EX-99.3 4 tm2121593d20_ex99-3.htm EXHIBIT 99.3

 

Exhibit 99.3

 

INDEX TO UNAUDITED INTERIM FINANCIAL INFORMATION

 

    Page
1.  Unaudited Interim Financial Statements:    
     
Combined Statements of Operations for the Nine Months Ended September 30, 2021 and 2020   2
     
Combined Statements of Comprehensive Income for the Nine Months Ended September 30, 2021 and 2020     3
     
Combined Balance Sheets as of September 30, 2021 and December 31, 2020   4
     
Condensed Combined Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020   5
     
Notes to Condensed Combined Financial Statements   6

 

 

 

 

LOTTERY BUSINESS

(Carve-Out of Certain Operations of Scientific Games Corporation)

COMBINED STATEMENTS OF OPERATIONS

(Unaudited, in millions)

 

   Nine Months Ended September 30, 
   2021   2020 
Revenue:        
Instant products  $504   $426 
Lottery systems   265    237 
Total revenue   769    663 
Operating expenses:          
Cost of instant products(1)   239    207 
Cost of lottery systems(1)   167    159 
Selling, general and administrative   78    58 
Research and development   4    1 
Depreciation and amortization   42    47 
Restructuring and other   1    11 
Operating income   238    180 
Other income:          
Earnings (loss) from equity investments   35    (5)
Other (expense) income, net   (5)   8 
Total other income, net   30    3 
Net income before income taxes   268    183 
Income tax expense   (66)   (52)
Net income  $202   $131 

 

 

(1)Excludes depreciation and amortization.

 

See accompanying notes to condensed combined financial statements.

 

2

 

 

LOTTERY BUSINESS

(Carve-Out of Certain Operations of Scientific Games Corporation)

COMBINED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in millions)

 

   Nine Months Ended September 30, 
   2021   2020 
Net income  $202   $131 
Other comprehensive (loss) income:          
Foreign currency translation (loss) income, net of tax   (15)   15 
Pension and post-retirement (loss) gain and other, net of tax   (1)   1 
Total other comprehensive (loss) income   (16)   16 
Total comprehensive income  $186   $147 

 

See accompanying notes to condensed combined financial statements.

 

3

 

 

LOTTERY BUSINESS

(Carve-Out of Certain Operations of Scientific Games Corporation)

COMBINED BALANCE SHEETS

(Unaudited, in millions)

 

   As of 
   September 30, 2021   December 31, 2020 
ASSETS        
Current assets:          
Cash and cash equivalents  $30   $61 
Restricted cash   2    1 
Receivables, net of allowance for credit losses of $6 and $4, respectively   182    153 
Inventories   79    72 
Contract assets   75    86 
Prepaid expenses, deposits and other current assets   18    38 
Total current assets   386    411 
Non-current assets:          
Property and equipment, net   171    169 
Operating lease right-of-use assets   31    27 
Goodwill   365    353 
Intangible assets, net   70    65 
Software, net   64    63 
Equity investments   258    259 
Other assets   10    9 
Total assets  $1,355   $1,356 
LIABILITIES AND PARENT'S EQUITY          
Current liabilities:          
Accounts payable  $62   $51 
Contract liabilities   47    47 
Accrued liabilities   114    109 
Total current liabilities   223    207 
Deferred income taxes   34    34 
Operating lease liabilities   24    21 
Long-term license liabilities   24    29 
Pension liabilities   27    31 
Other long-term liabilities   26    17 
Total liabilities   358    339 
Parent's equity:          
Accumulated net parent investment   1,033    1,037 
Accumulated other comprehensive loss   (36)   (20)
Total Parent's equity   997    1,017 
Total liabilities and Parent's equity  $1,355   $1,356 

 

See accompanying notes to condensed combined financial statements.

 

4

 

 

LOTTERY BUSINESS

(Carve-Out of Certain Operations of Scientific Games Corporation)

CONDENSED COMBINED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)

 

   Nine Months Ended September 30, 
   2021   2020 
Net cash provided by operating activities  $228   $203 
Cash flows from investing activities:          
Capital expenditures   (39)   (32)
Additions to equity method investments   (12)   (1)
Distributions of capital from equity investments   21     
Acquisition of business, net of cash acquired   (9)    
Net cash used in investing activities   (39)   (33)
Cash flows from financing activities:          
Payments on license obligations   (5)   (4)
Transfers to Parent and affiliates, net   (213)   (172)
Net cash used in financing activities   (218)   (176)
Effect of exchange rate changes on cash and cash equivalents   (1)    
Decrease in cash, cash equivalents, and restricted cash   (30)   (6)
Cash, cash equivalents, and restricted cash, beginning of period   62    36 
Cash, cash equivalents, and restricted cash, end of period  $32   $30 
           
Supplemental cash flow information:          
Cash paid for income taxes  $4   $2 

 

See accompanying notes to condensed combined financial statements.

