Greetings. Welcome to the GAN Quarter Two 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Robert Shore, Vice President of Investor Relations & Capital Markets. You may begin..

Thanks, John. GAN’s second quarter 2021 earnings release was issued today after market and it’s posted on the company’s website at gan.com. With me today are Dermot Smurfit, President and CEO; and Karen Flores, CFO. Please note, we’ve provided a set of PowerPoint slides that will accompany our prepared remarks.

You may access these slides in the Investor Relations section of our website and we will start on Page 2 with our Safe Harbor disclosure.

We would like to remind you that, except for the actual statements made today, the information contained in this conference call, including any financial and related guidance to be provided, consist of forward-looking statements that involve risks, uncertainties and assumptions that are hard to predict.

Words and expressions reflecting optimism and satisfaction with current prospects, as well as statements in the future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward looking.

Forward-looking statements should not be interpreted as a guarantee of future performance or results, as such statements are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements.

Some important factors that could cause such differences are discussed in the Risk Factors section of GAN’s annual report filed on Form 10-K at March 31, 2021.

Forward-looking statements speak only as of the date the statements are made, the company assumes no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable securities laws.

During the call, there will be a discussion of some non-GAAP financial measures. A description of these non-GAAP financial measures is included in the press release issued this afternoon. A reconciliation of these non-GAAP measures to the most directly comparable U.S.

GAAP measures are included in the appendix of the investor presentation and press release issued this afternoon as well, both of which are available on the Investors tab of our website. With that, I’d like to turn the floor over to Dermot for opening remarks. Please go ahead, Dermot..

number one, we have now armed ourselves with proven land-based iGaming content that we are rolling out to new B2B clients we don't already have, as well as clients of our core platform, which will yield the continued expansion of our B2B iGaming take rate.

Number two, we are focused on our exciting B2B launch of GAN Sports in the coming months, remain highly confident this product will change American consumers expectations of any online or retail sports betting experience.

Number three, coolbet.com outside the U.S remains a highly successful and valuable indeed coveted asset to leverage in terms of cash flow contribution, trading and risk management capability, and of course, industry leading sports betting technology.

And number four, we are scaling right now to meet the demand from existing and new clients we can see emerging from an extremely active sales pipeline comprising new U.S market entrants from overseas domestic retail casinos here in the U.S looking to move online consequent regulation, and existing U.S B2C online operators with their own in-house tech, looking to lean on our battle tested platform in selected states as they themselves run short of engineering bandwidth.

Okay, let me repeat that. Existing B2C U.S online operators with enhanced tech looking to lean on our battle tested platform.

On that last point, given the recent wave of M&A in the space, our technology becoming demonstrably scarcer, and ultimately more valuable, or some of the bigger operators are looking to bring their tech platforms in-house, given the cost, technical complexity and regulatory expertise required, we don't see this as a realistic option for most casinos.

And foresee that some who tried will ultimately fail, as they have again and again throughout Europe 25 year industrial history, which must serve as a cautionary tale for all who underestimate the challenges here in the U.S entrust gambling markets, which remain the high watermark of online regulatory technical complexity anywhere in the world.

To wrap up, we have the right team, the right technology, and the right strategy to continue to grow revenues domestically in North America and abroad in Europe, and Latin America. So with that, I'll turn it over to my fellow Executive Director and Chief Financial Officer, Ms. Karen Flores. Karen, over to you..

Thanks, Dermot and good afternoon.

Our strong revenue performance in the second quarter reflects the continued broad based strength in online gaming and excellent ongoing execution by our teams, which resulted in accelerated growth for our B2C segment and continued elevated activity for our B2B segment, which this quarter delivered almost 90% of its revenue from recurring SaaS revenue.

My comments today will be on quarter-over-quarter comparisons for the second quarter, given the effect of the COVID acquisition on January 1 of this year. For reference, we've provided both sequential and comparative tables and our earnings release and 10-Q filed today. Starting with our consolidated financial results on Slide 11.

We again had impressive performance with a 24% increase in our second quarter revenues to $34.6 million in line with our preliminary results announced in early July.

As Dermot already noted, we are excited to state that the revenue this quarter was almost equal to our consolidated revenues in all of 2020, a $35.2 million before giving effect to the acquisition.

B2C segment revenue outperformed our expectations, increasing 68% to $24 million in the second quarter, derived from the contribution of Coolbet's on international sports betting and casino iGaming operations.

