Greetings, and welcome to the GAN’s Third Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Robert Shore, Vice President of Investor Relations. Thank you, sir. You may begin..

Thanks, Maria, and good afternoon, everyone. GAN's third quarter 2022 earnings release was issued today after the market closed and is posted on the company's website at gan.com. With me today are Dermot Smurfit, President and CEO; and Karen Flores, CFO.

Please note that we have provided a set of PowerPoint slides that will accompany our prepared remarks. You may access these slides on the Investor Relations section of our website.

I'd like to direct you the slide number one of the presentation we have posted on the IR portion of our website that talks to our forward-looking statement and legal disclosures.

Along these lines, I'd like to remind our audience today that we may make forward-looking statements on the call which are protected in our Safe Harbor and Federal Securities laws, and in each case are qualified by the forward-looking disclaimers contained in our earnings release.

The comparisons we make on the call today are late -- corresponding period of last year, unless otherwise noted.

We also provide growth rates of constant currency when available as a framework for existing how our underlying business before, excluding the effect of foreign currency fluctuations, where growth rate to the same in constant currency will refer to growth rate only.

Please also note that we discuss all of our expense figures they will exclude stock-based compensation and related payroll taxes as well as depreciation, amortization and non-recurring charges. Please refer to our filings with the SEC understand how to calculate any of the metrics discussed in today's call.

With that, I'll turn the call over to our CEO, Dermot Smurfit. Dermot, go ahead please..

Thank you, Bobby, and good afternoon, everyone. Please join me on the second slide of the presentation to discuss our third quarter 2022 financial performance and operating segment results. I'll start with our consolidated quarterly results.

We generated revenue of $32.1 million, which was roughly flat, compared to the prior year and up 11% on a constant currency basis. As a quick note, foreign currency was a headwind for revenue, but positively impacted our operating expenses this quarter.

Adjusted EBITDA was $2.1 million, delivering on our commitments for a positive number every quarter this year.

We ended the quarter with approximately $42 million in cash, which was $7 million lower from the prior quarter and heavily impacted by both the effect of foreign currencies, as well as timing of capital expenditures, including required investments in gaming licenses for soon to be launched regulated territories of Nevada and Mexico.

However, we are making important progress towards achieving sustained positive free cash flow with operating cash flow being positive for the first time since the second quarter of 2021. Additionally, Q4 is seasonally the strongest quarter and combined with our cost reduction initiatives that are yielding positive results.

We anticipate positive operating cash flow in the fourth quarter as well. Lastly, we anticipate Q4 will be the lowest quarter of the year for capital expenditures with our investments in content, gaming licenses, and PP&E largely complete for the year.

Turning to fourth quarter and full-year performance, FX headwinds on the uncertain impact of the upcoming World Cup on our B2C business are creating a wide range of potential outcomes, despite a positive start in October when we experienced an all-time monthly record in sports betting handle on a constant currency basis.

As a result, we will not be providing revenue or adjusted EBITDA guidance for the fourth quarter. I'm not at all pleased with not delivering on what we had previously provided to the street this year.

Not at all, I take ownership of this as CEO and we'll be further adjusting our cost structure and making operational improvements to deliver on expectations and ensure a healthy balance sheet. Looking now at our two segments, I'll begin with B2C. Revenue in the segment was $19.4 million versus $21.1 million in the prior year.

The underlying health of the business remains robust with active customers increasing 31% and turnover with the amount wagered increasing 16% from the prior year period.

The mix shift of customers is skewing towards Latin America, where average wages tend to be lower than in European countries, but rapid returns on marketing investments and user acquisition remain consistent. The results relative to the prior year were impacted by a couple of main items.

Firstly, the international business of coolbet.com saw a negative foreign currency impact to revenue of $3.3 million, because of the strengthening U.S. dollar. To note, on a constant currency basis, year-over-year revenue is growth of 8% versus the actual decline of 8%.

Secondly, continued marketing challenges emerged in certain European markets and increased competition in certain Latin American markets. On the B2B side, we generated $12.7 million in revenue, which was a 14% increase from $11.2 million in the prior year. The revenue increase was driven by a 29% increase in gross operator revenue.

Our take rate on that gross operator revenue, however, was down 60 basis points to 4.6%, due to the mix shift of revenue during the quarter. Over time, we expect our take rate all the digital gaming value chain to increase driven by our expanded B2B offerings, but this metric intend to be volatile from quarter-to-quarter depending on revenue mix.