 

5

 

 

 

LOTTERY BUSINESS

(Carve-Out of Certain Operations of Scientific Games Corporation)

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS

(amounts in USD and in millions)

 

(1) Description of the Business and Summary of Significant Accounting Policies

 

Background and nature of operations

 

The accompanying condensed combined interim carve-out financial statements include the historical accounts of the Scientific Games Corporation (“the Parent”), 100%-owned direct and indirect subsidiaries that hold substantially all of the assets of, and operate, the lottery business, herein collectively referred to as “the Lottery Business”, “we”, "us", and “our.”

 

The Lottery Business provides instant and draw lottery products and related value-added services including licensed brands used in instant lottery products, and loyalty, reward services, and lottery systems products and comprehensive services generally comprised of point-of-sale terminals, a central system, customized computer software, data communication services, support and/or related equipment.

 

Basis of presentation

 

The accompanying combined carve out financial statements of the Lottery Business have been derived from the unaudited condensed consolidated financial statements and accounting records of Scientific Games Corporation using the historical results of operations and historical cost basis of the assets and liabilities as if the Lottery Business operated on a stand-alone basis during the periods presented.

 

The accompanying condensed combined financial statements of the Lottery Business have been prepared in accordance with the accounting rules applicable for interim periods and therefore, do not include all information and footnotes necessary for complete financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"). For ease of reference the accompanying condensed combined carve out financial statements are herein referred to as "financial statements" unless otherwise stated or the context requires otherwise. All intercompany balances and transactions within the Lottery Business have been eliminated. Transactions between the Lottery Business and the Parent and its other subsidiaries are reflected as affiliate transactions within these financial statements.

 

The accompanying financial statements include the assets, liabilities, revenues, and expenses that are specifically identifiable to the Lottery Business. In addition, the accompanying financial statements include certain costs that have been allocated from the Parent, which relate to certain corporate functions and shared services performed by the Parent, including but not limited to, finance, human resources, legal, information technology and other. These expenses have been allocated to the Lottery Business on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenues, operating expenses, headcount, or other relevant measures.

 

We believe the assumptions underlying the financial statements, including assumptions regarding the allocations from the Parent, are reasonable. Nevertheless, the financial statements may not include all of the expenses that would have been incurred had the Lottery Business been a stand-alone company during the periods presented and may not reflect the Lottery Business’s financial position, results of operations, and cash flows had the Lottery Business been a stand-alone company during the periods presented. Actual costs that would have been incurred if the Lottery Business had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology, infrastructure and acquisition of intellectual property. For additional information related to costs allocated to the Lottery Business by the Parent, see Note 12.

 

In the opinion of management, we have made all adjustments necessary to present fairly our combined financial position, results of operations, comprehensive income and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These financial statements should be read in conjunction with the 2020 combined financial statements and related notes. Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.

 

6

 

 

We have two business segments – Instant Products and Lottery Systems – representing our instant and draw-based lottery products and related services and comprehensive lottery system solutions to lottery operators worldwide. We had $52 million and $54 million in Property and equipment, net outside the U.S. as of September 30, 2021 and December 31, 2020, respectively. For additional information related to our business segments, see Note 2.

 

Impact of COVID-19

 

In March 2020, the World Health Organization declared the rapidly spreading COVID-19 outbreak a pandemic. In response to the COVID-19 pandemic, governments across the world implemented a number of measures to prevent its spread, including but not limited to, the temporary closure of a substantial number of gaming operations establishments and disruptions to lottery operations, and travel restrictions, which are affecting the Lottery Business in a number of ways. During the latter part of the second quarter and throughout the remainder of 2020, lifting of restrictions began. During the fourth quarter of 2020 and in the response to the second wave of the COVID-19 pandemic, certain jurisdictions implemented additional temporary closures.

