The fourth quarter conference call from GAN may have created more questions than answers after announcing a steep net loss and a strategic review.
It was clear GAN was not getting everything possible out of its operations when it elected to shut down its Coolbet B2B sportsbook in Ontario after just one year. The company also is moving away from its iGaming aggregation platform, SuperRGS, and using those funds elsewhere, CEO Dermot Smurfit said in Thursday’s release.
“… it has become apparent to us that the capital requirements to gain market share for initiatives such as SuperRGS as well as in certain competitive markets for sports betting like Ontario, Canada do not provide a path toward achieving an acceptable ROI in a reasonable period of time. As such, we have elected to allocate capital away from these endeavors and toward more appropriate growth strategies.”
GAN’s stock closed before Thursday afternoon’s call at $1.70, but fell to $1.48 by Friday’s open. The stock continued its downward trend Monday after opening at $1.26, down from Friday’s closing price of $1.29.
Strategic review in place
GAN hired B. Riley Securities to oversee a strategic review process. The financial advisor will look at multiple strategic alternatives that would maximize shareholder value.
The review process left GAN unable to provide guidance for the full year, instead offering expected revenue of $37 million to $39 million for the quarter.
Smurfit said the company should be in a good position to provide guidance for the full year “hopefully in the very near future” as the review winds up.
Could GAN violate financial covenants?
GAN recorded a $137 million non-cash impairment charge during the fourth quarter. That came from changes to both the company’s 2023 budget and its long-range plan since GAN expects “material reductions” in cash flows from its B2B segment, interim CFO Brian Chang said.
With those changes comes the possibility of potentially violating a financial covenant on a term loan. That could lead the lender to accelerate that debt, leaving the company with insufficient cash flows to support the business for 12 months.
Negotiations are continuing with the lender, Chang said. GAN had $30 million in principal debt at the end of 2022.
Where’s the 10-K?
Chang told GAN investors to reference the company’s annual filing for additional details:
GAN plans to address its liquidity needs by taking steps to improve its operations and cash position, including identifying access to future capital, continued growth from the company’s consolidated operations, cost savings initiatives implemented during the past year and the strategic review process. I’d encourage investors on the call to refer to our Annual 10-K filing for additional details when filed.
The company announced Monday afternoon the 10-K would be late, with it likely filed by April 15. The delay stems from GAN’s audit committee needing more time to review the annual report because of two issues that happened right before the March 31 filing deadline:
- On March 29, GAN amended its content licensing agreement with Ainsworth. The new deal reduced the contract term to through March 2024 and reduced the fixed fees GAN had to pay by $15 million in exchange for 1.25 million GAN shares.
- On March 30, GAN signed a master gaming services agreement with Red Rock Resorts to provide self-service kiosks and mobile betting in Nevada. The agreement includes a guaranteed payment from GAN if there is a change of control in the company.
GAN to focus on righting ship this year
The company will focus on a few areas that Smurfit called “unresolved challenges” in 2023:
- B2C annual growth impacted by reduction of COVID-related tailwinds, increased competition in some Latin American markets and regulatory marketing challenges in Europe.
- Underperforming B2B profitability with “overconcentration on certain partnerships as newer B2B clients fail to attain meaningful scale”
- SuperRGS struggling against other available content libraries
GAN will pivot to where it can truly win, which Smurfit defined as markets with “attractive growth profiles, scalability and rapid [return on investments].”
Mexico crucial for B2C
GAN will use what it has learned in other Latin American markets to hopefully succeed in Mexico, where Coolbet is live. Growth in Latin America led active customers to grow 49% in the fourth quarter compared to the prior year, though it will be key to see how many customers remain or were just betting on the World Cup.
There are some Latin American markets without a clear and rapid path to profitability, which will lead to either pulling back resources or exiting completely, Smurfit said.
That is why the company left Ontario, he explained, noting some industry experts have called it the “most competitive market in the world.”
“The sheer number of entrenched operators and heightened promotional environment did not present a clear path to profitability or achieving an adequate return on capital relative to existing Latin American market opportunities,” Smurfit said. “These resources, both operational and financial, will be focused towards higher-return markets and cash flow generation.”
B2B now focused on GAN Sports
The upcoming launch with Red Rock casinos should go live in the second half of 2023, subject to licensure.
GAN is also on the verge of saving $10 million a year with the rollout of the GameSTACK 2.0 platform. New customers will go live on the new platform, which drives efficiencies and delivers a better product at a lower cost, Smurfit said.