrongful termination claim made by a former
employee and director to the U.K. Employment Tribunal disclosed in Note 17 – Commitments and Contingencies. The settlement
agreement provides for a cash payment of $74 and issuance of 16,675 ordinary shares (market price of $20.28 per share at December
31, 2020) as compensation for unvested stock options that were canceled upon termination. The full amount of the settlement of
$412 was recorded at December 31, 2020.