 

The Lottery Business has experienced relative growth and recovery as the shelter in place orders and lockdowns have been eased back resulting in increased foot traffic and more spending by end players, coupled with international retail establishments that have now substantially re-opened. Lottery sales were down meaningfully initially as a result of the pandemic, but have since largely recovered in the U.S. and international markets. The disruptions to lottery operations and travel restrictions had an adverse effect on the results of operations, cash flows and financial condition during the nine months ended September 30, 2020.

 

The current state reflects continued fluctuations in infection rates and regulations for various regions along with ongoing domestic and international travel restrictions or warnings, social distancing measures, reduced operating capacity and an overall economic and general uncertainty regarding the magnitude and length of time that these disruptions will continue. These circumstances may change in the future and such changes could be material.

 

Significant Accounting Policies

 

There have been no changes to our significant accounting policies described within the notes to our 2020 financial statements.

 

New Accounting Guidance - Recently Adopted

 

The FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors – Certain Leases with Variable Lease Payments, on July 19, 2021. The new guidance requires the lessor to classify a lease with variable lease payments that do not depend on an index or a rate as an operating lease at lease commencement if classifying the lease as a sales-type lease or direct financing lease would result in the recognition of a selling loss. We adopted this standard during the third quarter of 2021 on a prospective basis. The adoption of this guidance did not have a material effect on our financial statements.

 

We do not expect that any other recently issued accounting guidance will have a significant effect on our financial statements.

 

Acquisition of Sideplay Entertainment and Preliminary Purchase Accounting

 

On September 3, 2021, we acquired Sideplay Entertainment (“Sideplay”), a digital “e-instant” content studio. The acquisition allows us to expand our iLottery content portfolio and accelerate growth of this line of business. Sideplay has been included in our Lottery Systems business segment.

 

7

 

 

We accounted for this acquisition using the acquisition method of accounting allocating the total consideration transferred to acquired tangible and intangible assets and assumed liabilities based on estimated fair values. The fair value determination of the acquired assets and assumed liabilities requires significant judgments and estimates. The estimated fair values of the acquired assets, assumed liabilities, and resulting goodwill are subject to adjustment as we finalize our purchase price accounting, and such adjustments could be material.

 

The total consideration transferred was $25 million consisting of $10 million in cash and $15 million total contingent acquisition consideration. The fair value of the contingent acquisition consideration has been preliminarily determined using a real options valuation technique and level 3 inputs in the hierarchy as established by ASC 820 The maximum payout for the contingent acquisition consideration is $23 million and is primarily based on reaching certain performance based targets. The discount rates used in the valuation analysis were 7% to 29%.

 

The preliminary allocation of the purchase price resulted in $9 million allocated to intangible assets primarily consisting of technology and customer relationship and $16 million allocated to goodwill. The fair value of intangible assets that have been preliminarily identified was determined using a combination of the relief from royalty method, cost approach and the excess earnings method using level 3 inputs in the hierarchy as established by ASC 820.

 

The factors contributing to the recognition of acquisition goodwill are based on customer offering diversification, expected synergies, assembled workforce and other strategic benefits. None of the resultant goodwill is expected to be deductible for income tax purposes.

 

The amount of revenue and earnings associated with the above acquisition and since the acquisition date included in the condensed combined financial statements was not significant to our financial statements.

 

Subsequent events

 

We evaluated subsequent events through November 19, 2021, which is the date the financial statements were available to be issued.

 

On October 28, 2021, the Parent announced that it had entered into a definitive agreement to sell the Lottery Business to Brookfield Business Partners L.P. together with its institutional partners (collectively “Brookfield”) for total consideration of $6.05 billion consisting of $5.825 billion in cash and an earn-out of up to $225 million based on the achievement of certain EBITDA targets in 2022 and 2023. The Parent expects to complete this transaction in the first half of 2022, subject to applicable regulatory approvals and customary closing conditions.