Slipping now please onto the next slide, slide number three. On the positive side, we continue to make strides on key strategic initiatives in the quarter and there were strong underlying growth trends in both of our business segments.

Notably, we ushered into operation a new B2B product line for the company, GAN Sports, completing our existing B2B product and service offerings of a leading platform or PAM, iGaming content aggregation or Super RGS, simulated gaming for deployment prior to like gaming regulation and of course our retail and online sports gambling solutions.

We are a proven one stop shop for all your B2B needs here in the U.S., whether you need just the PAM or the complete enterprise solution ranging from PAM to our gaming, to retail and online sports driven by our managed trading services team, we now believe we have all pieces of the Jigsaw Puzzle here in the U.S.

Looking ahead, there's a lot of excitement for the World Cup, which kicks off this Sunday with Quikr versus Ecuador.

While the tournament will be a huge event for the industry, similar to commentary this earnings season from our international B2C peers, pinpointing the revenue impact is nearly impossible given the multitude of factors, including what teams advanced to later round.

For some context, looking back the second quarter 2021 that featured the Cooper and European Championships, our new depositing customers more than doubled over the events versus the prior months, which closes up us to be optimistic for a similar operator outcome in the current quarter.

While I'm generally pleased with the underlying strong trends in the business and the progression of GAN Sports, the timing of our revenue acceleration on the B2B side has been delayed by the timing of state regulatory approvals and state by state legislation, particularly on iGaming. We now possess gaming licenses in 19 U.S.

States, as well as Ontario, Canada. As noted previously, these regulatory relationships and privileged licenses represent very real assets both today and in the future, as well as create a significant barrier to entry for competition.

While we can't control these dynamics in the interim, we can improve our cash generation as we wait new states coming online. And as an organization, we absolutely must do a better job of continuing to be more profitable and cash generative, while staying nimble to deliver for our clients.

This will be achieved by laser focus on all of our operating expense line items heading into next year. There's also an opportunity to reallocate our marketing spend on B2C to only the highest return regions along with other measures to drive profitability. To assist in this task and before moving on, I'll take the opportunity to welcome Mr.

Eric Green to our Board of Directors. I know some on this call may in fact know Eric. Eric’s expertise in the capital markets and the U.S. gaming space will be invaluable as we execute our strategy of becoming the premier B2B technology provider here in the U.S. and he has important independent leadership to our Board.

Our Board of Directors will continue to evaluate its composition and structure to ensure we have the right leadership and expertise to support our growth plan and drive shareholder value. Moving now on to the next slide, slide number four.

And so we delivered new content, we launched new clients and recently debuted our new Coolbet sportsbook app in the Ontario market. Silverback Studios, which we acquired last December, now has five live slot titles online with an additional five more slot titles expected by the end of the first quarter.

The initial performance metrics are highly encouraging and each game has outperformed its subsequent release.

In December, we will launch Tiki Bonanza, which features a unique take and lock reels that allow players not only to lock any of these five reels after any spin, but also to change their stakes before they spin again, without losing their locks.

The Silverback team is very excited to debut this title with an expectation that this will be the strongest title release to-date. We entered two new markets in the quarter with the launch of our platform at Oaklawn Casino in Arkansas and the debut of course of our retail games sports in Mississippi with the Island View Casino and Resort.

While switching on 20 sports betting kiosk from Gulf Coast to Mississippi would be material near-term revenue driver, in my view, this actually matters more than any B2B product and service launch in GAN's history. We created a leading sports betting product that we expect to go on a considerable success here in the U.S.

While there's simply too many GANgsters or GAN employees to name across the globe, I'd like to personally thank everyone directly involved for their efforts of getting GAN Sports live and into the market. GAN Sports received great feedback at Global Gaming Expo last month in Las Vegas.

The product is truly differentiated given the ease of use, the end user personalization and the operator customization ranging from the user interface to hybrid creating models and we expect to announce new plant partners when contracts are formalized.

Moving North of the border, the Coolbet team just launched a native [indiscernible] in the Ontario market. It's too early to tell the impact given limited data, but it does open new marketing channels to that line of business.

That being said, Coolbet’s 20-year history and also setting them risk management in the country's national sport, Ice Hockey, bodes well for the potential success in that market. Wrapping up now on slide five.

I'm looking near-term, it will be an exciting fourth quarter with the FIFA World Cup, we'll be watching day-by-day to see new customer sign ups, wagering volumes and other key metrics for our B2C business. As we head into 2023, we'll be entering two new B2B markets with Red Rock Resorts providing our sports platform in the Las Vegas local market.