The results were primarily driven by stronger-than-expected performance in Latin America and Northern Europe, as the quarter benefited from strong performance from two major international soccer events. Importantly, we view the strength in Coolbet as sustainable.

In perspective, the Copa and Euro Cups accounted for less than 15% of turnover in the quarter. So while a clear positive contributor to the growth, there is broader underlying strength in the business.

B2B segment revenue of $10.6 million was down $3 million sequentially, or roughly flat excluding $3 million of patent licensing revenue recognized in the first quarter.

We are pleased with the elevated levels of online activity that we observed in the first quarter were sustained in the seasonally low second quarter, including for simulated gaming in Italy, which were both relatively unchanged from the prior quarter.

Operating expenses increased to 15% to $36.4 million, the largest drivers of which were increased personnel expenses related to investments in talent, technology and corporate infrastructure to meet the strong demand environment, as well as increased marketing spend in support of Coolbet user acquisition and retention.

Global headcount increased 15% during the second quarter to 591 worldwide. With revenue growth and margin expansion outpacing the growth in our cost structure, our operating margin improved to negative 5% versus negative 14% in the first quarter, and our net loss was reduced by 39% to $2.7 million.

Adjusted EBITDA increased 173% to profit of $4.6 million. The balance sheet remains strong with a cash balance of $52 million at quarter end, and we continue to remain debt free, granting us a clear path to focus on high growth initiatives, securing additional market share and delivering the best platform technology to the market.

Moving on to our key performance indicators on Slide 12. B2B growth operator revenue from our clients increased 3% to $221 million. Total U.S iGaming growth operator revenue increased 5% for which GAN's relative market share is 21%. Trends in iGaming have remained strong even as casinos have reopened across the U.S.

And GAN's position as the number one B2B supplier to this market remains equally strong with 59% supplier market share in the second quarter versus the next closest competitor, the supplier market share is approximately 10%.

As we look forward to the launches of Super RGS and GAN Sports, we see a meaningful opportunity to greatly expand our access to the larger addressable market, displace existing providers, grow our wallet share of the value chain and deliver an unmatched product to our clients.

Turning to B2C, key performance indicators remain at exceptional levels across the board with active customers at nearly 70% to 187,000. Congruent to the growth and active customers, we view marketing spend as a percentage of total revenue and cost per acquisition as critical measures of performance and profitability.

Our B2C segments scaled customer acquisition throughout the second quarter, while seeing significant improvements in these metrics. The total marketing spend ratio declined to just 12% of revenue and cost per acquisition fell 60% to an astounding $30 per new deposit in customer.

These enviable KPIs speak to the social engagement features driving viral and low cost customer acquisition as well as the geographic makeup of our customer base. There is a tremendous growth opportunity in Coolbet ahead of us as we focus on large and growing markets with industry tailwinds and the best-in-class award winning mobile sports offering.

We continue to execute against our long-term strategy. It's been just over a year and a half since I joined the GAN team, and in that time, we have accomplished an amazing amount financially and strategically.

I’m now even more optimistic about the growth path ahead for the company with our upcoming Super RGS and GAN Sports B2B product launches, and the secular B2C growth trends internationally. We continue to be the number one B2B enterprise platform in the U.S based on market share, and one of the fastest growing B2C iGaming companies in the world.

The GAN team continues to rise to the challenge of competing and competing well, in an incredibly dynamic market environment. We are reiterating guidance that we provided the market early July with our preliminary results. We expect revenue of $125 million to $135 million.

The growth in the second half of the year will be more weighted on the fourth quarter given new B2B customers coming online and seasonality in both B2B and B2C.

While we aren't providing adjusted EBITDA guidance, we are continuing to ramp our talent and technology in the near-term, with operating margins expected to progressively improve on an annualized basis.

As a reminder, we hope to see many of you at our Investor Event on October 4, during the first day of the Global Gaming Expo in Las Vegas, also known as G2E. We look forward to providing a deeper dive into Coolbet's unique capabilities and the long-term scalability of our B2B business as well as introduce other senior leaders here again.

More information on that will be forthcoming. I'll now turn it back over to Dermot to conclude our remarks.

Dermot?.

