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GAN Limited Begins $35 Million U.S. IPO Effort

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About: GAN Limited (GAN)
by: Donovan Jones
Summary

GAN Limited has filed to raise $35 million in a U.S. IPO, although the final figure may differ.

The firm sells a suite of software tools to assist casinos with their online gaming offerings.

GAN is growing quickly, producing net profits and positive cash flow from operations.

Quick Take

GAN Limited (GAN) has filed to raise $35 million in an IPO of its common stock, according to an F-1 registration statement.

The firm sells software to companies operating online casino gaming and sports betting applications.

GAN is growing revenue sharply, producing net profits and growing cash flow from operations.

I’ll provide an update when we learn more IPO details from management.

Company And Technology

London, UK-based GAN was founded to develop a software-as-a-service enterprise solution for casino operators to run their online casino and sports book service offerings.

Management is headed by Chief Executive Officer Mr. Dermot Smurfit, who has been with the firm since 2003 as a director and was previously in the European Investment Banking unit of SoundView Technology Group.

Below is a brief overview video of the possible future of online sports betting:

Source: Wall Street Journal

The company has developed numerous partnerships in the following categories:

  • Simulated Gaming

  • Real Money Gaming

  • Integrated Partners

The company has created GameSTACK, a platform that provides back-office tools such as:

  • Player account activation

  • Payment services

  • Geolocation

  • Marketing

  • Loyalty management

  • Real-time analytics and reporting

The service is primarily aimed at U.S. casino operators, although GAN has sold versions of it to operators in the U.K., Italy and Australia. Management estimates that about 'half of all online sports wagers in the states of New Jersey and Pennsylvania, the two largest and fastest growing U.S. markets for online sports betting, are presently processed using [its] platform.'

Customer Acquisition

GAN markets its software suite directly to casino or simulated money operators via a direct sales force and the firm had 25 total customers as of March 17, 2020.

Sports betting activity has enjoyed strong growth since May 2018 when the U.S. Supreme Court overturned the Professional and Amateur Sports Protection Act [PASPA] which had prevented most U.S. states from regulating sports betting at the intrastate level.

Administrative expenses as a percentage of total revenue have been dropping as revenues have increased, as the figures below indicate:

Administrative

Expenses vs. Revenue

Period

Percentage

2019

50.4%

2018

73.0%

Source: Company registration statement

The Administrative efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Administrative spend, was 1.1x in the most recent reporting period.

Market And Competition

According to a 2019 market research report by Grand View Research, the market for online gambling was $48.5 billion in 2018.

This represents a forecast CAGR of 11.5% from 2019 to 2025.

The main drivers for this expected growth are continued increase in internet penetration, a growing use of smartphones for playing online games, wider legalization and acceptance, corporate sponsorships and celebrity endorsements.

Major competitive vendors include:

  • Retail casinos that create their own in-house systems

  • Online casinos that develop competing content

Management says its ability to modify its system for the highly variable regulatory environments between U.S. states is a strong competitive advantage.

Financial Performance

GAN’s recent financial results can be summarized as follows:

  • Sharp growth in top line revenue

  • Strong growth in gross profit and gross margin

  • A swing to operating profit

  • Sharp increase in cash flow from operations

Below are relevant financial metrics derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

2019

$ 29,971,000

113.7%

2018

$ 14,023,000

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

2019

$ 17,989,000

745.0%

2018

$ 2,129,000

Gross Margin

Period

Gross Margin

2019

60.02%

2018

15.18%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

2019

$ 2,474,000

8.3%

2018

$ (8,196,000)

-58.4%

Comprehensive Income (Loss)

Period

Comprehensive Income (Loss)

2019

$ 2,173,000

2018

$ (6,885,000)

Cash Flow From Operations

Period

Cash Flow From Operations

2019

$ 6,253,000

2018

$ 2,244,000

Source: Company registration statement

As of December 31, 2019, GAN had $10.1 million in cash and $11.0 million in total liabilities.

Free cash flow during the twelve months ended December 31, 2019, was $6.1 million.

IPO Details

GAN intends to raise $35 million in gross proceeds from an IPO of its common stock, although the final amount may differ.

Management says it will use the net proceeds from the IPO as follows:

We currently intend to use the net proceeds from this offering for working capital and general corporate purposes, including sales and marketing activities, product development and capital expenditures.

Management’s presentation of the company roadshow is not available.

The sole listed bookrunner of the IPO is B. Riley FBR.

Commentary

GAN is seeking to go public on U.S. markets as it shows the beginnings of an impressive revenue ramp. The firm’s financials indicate strong revenue growth, a swing to net profits and growing cash flow from operations.

Administrative expenses are dropping as a percentage of revenue as revenues rise, a good signal. The market opportunity for selling online betting software in the U.S. appears to be bright, especially in the aftermath of a favorable Supreme Court ruling for the industry in 2018.

GAN represents an interesting opportunity as it is selling the ‘picks and shovels’ to casino operators via a SaaS software bundle. I look forward to learning management’s IPO assumptions on pricing and valuation and will provide a final opinion at that time.

Expected IPO Pricing Date: To be announced.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.