And in addition, the Coolbet B2C brand will go live in Mexico. However, what's critical is delivering revenue growth and positive adjusted EBITDA and free cash flow to drive a healthy business. We will be nicely focused on prudent spending and cost cutting where appropriate to drive bottom line performance as we await acceleration in our revenues.

Let me just take a small step back for a moment and speak to the State of the Union. Currently, iGaming operates in just six U.S. states with really the three key larger states of New Jersey, Pennsylvania, Michigan driving the majority of the $5.1 billion in estimated revenue in 2022 from iGaming.

Retail sportsbooks are permitted in 32 states, with online sportsbooks currently allowed in 22 states, which combined or expected to generate $7.1 billion in 2022. We really are still in the earliest days of this process and the massive overall opportunity for commercial and tribal gaming operators.

This is what's really exciting to be day-in and day-out for what GAN can accomplish for its clients. I truly believe GAN is uniquely positioned to provide a range of clients with a full suite of enterprise solutions that gets them up, running and winning.

From this perspective, there is really no true competitor at GAN that can deliver this type of comprehensive offering here in the U.S. And so while the timing of the opportunity is challenging to pinpoint, it remains as real and tangible as ever. I remain confident that GAN will be a major beneficiary of this opportunity.

And with that, I'll hand over to our CFO, Karen Flores.

Karen?.

Thank you, Dermot, and good afternoon, everyone. Starting with our consolidated financial results on slide seven, Q3 revenue of $32.1 million was flat compared to the prior year. B2B revenue of $12.7 million increased 14% and B2C revenue of $19.4 million declined 8%.

Adjusting for the effect of foreign currency exchange, revenue increased 11% in constant currency, normalizing a $3.6 million year-over-year impact, primarily realized in our B2C segment. Excluding this impact, revenue increased 16% and 8% for B2B and B2C respectively.

Adjusted EBITDA was $2.1 million versus a loss of $900,000 in the prior year period. The FX headwind on revenue was a tailwind or benefit to our operating expenses this quarter as nearly 90% of our approximate 700 employees global workforce are now based internationally and we observed larger quarter-over-quarter declines in both the euro and pound.

I'll dive a bit deeper into our OpEx improvements on the next slide. But first, as Dermot mentioned, given the uncertainty on the range of World Cup outcomes and the impact of FX on our business, we will not be providing guidance for the fourth quarter of 2022.

That said, holding B2C's fourth margin within our normalized range, we do expect the fourth quarter to be the seasonally strongest of the year and to continue to deliver on our commitment to generate positive adjusted EBITDA each quarter this year. Let's dig into this on the next slide.

Our continued cost discipline coupled with FX tailwinds have demonstrably impacted our profit margins and we are proud that the trajectory has shifted from an adjusted EBITDA loss to a profit year-over-year. The chart on the left measures our cost structure as a percent of revenue year-over-year.

You will see marketing spend increased 410 basis points to 14.2% of revenue. This is mainly attributable to supporting the organic growth of our B2C business where the marketing spend ratio this quarter of 23% is still well below the peer group and to a lesser extent, this also includes timing of industry trade shows and related spend such as G2E.

This is a dial that we have full control over and we are actively evaluating capital allocations to ensure spend is focused on the highest ROI regions, channels and opportunities for 2023.

Excluding marketing spend, every other operating expense category being our cost of sales, personnel, or other OpEx declined over 400 basis points each versus the prior year period, primarily on cost controls and FX benefits.

In total, our non-cost of sales expense structure declined 5 percentage points from 68% to 64% of revenue, and we see this as great progress towards the commitments we've made to gain scale and achieve profitability.

Turning to the chart on the right hand side, this illustrates the growth we have been delivering in adjusted EBITDA since the third quarter of last year. Quarter-to-date, we improved adjusted EBITDA by reversing a loss.

Year-to-date, we've doubled the adjusted EBITDA profit versus prior year and full-year we expect to maintain this trajectory again reversing the loss we incurred in 2021. The path we are on ultimately will translate into sustained positive free cash flow. Moving on to the next slide, slide number nine.

I'll take a moment to highlight some key metrics this quarter and our path to sustain positive free cash flow. First, we have a cash generative CapEx light growing B2C business. As a proof point, the team driving our entry into the Mexico market is under 10 employees.