 

8

 

 

(2) Business Segments

 

Operating segments are components of the Lottery Business for which separate discrete financial information is available to and evaluated regularly by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and assessing performance. We report our operations in two business segments – Instant Products and Lottery Systems – representing our different products and services. In evaluating financial performance, our CODM focuses on Adjusted EBITDA (“AEBITDA”) as management’s segment measure of profit or loss, which is described below. The following tables present our segment information:

 

   Nine Months Ended September 30, 2021 
           Unallocated and     
   Instant   Lottery   Reconciling     
   Products   Systems   Items (1)   Total 
Total revenue  $504   $265   $   $769 
AEBITDA(2)   265    99    (11)   353 
Reconciling items to net income before income taxes:                    
Depreciation and amortization   (16)   (26)       (42)
Restructuring and other   (1)           (1)
EBITDA from equity investments (2)             (61)   (61)
Earnings from equity investments             35    35 
Other expense, net             (5)   (5)
Stock-based compensation             (11)   (11)
Net income before income taxes                 $268 

 

 

(1)Includes amounts not allocated to the business segments (including shared costs) and reconciling items to reconcile the total business segments AEBITDA to our net income before income taxes.
(2)AEBITDA is reconciled to net income before income taxes and includes the following adjustments: (1) restructuring and other, which includes charges or expenses attributable to: (i) employee severance; (ii) management restructuring and related costs; (iii) restructuring and integration; (iv) cost savings initiatives; (v) major litigation; and (vi) acquisition costs and other unusual items; (2) depreciation and amortization expense and impairment charges (including goodwill impairments); (3) interest expense; (4) income tax expense; (5) stock-based compensation; and (6) other (expense) income, net, including foreign currency gains and (losses). In addition to the preceding adjustments, we exclude earnings (loss) from equity method investments and add (without duplication) our pro rata share of EBITDA of our equity investments, which represents our share of earnings (whether or not distributed to us) before income tax expense, depreciation and amortization expense, and interest income (expense), net of our joint ventures and minority investees. AEBITDA is presented exclusively as our segment measure of profit or loss.

 

   Nine Months Ended September 30, 2020 
           Unallocated and     
   Instant   Lottery   Reconciling     
   Products   Systems   Items (1)   Total 
Total revenue  $426   $237   $   $663 
AEBITDA(2)   219    78    (35)   262 
Reconciling items to net income before income taxes:                    
Depreciation and amortization   (19)   (28)       (47)
Restructuring and other   (5)   (6)       (11)
EBITDA from equity investments (2)             (21)   (21)
Loss from equity investments             (5)   (5)
Other income, net             8    8 
Stock-based compensation             (3)   (3)
Net income before income taxes                 $183 

 

 

(1)Includes amounts not allocated to the business segments (including shared costs) and reconciling items to reconcile the total business segments AEBITDA to our net income before income taxes.
(2)AEBITDA and EBITDA from equity investments are described in footnote (2) to the first table in this Note 2.

 

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(3) Revenue Recognition

 

The following table disaggregates our revenues by segment, line of business, and by geographical location:

 

   Revenue recognized for 
   Nine Months Ended 
   September 30, 
Revenue by segment and line of business   2021    2020 
Instant products:          
SGEP  $236   $207 
PPK   175    145 
POS   93    74 
Total instant products  $504   $426 
Lottery systems:          
Systems and solutions(1)  $247   $228 
  iLottery   18    9 
Total lottery systems  $265   $237 
  Total  $769   $663 
           
Revenue by geography          
U.S.  $548   $462 
International   221    201 
Total  $769   $663 

 

 

(1)Product sales included in lottery systems were $51 million, and $75 million for the nine months ended September 30, 2021, and 2020, respectively.

 

Contract Liabilities and Other Disclosures

 

The following table summarizes the activity in our contract liabilities for the reporting period:

 

   Nine Months Ended 
   September 30, 2021 
Contract liability balance, beginning of period(1)  $50 
Liabilities recognized during the period   24 
Amounts recognized in revenue from beginning balance   (25)
Contract liability balance, end of period(1)  $49 

 

 

(1)Long-term contract liabilities are included within Other long-term liabilities.

 

The timing of revenue recognition, billings and cash collections results in billed receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities). Revenue recognition is generally proximal to conversion to cash, except for the POS instant products revenue. Revenue is recognized for such contracts upon delivery to our customers, while conversion to cash is based on the retail sale of the underlying tickets to end consumers. As a result, revenue recognition under ASC 606 does not approximate conversion to cash for such contracts in any periods presented. The following table summarizes our opening and closing balances in these accounts (other than contract liabilities disclosed above):

 

    Receivables   Contract Assets 
 End of period balance, December 31, 2020   $153   $86 
 End of period balance, September 30, 2021    182    75 

 

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(4) Inventories

 

Inventories consisted of the following:

 

   As of 
   September 30, 2021   December 31, 2020 
Parts and work-in-process  $36   $35 
Finished goods   43    37 
Total inventories  $79   $72 

 

Parts and work-in-process include parts for terminals and instant ticket materials, as well as labor and overhead costs for work-in-process associated with the manufacturing of instant tickets and lottery terminals. Our finished goods inventory primarily consists of instant products.