Thank you, Karen. Wrapping up, we delivered sequential growth in B2B U.S gross operating revenue. We demonstrated the excellence of our B2C international operations, and are investing to accommodate growth and demand for our B2B technology and services right here in the U.S.

These strong results will continue as we move through the balance of the year as we ramp through the key NFL sports betting season, launch into Canada and stand up additional clients such as Super Bowl in New Jersey and Colorado and Soaring Eagle in Michigan, with anticipated expansions into Connecticut iGaming and mobile sports betting in Arizona.

Continuing to execute on our stated strategy has booked down on a path to deliver a highly scalable and recurring business model which will maximize value for all of our stakeholders. That concludes our remarks. We will now open the line for questions..

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Chad Beynon with Macquarie. You may proceed with your question..

Hi, good afternoon. Thanks for taking my question. Nice results. Dermot, with respect to your implied guidance, Karen, you noted that you're assuming more revenues in the fourth quarter. But I think you guys also noted that July has started off pretty strong.

Could you just kind of help us think about what's going into your assumptions for iGaming? There's some debate out there in terms of if it will hold or if some of the stimulus checks were off. And the fact that people are getting back out of their homes, just trying to get a better sense of how that went into your thinking.

And then also, can you help us think about the normal Coolbet seasonality? Thank you..

Yes. Thank you, Chad. So relative to the last comment, I think the information for both New Jersey and Michigan was just released into the market. And for the month of July, we're seeing very positive results in terms of, again, those continued elevated levels of online activity. So we were very happy to see that.

And of course, just understanding within the B2B business, the way that I would characterize it is that we feel like we've hit our stride for the rest of the year. I think it's extremely positive that the revenue results for the second quarter are primarily that recurring SaaS revenue.

So the revenue for the remainder of the year is highly predictable low risk. Most of the major launches that we had on the B2B side of the business occurred in the first half of the year with Michigan and with all of the multi state launches associated with Churchill.

So even though we have over $10 million of revenue coming in this year, just from all of the nuances combined in terms of the contribution in the second half of the year, it really is low single-digit millions.

And so from a B2B perspective, we're really sort of in that strike for the remainder of the year, all things held equal relative to the market. But again, I think we're seeing a lot of that favorable activity continue with the July results. On the B2C side of the business, I would say the same thing, obviously, tremendous, tremendous success.

With a soccer tournament that started in the month of June, there's always an inherent swing factor there in the sports business, specifically around the hold. And so there could be some volatility there. We've taken that into consideration in the guidance. And it's again, just the sheer execution ability of that team is what is giving us confidence.

And I would say there's a little more volatility, of course, it's by nature, on the B2C side of the business. But we are -- we've taken that into consideration and feel very comfortable with the revenue range right now..

Okay. .

It's worth adding those well. Anders Karlsen told me not that long ago, don't forget to tell everybody that there are more international sporting events taking place in this calendar year than in any other year in living memory. So seasonality -- what seasonality, you're bouncing from one major sporting event to the next to the next..

That's great. Thanks. And related to that, I know, for U.S. Sports betting, a lot of the companies just focus solely here. I've talked about a really high customer acquisition period in the fourth quarter, and they're going to be spending a lot in marketing, given Coolbet's reach is a little bit different than some of the U.S names here.

On Slide 12, when you talked about marketing spend around 12%, I think last year was 14%.

Should we assume that at any period, it gets back into these heavy customer acquisition period quarters like we're seeing from some of the others, or do you think the goal for that business is to keep that marketing spend as low as possible, at least, in the near-term and it won't go through any major quarters where it's just all about acquiring customers at whatever cost? Thank you..

Yes. You've already hit the nail on the head there, Chad. The Coolbet team are outperforming industry metrics that the international industry certainly pays a lot of attention to. They are doing things differently with a vastly superior product, which results in people or customers recommending the product to others.

We think that's going to continue for the foreseeable future. And accordingly, existing cost of acquisition and percentage of revenues and marketing will be well within the range that's already been established. There may will be an exception next year, as Brazil begins to look like launching.

There may well be some investment in a quarter related to preparations of launch in Brazil, which is such a huge opportunity that we take extremely seriously and the team is progressing extremely well in terms of preparations. But that's very much at the earliest Summer fall of next year..

Great. Thank you very much, guys. Nice quarter..

Our next question comes from David Katz with Jefferies. You may proceed with your question..

Hi. This is Cassandra Lee on behalf of David. Thank you for taking my questions. I just want to ask about the strategy in Canada.