And as we've discussed before, the marketing playbook for our B2C operation is to enter the market through a focused social media and digital campaign, which allows us to scale the business over time rather than invest in a big flash launch. And importantly, as a pure play B2B player in the early stage U.S.

digital gaming market, we do not spend marketing dollars, but rather strictly take a recurring cut of the value chain. Second, there have been strides made with continued room for refinement of our corporate cost base, which is essentially fixed in nature.

Items such as corporate insurance and bringing professional cost in-house for tangible opportunities for near-term savings without impacting our growth objectives. In fact, we've already capitalized on some of these opportunities and we'll see some benefit of cost reductions starting in this quarter.

Third, I'll touch on our capital expenditures and cash. In Q3, we view our cash burn as burdened by both the timing of unfavorable FX and CapEx, which required investments in PP&E and gaming licenses for new upcoming markets.

Looking forward, our fourth quarter CapEx should be the lowest of the year with the de minimis cost for gaming licenses, sequentially lower PP&E and invest and exclusive gaming content largely complete for the year.

To reinforce what Dermot said earlier, Q4 is seasonally the strongest quarter and combined with our cost reduction initiatives that are yielding positive results, we anticipate positive operating cash flow in Q4.

We are committed to ensuring a healthy balance sheet and runway to sustain positive free cash flow and we'll continue to adjust the cost structure to ensure these goals are achieved.

To wrap up my remarks on the next slide and as Dermot noted, while there were a lot of positives this quarter, we haven't delivered on all our current commitments to our shareholders.

And we must and will be better by taking actions to further focus our business making as much progress as possible -- as quickly as possible in the areas of our business that we are able to control. We did deliver growth in our B2B segment, our B2C segment on a constant currency basis and $2 million of adjusted EBITDA profit.

There is a lot to look forward to in the quarters ahead with our entry into the $600 million Mexico online gaming market, the launch of GANSports in the Las Vegas locals market with Red Rock and the World Cup kicking off this weekend.

These revenue opportunities should translate into a higher conversion of profit and ultimately free cash flow as we continue to refine our cost structure and scale. With that, I'll now turn the line back over to the operator to open it up for questions. Maria, back to you..

We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from David Katz with Jefferies. Please proceed with your question..

Hi. This is Cassandra Lee on behalf of David. Thank you for taking my question. I hear about a year ago, you laid out a longer term target of $500 million to $600 million revenue by 2026. And I understand a lot can change within one year, especially in this space.

I just want to get your updated thoughts on, kind of, mid to longer term aspirations for this company?.

Yes. Thank you, Cassandra. First of all, it's important to say that on our first quarter earnings call, we did note that the 2023 target was operational and contingent on a number of things happening, which include timing around the launch of GANSports and also additional states regulating.

But with that said, we're currently evaluating that and are likely to provide 2023 guidance during our fourth quarter conference call..

Great. But how are we thinking about kind of more longer term to, like, 2026? And also California -- the recently rejected the propositions on sports betting.

How are you thinking about next cycle and what kind of opportunities there maybe in States like California and Florida?.

Yes. Thanks, Cassandra. I mean, California was disappointing for many, but we looked at it as two propositions that effectively split the boat. So it's, of course, possible that we'll see perhaps any one proposition come in 2023, which I think would be a relief to many stakeholders and listeners on this call.

In the meantime, there's plenty of opportunity for GANSports in both retail and online.

We've made great progress year-to-date and we're firm believers 2026 revenue targets based on both the ramp up and organic growth coming out of B2C in various different international markets, particularly Latin America, but crucially for our core value proposition, which is B2B here in the U.S.

we are seeing very, very high levels of demand for the GANSports capability and we look forward to making additional new client announcement as and when contracts are finalized..

Great. Thank you for taking my question..

Thank you..

Our next question comes from Chad Beynon with Macquarie. Please proceed with your question..

Hi, good afternoon. Thanks for taking my question. I wanted to ask about the B2C growth rates. I believe you said 8% same-store FX adjusted growth rate in the third quarter. I believe we had thought about this being certainly a double-digit grower. I know the gross margin was a little bit light, but I guess I'm kind of focusing on the handle.

As we look at the markets where you operate, kind of, you know, Norway, Finland, Sweden and then kind of what you're doing in Latin America.

Can you talk about, you know, what the growth rates are looking at broadly? Are you seeing the growth rates in Latin America that you originally sought out to achieve? And what's going on in some of the core markets? Is that what's kind of bringing down the B2C market on the overall financials? Thanks..

Yes, Chad thanks for that. Q3 of 2021, in fact, in Latin America and certain of our key markets theer, we had a greater than anticipated tailwind from COVID and COVID lockdowns, particularly of gaming and retail gaming establishments. So that was one factor that impacted year-over-year, effectively Q3 ’21 with most of that quarter.