 

(5) Property and Equipment, net

 

Property and equipment, net consisted of the following:

 

   As of 
   September 30, 2021   December 31, 2020 
Land  $9   $9 
Buildings and leasehold improvements   74    70 
Lottery machinery and equipment   540    511 
Furniture and fixtures   6    6 
Construction in progress   30    37 
Less: accumulated depreciation   (488)   (464)
Total property and equipment, net  $171   $169 

 

Depreciation expense is excluded from Cost of instant products, Cost of lottery systems, and Other operating expenses and is separately presented within depreciation and amortization.

 

   Nine Months Ended September 30, 
   2021   2020 
Depreciation expense  $24   $25 

 

(6) Intangible Assets, net and Goodwill

 

Intangible assets, net

 

The following tables present certain information regarding our intangible assets as of September 30, 2021 and December 31, 2020:

 

   September 30, 2021   December 31, 2020 
   Gross   Accumulated   Net   Gross   Accumulated   Net 
   Carrying Value   Amortization   Balance   Carrying Value   Amortization   Balance 
Amortizable intangible assets:                              
Customer relationships  $16   $(14)  $2   $14   $(14)  $ 
Intellectual property   17    (7)   10    11    (6)   5 
Licenses   86    (63)   23    87    (61)   26 
Patents and other   11    (7)   4    12    (9)   3 
    130    (91)   39    124    (90)   34 
Non-amortizable intangible assets:                              
Trade names   33    (2)   31    33    (2)   31 
Total intangible assets  $163   $(93)  $70   $157   $(92)  $65 

 

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The following reflects intangible amortization expense included within depreciation and amortization:

 

   Nine Months Ended September 30, 
   2021   2020 
Amortization expense  $6   $12 

 

Goodwill

 

The table below reconciles the change in the carrying value of goodwill, for the period from December 31, 2020 to September 30, 2021.

 

   Instant Products   Lottery Systems (1)   Total 
Balance as of December 31, 2020  $330   $23   $353 
Acquired goodwill       16    16 
Foreign currency adjustments   (3)   (1)   (4)
Balance as of September 30, 2021  $327   $38   $365 

 

 

(1)Accumulated goodwill impairment charges as of September 30, 2021 were $137 million.

 

(7) Software, net

 

Software, net consisted of the following:

 

    As of
    September 30, 2021   December 31, 2020
Software   $  184   $  172
Accumulated amortization      (120)      (109)
Software, net   $  64   $  63

 

The following reflects amortization of software included within depreciation and amortization:

 

   Nine Months Ended September 30, 
   2021   2020 
Amortization expense  $12   $10 

 

(8) Equity Investments

 

Equity investment consisted of the following:

 

       Equity earnings   Cash distributions and 
       (loss) recognized   dividends received 
   Equity investment   for the Nine Months Ended   for the Nine Months Ended 
   balance as of   September 30,   September 30, 
Equity Investment  September 30, 2021   December 31, 2020   2021   2020   2021   2020 
LNS  $194   $202   $31   $5   $32   $16 
GLB and CSG   25    26    3    2    4     
Greece   11    16    (3)   (3)        
Northstar NJ and NJ Supply Co   27    14    4    (8)       3 
Other   1    1        (1)        
Total under equity method  $258   $259   $35   $(5)  $36   $19 

 

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(9) Leases

 

Our operating leases primarily consist of real estate leases such as offices, warehouses, and research and development facilities. Our leases have remaining lease terms ranging from 1 year to 10 years, some of which include options to extend the leases for up to 5 years or to terminate the leases within 1 year. Our finance leases are immaterial.

 

Supplemental balance sheet and cash flow information related to operating leases is as follows:

 

   As of 
   September 30, 2021   December 31, 2020 
Operating lease right-of-use assets(1)  $31   $27 
Accrued liabilities   8    7 
Operating lease liabilities   24    21 
Total operating lease liabilities  $32   $28 
Cash paid for amounts included in the measurement of lease liabilities:          
Operating cash flows for operating leases for the nine-month periods ended September 30, 2021 and 2020, respectively  $7   $7 
Weighted average remaining lease term, years   5    5 
Weighted average discount rate   5%   5%

 

 

(1)Operating lease right-of-use assets obtained in exchange for lease obligations were immaterial.