How do you consider the B2C opportunity versus B2B opportunity there?.

Yep. The – so the B2C business we have in Canada is relatively de minimis. It's a pretty small percentage of overall revenues, low single-digit across the enterprise. So it will transit into the regulated market environment, but it's not a marketplace that we will be investing in proactively.

It's really about keeping what we have as opposed to aggressively investing in that market. Equally, we have a highly exciting B2B opportunity in Canada for a battle tested U.S platform and a lot of the things that have been developed specifically for the U.S.

from a regulatory technical framework standpoint and compliance standpoint are immediately relevant and immediately deployable in Canada, which makes us a very attractive technology system to choose. If you're eyeing up the provincial Canadian opportunity, starting with Ontario on the 1st of December..

Got it. Thank you. And can you provide a bit more colors on the outlook around NFL seasons? We know that many states are looking to go live around that time. And there have been some glitches or blackout during the Super Bowl weekend this year due to surge of volume.

So do you anticipate any challenges in the upcoming months to handle the elevated volume?.

I think we're the only guys out there who didn't have any problems in the last three Super Bowls that took place here in America in the regulated market environment. So I’ll put with the usual industrial health warnings.

But I would say, our CIO and the entire technology team is extremely confident that we will not be experiencing any material technical issues in our U.S. platform delivered to our clients. That's a brief statement to make. We all know the tsunami of demand that's coming down of people opening accounts, depositing to play in the online casino.

All while things ramp up to that all important Super Bowl kickoff that we went through this year, Super Bowl flawlessly, very, very happy with a massive step up and activity and the platform year-on-year. And we're looking forward to delivering the same flawless performance in Super Bowl early next year for all of our B2B platform clients.

So no concerns at this point. We've learned a huge amount of the last Super Bowl. And I really think that that points towards the scarcity value of Dan's technology platform and the sheer confidence the clients going to have in choosing GAN as your platform because we have driven through successes Super Bowls, again, flawlessly.

So great question, hopefully a reasonable answer..

Got it. Thank you very much..

Our next question comes from David Bain with B. Riley. You may proceed with your question..

Great. Thank you and nice performance on Q2 and very interesting M&A comments in your remarks. We concur with those, by the way.

In discussing so far with existing customers and prospective customers, have the exclusive content that the offerings that you've now talked in, are going to talk in, have they shown to be typically beneficial to the larger business even anecdotally, or does it need to lie first before we see something like that, and then just any kind of update on launch timing for both Ainsworth and incredible would be great..

Yes, no problem. I'll take the second last, if you don't mind. So Ainsworth, the technical integration is now done. We're talking about launching Ainsworth in either the very end of this quarter, early next quarter in the additional states. So Ainsworth content is only live in New Jersey today.

And all of the existing integrations Ainsworth has done for the RGS will sunset within the next 12 months. So we will, if you like take over the reins of the existing single market, their presence in operationally present in. So we'll expand into Michigan, West Virginia and Connecticut reasonably quickly as the next few months relapse.

Similar story for incredible technologies, maybe 2 to 3 months incremental to Ainsworth. And then when you ask about has it improved our market position as a platform. I would say anecdotally, yes.

However, it's really the response that we've received to the Super RGS proposition, enhanced with things worth anecdotal technologies has been overflowing and positive.

So hence our statements in the prepared remarks that we believe the vast majority possibly with one or two exceptions for the vast majority of the B2C operators today and in the future here in the U.S will be taking the Super RGS as a service in order to get access to what I broadly describe as must have iGaming content for America.

And that's a statement that's been validated by many of our existing B2B clients of our platform..

Okay, great. Perfect. And my second question on the Kiosk.

The Kiosk installation, the operator, are there crossover opportunities with the online platform as an additional strategic opportunity there? Or these just the standalone picture relative to [indiscernible] U.S Digital [indiscernible] is there like, I think you spoke to expanded wagering options the thing maybe you can give us an idea of what makes your offering different from all the others.

That'd be fantastic..

Yes, great question, David.

So, historically, up until this point, the retail sports opportunity in retail only states where they've only passed legislation to enable retail sports betting to take place inside casinos, that's been a bit of a standalone part of the industry and that has been served by really one or two major providers of standalone sports betting tech broadly describable as plugging in a microwave.