We had a tailwind that was unexpectedly strong. But generally, I think you should think teen percentage growth year-over-year would be a natural way of thinking about the B2C business and the growth prospects going forward.

Karen, any additional color?.

Yes. I mean, we haven't had another major customer acquisition opportunity really since the Copa America in the year of Q2 of last year. So again, we're looking forward to the World Cup. We think it's going to be pretty major opportunity, at least from a customer acquisition and underlying KPI perspective.

And then throughout 2023, we'll have opportunities to reactivate all of those customers that we've acquired during the tournament. So we're excited for what is to come in the fourth quarter..

Okay. Thank you, both. And then on the capital allocation, good to hear that you're reiterating the Q4 positive cash flow from operations.

On the share repurchase front, I know that there was a press release early in the quarter, how much did you acquire during the quarter? Were you on blackout during any of that period? And how should we expect you to end up spending the remainder of what's out there on the share repo? Thanks..

Sure. We did have purchases that occurred in Q2, we did not have any purchases in the third quarter. And we are just laser focus right now on achieving cash flow, a sustained cash flow positive runway. So at this point, we're not actively discussing additional purchases, but of course we'll be opportunistic as we look at 2023 and capital needs..

Okay.

So you weren't on blackout for any of the third quarter that was internal decision?.

Correct..

Okay. Okay. Thank you very much. Appreciate it..

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

Good afternoon, guys.

I want to start with guidance or I guess withdrawn guidance, I get it with the expected volatility, but I'm curious what changed relative to your expectations for World Cup today versus three months ago, when you're comfortable giving that guidance? And then I guess just as I think about internal assumptions and standpoint, is there anything in the previous range that wouldn't be a good guidepost for us to think about as we think about Q4, again assuming and knowing that greater volatility?.

Yes. The first thing I would say Ryan is that it's not just the range of outcomes for the World Cup. Of course, we've also seen FX movements. And that has continued to degrade with the strengthening of the dollar.

We saw that throughout the third quarter, so those are the things that we're also weighing and really we're looking at it more just in terms of the confidence bound. So because of the range of outcomes both from an FX and World Cup standpoint as we've been talking about constant currency results, et cetera.

It really is -- if you just do the math to get to the low end of the previous guidance of $37.9 million for fourth quarter revenue. So we're just looking at again the potential impact of FX, outcome of the World Cup and that is the main reason that we're withdrawing the guidance..

I think, Ryan, there's another aspect which is interesting, which is you have a very, very capable tenured and experienced leadership group in the B2C division. And it's as a private company, transition to being a public company, if they develop their awareness of the level of certainty required in order to make guidance calls on major sports events.

And I think this leadership team in the B2C division has to be commended for being grown ups about the World Cup and saying, you know what, there isn't a World Cup that has never been good for bookies, not just the reality history, but you just don't know with certainty of the level required to maintain the revenue guidance for the fourth quarter.

So, again, I'll commend them for being grown ups and being very considered in the way that they've enabled us to make these statements today..

Then on just my second follow-up here. Can you provide an update on the relationship with FanDuel for the platform and PAM given you are the exclusive provider of their gaming -- casino gaming operations ending in January 2023, but acknowledging again that contract does extend through 2025 with various elements.

So curious kind of how the negotiation is going with that exclusivity ending here in January?.

Right, Ryan, you would be surprised that we'll simply say we'll update the market as when we have something to update the market with. I mean, for now, we don't see any operational change in the relationship as you go through the January date that you called out.

So we're very comfortable with the status quo and we're very happy with nature of the expanded relationship into Ontario north of the border and of course the very significant U.S. online casino, which we are operating for them and with them in great partnership..

Thanks, Dermot. A - Dermot Smurfit Thank you..

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Dermot Smurfit for closing comments..

All right. Thank you everyone for joining us today and of course your interest in our company. There are a lot of upcoming things to be excited about in our business and the mid to longer term massive opportunity for GAN to monetize our enterprise technology solutions for regulated iGaming and sports gambling here in the U. S.

an opportunity which remains in its infancy. In the interim, we will continue to work to operate our business as efficiently as possible, identify opportunities to maximize shareholder value and ultimately navigate our enterprise through this challenging macro environment.

On this basis, we very much look forward to updating you all early in the New Year. Thank you again..

This concludes today's conference. Thank you for your participation. You may now disconnect your lines..