 

Lease liability maturities:

 

   Operating Leases 
Remainder of 2021  $2 
2022   9 
2023   8 
2024   6 
2025   5 
Thereafter   6 
Less: imputed interest   (4)
Total  $32 

 

As of September 30, 2021, we did not have material additional operating leases that have not yet commenced.

 

(10) Parent’s Equity

 

The following table presents certain information regarding Parent’s equity as of September 30, 2021 and September 30, 2020:

 

           Accumulated     
       Accumulated   Other     
   Retained   Net Parent   Comprehensive     
   Earnings   Investment   Loss   Total 
January 1, 2021  $   $1,037   $(20)  $1,017 
Net income   202            202 
Transactions with parent and affiliates, net   (202)   (4)       (206)
Other comprehensive loss           (16)   (16)
September 30, 2021  $   $1,033   $(36)  $997 

 

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           Accumulated     
       Accumulated   Other     
   Retained   Net Parent   Comprehensive     
   Earnings   Investment   Loss   Total 
January 1, 2020  $   $1,065   $(48)  $1,017 
Net income   131            131 
Transactions with parent and affiliates, net   (131)   (44)       (175)
Other comprehensive income           16    16 
September 30, 2020  $   $1,021   $(32)  $989 

 

(11) Income Taxes

 

We consider new evidence (both positive and negative) at each reporting period that could affect our view of the future realization of deferred tax assets. Based upon the evaluation of all available evidence, we maintain a valuation allowance for certain of our foreign operations as of September 30, 2021.

 

Our effective income tax rate for the nine months ended September 30, 2021 and 2020 was 24.6% and 28.4%, respectively. The rate was determined using an estimated annual effective tax rate after considering any discrete items for such periods. The tax rates in both periods differ from the U.S. statutory rate primarily due to state income taxes and foreign earnings at rates other than the U.S. statutory rate.

 

As discussed in Note 1, the COVID-19 disruptions significantly impacted certain segments of our business during 2020 and through the first quarter of 2021. We considered the COVID-19 disruptions in our ability to realize deferred tax assets in the future and determined that such conditions did not change our overall valuation allowance positions. Additionally, we continue to monitor and evaluate the tax implications resulting from any existing and forthcoming legislation passed in response to COVID-19 in the federal, state, and foreign jurisdictions where we have an income tax presence.

 

(12) Related Party Transactions

 

Parent Services

 

Parent services represent allocations of corporate level general and administrative expenses, including but not limited to, finance, corporate development, human resources, legal, information technology, as well as rental fees for shared assets. These expenses have been allocated to the Lottery Business on the basis of direct usage when identifiable, with the remainder allocated on the basis of revenues, operating expenses, headcount or other relevant measures, which we believe to be the most meaningful allocation methodologies.

 

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Total parent services expense recorded for the nine months ended September 30, 2021 and 2020 was $25 million and $22 million, respectively, and is included in Selling, general and administrative expenses. These charges are not cash settled but allocated for purposes of these financial statements and as such are accounted for as a component of Parent’s equity.

 

IP Licensing

 

The Parent frequently licenses intellectual property (“IP”) from third parties, which is utilized by the Lottery Business in developing the instant games. These IP licenses are generally pushed down to the Lottery Business at the origination of these agreements based upon agreed usage commitment. We account for these minimum guaranteed obligations within accrued and other long-term liabilities at the onset of the license arrangement and record a corresponding license asset within intangible assets, net. The total liability associated with these agreements as of September 30, 2021 and December 31, 2020 was $26 million and $31 million, respectively.

 

Amortization expense related to these licenses and recorded in depreciation and amortization for the nine months ended September 30, 2021 and 2020 was $4 million and $9 million, respectively.

 

We market many of our products under trademarks and copyrights that provide product differentiation and recognition and promote our portfolio of product offerings. All of our games feature elements that are subject to copyrights and protection. In addition, we generally obtain trademark protection and often seek to register trademarks for the names and designs under which we market and license our products and games. Protections for trademarks exist in many countries, including the U.S., for as long as the trademark is registered and/or used. Registrations are generally issued for fixed, but renewable terms, although trademark rights may exist whether or not a mark is registered and the duration of the registrations varies by country.

 

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