So we're actually bringing in a very different and superior technology system where people can do retail sports betting and mobile on premise, so really, when we deploy the kiosks, or actually deploying is the ability for people to attend a casino, place a bet on the kiosk if they wish, and equally collect the mobile phone and place that save that via the mobile phone.

So it is very much leveraging our online capability to infiltrate a very lucrative corner of the industry..

Okay, that's awesome. Thank you very much..

Our next question comes from Greg Gibas with Northland Securities. You may proceed with your questions..

Any Germany, Karen? For taking the questions and congrats on the Q2 results.

Wanted to clarify the -- how much of a sports betting margin benefit you got in the quarter, and maybe where you're forecasting that margin going forward?.

Yes, we did have a higher than normal margin on sports for the quarter. It was close to 10%. And we typically would expect in the way that we forecast it for the balance of the year is closer to 8%. One of the things that Coolbet does very well, of course, is compete on price. And so it was a little bit of a higher benefit.

We did mention in our prepared remarks that the total amount of revenue from the quarter relative to the tournament was 15% of total corporate revenue. So you can kind of do the math from there in terms of the incremental benefit.

But just overall, it's a combined effect essentially, it's not only the soccer tournament, but just the Latin America growth story that we are seeing, which is going to be sustained. Let's call that moving forward..

Okay, great.

And, I guess I apologize, we already mentioned this, but you kind of expect that B2C strength on the international side to kind of carry over into Q3, I mean, maybe with some international events like the Olympics, over the primarily a function of those two large events that you mentioned in Q2?.

Yes. I think I've touched on it, in an answer to an earlier question, Greg, that yes, it's per the international sports calendar being absolutely jam packed with events this year, in part because of delays from COVID, impacted last year and pushing the events into this year.

But you can't really move without coming across in international sports event. You've got the Olympics, you've got the soccer seasons in Europe, already recommenced. It's a very exciting time to be in this particular market, with this particular team and product offering..

Great. Thanks for clarifying. Appreciate it..

[Operator Instructions] Our next question comes from Ryan Sigdahl with Craig-Hallum Capital. You may proceed with your question..

Good afternoon, Dermot and Karen. Congrats on the strong B2C results this quarter..

Thank you..

Curious you announced on Coolbet, you announced the customer, an unnamed customer back in January for launch in Virginia.

Curious if you can an update on who that customer is and then any progress there with that customer and then any other cross-sell?.

Yes. The curse of B2B remains in place. We cannot disclose the identity of our B2B client until they are comfortable of doing so and the license is being in place. They were not successful in getting the first wave of Virginia licenses that we pushed out to the second wave.

As far as I understand it, it will be a launch at some point in the first half of next year. But of course, we look forward to updating everybody hopefully by Investor Day on the fourth of October, we'll be in a position to be a little bit more transparent. But again, such as the nature of the B2B vendor side of the industry.

So please accept my apologies on behalf of the entire industry..

And then, curious, you announced a lot of nice wins in the quarter. I didn't see when in there, I know they've launched a couple of new states in the quarter any update with progress with when outside of Michigan..

We are in continuing conversations with all of our clients almost simultaneously. So we're very excited to talk about Arizona and Maryland and Canada and Connecticut, of which three of those four are launching this side of the year end.

But beyond that, I'm really going to have to re-deflect your question over to the Wynn Resorts management team as and when you can..

Great. That's impressed. Thanks..

At this time, we have reached the end of the question-and-answer session, and I will now turn the call over to Dermot for closing remarks..

Thank you for joining today for our second quarter earnings. We now have the complete product offering required to further deepen our stable of long-term B2B clients to include the vast majority of the B2C operators active here in the U.S. We will also deploy rapidly for platform clients into additional states as they regulate.

I believe we're well-positioned to increase our tick rate on gross operating revenues by leveraging our Super RGS and exclusive iGaming content.

We have firm visibility over our domestic and international growth and solid control over our business going forwards, which is now equipped with both a strong balance sheet and the burstable bandwidth and engineering resources required to continue delivering for all of our clients all of the time.

Accordingly, we look forward to continuing with a strong execution of the current third quarter as we progress into the seasonally strongest period in Americas growing online gambling industry.

We look forward to hopefully seeing many of you in person on October the fourth during our Investor Day in Las Vegas and look forward to exciting developments in the interim. Stay safe wherever you are..

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation..