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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019
 
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to        
 
Commission file number: 001-38889 
SciPlay Corporation
(Exact name of registrant as specified in its charter)
Nevada
 
83-2692460
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
6601 Bermuda Road, Las Vegas, Nevada 89119
(Address of principal executive offices)
(Zip Code) 
(702) 897-7150
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $.001 par value
SCPL
The NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
Smaller reporting company
 
 
 
 
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 
The registrant has the following number of shares outstanding of each of the registrant’s classes of common stock as of November 5, 2019:
Class A Common Stock: 22,720,000
Class B Common Stock: 103,547,021



SCIPLAY CORPORATION
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019
 
 
Page
 
 
 
 
Item 1.
 
 
 
 

 
 
 
 
 
 
 
 

 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

2


FORWARD-LOOKING STATEMENTS
Throughout this Quarterly Report on Form 10-Q, we make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect,” “anticipate,” “target,” “should,” “could,” “potential,” “opportunity,” “goal” or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well. These statements are based upon management’s current expectations, assumptions and estimates and are not guarantees of timing, future results or performance. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:
our ability to attract and retain players;
our reliance on third-party platforms;
our dependence on the optional purchases of virtual currency to supplement the availability of periodically offered free virtual currency; 
our ability to continue to launch and enhance games that attract and retain a significant number of paying players;
our reliance on a small percentage of our players for nearly all of our revenue;
our ability to adapt to, and offer games that keep pace with, changing technology and evolving industry standards;
competition;
the impact of legal and regulatory restrictions on our business, including significant opposition in some jurisdictions to interactive social gaming, including social casinos, and how such opposition could lead these jurisdictions to adopt legislation or impose a regulatory framework to govern interactive social gaming or social casinos specifically, and how this could result in a prohibition on interactive social gaming or social casinos altogether, restrict our ability to advertise our games, or substantially increase our costs to comply with these regulations;
laws and government regulations, both foreign and domestic, including those relating to our parent, Scientific Games Corporation, and to data privacy and security, including with respect to the collection, storage, use, transmission, sharing and protection of personal information and other consumer data, and those laws and regulations that affect companies conducting business on the internet, including ours;
the continuing evolution of the scope of data privacy and security regulations, and our belief that the adoption of increasingly restrictive regulations in this area is likely within the U.S. and other jurisdictions;
our ability to use the intellectual property rights of our parent, Scientific Games Corporation, and other third parties, including the third-party intellectual property rights licensed to Scientific Games Corporation, under our intellectual property license agreement (“IP License Agreement”) with our parent; 
protection of our proprietary information and intellectual property, inability to license third-party intellectual property and the intellectual property rights of others;
security and integrity of our games and systems;
security breaches, cyber-attacks or other privacy or data security incidents, challenges or disruptions;
reliance on or failures in information technology and other systems;
our ability to complete acquisitions and integrate businesses successfully;
our ability to pursue and execute new business initiatives;
fluctuations in our results due to seasonality and other factors;
dependence on skilled employees with creative and technical backgrounds;

3


natural events that disrupt our operations or those of our providers or suppliers;
risks relating to foreign operations, including the complexity of foreign laws, regulations and markets; the uncertainty of enforcement of remedies in foreign jurisdictions; the effect of currency exchange rate fluctuations; the impact of foreign labor laws and disputes; the ability to attract and retain key personnel in foreign jurisdictions; the economic, tax and regulatory policies of local governments; and compliance with applicable anti-money laundering, anti-bribery and anti-corruption laws;
U.S. and international economic and industry conditions;
changes in tax laws or tax rulings, or the examination of our tax positions;
litigation and other liabilities relating to our business, including litigation and liabilities relating to consumer protection, gambling-related matters, employee matters, alleged service and system malfunctions, alleged intellectual property infringement and claims relating to our contracts, licenses and strategic investments;
restrictions and covenants in debt agreements, including those that could result in acceleration of the maturity of our indebtedness;
failure to maintain adequate internal control over financial reporting;
influence of certain stockholders, including decisions that may conflict with the interests of other stockholders;
our ability to achieve some or all of the anticipated benefits of being a standalone public company; 
our dependence on distributions from SciPlay Parent Company, LLC (“SciPlay Parent LLC”) to pay our taxes and expenses, including substantial payments we will be required to make under the Tax Receivable Agreement (the “TRA”); and
stock price volatility.
Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is included from time to time in our filings with the SEC, including under “Risk Factors” in this Quarterly Report on Form 10-Q. Forward-looking statements speak only as of the date they are made and, except for our ongoing obligations under the U.S. federal securities laws, we undertake no and expressly disclaim any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.
You should also note that this Quarterly Report on Form 10-Q may contain references to industry market data and certain industry forecasts. Industry market data and industry forecasts are obtained from publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. Although we believe industry information to be accurate, it is not independently verified by us. In general, we believe there is less publicly available information concerning international social gaming industries than the same industries in the U.S. Some data is also based on our good faith estimates, which are derived from our review of internal surveys or data, as well as the independent sources referenced above. Assumptions and estimates of our and our industry's future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” in this Quarterly Report on Form 10-Q. These and other factors could cause future performance to differ materially from our assumptions and estimates.
    


4


PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)

SCIPLAY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in millions, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Revenue
$
116.4

 
$
105.3

 
$
352.9

 
$
302.5

Operating expenses:
 
 
 
 
 
 
 
  Cost of revenue(1)
36.9

 
40.6

 
123.1

 
116.6

  Sales and marketing(1)
32.9

 
27.5

 
98.4

 
74.3

  General and administrative(1)
9.8

 
7.9

 
31.2

 
25.1

  Research and development(1)
6.3

 
6.4

 
18.1

 
19.1

  Depreciation and amortization
1.7

 
1.7

 
5.2

 
13.3

  Contingent acquisition consideration

 
8.4

 
1.7

 
26.4

  Restructuring and other
0.2

 
0.6

 
0.7

 
0.7

         Operating income
28.6

 
12.2

 
74.5

 
27.0

Other expense:
 
 
 
 
 
 
 
  Other expense, net
(0.4
)
 
(0.2
)
 
(2.4
)
 
(0.8
)
     Total other expense, net
(0.4
)
 
(0.2
)
 
(2.4
)
 
(0.8
)
         Net income before income taxes
28.2

 
12.0

 
72.1

 
26.2

Income tax expense
3.2

 
2.8

 
7.2

 
5.9

         Net income
25.0

 
9.2

 
64.9

 
20.3

Less: Net income attributable to the noncontrolling interest
23.0




36.9



         Net income attributable to SciPlay
$
2.0

 
$
9.2

 
$
28.0

 
$
20.3

 
 
 
 
 
 
 
 
Basic and diluted net income attributable to SciPlay per share:

 
 
 

 
 
  Basic
$
0.09

 
$
0.41

 
$
1.23

 
$
0.89

  Diluted
$
0.09

 
$
0.41

 
$
1.23

 
$
0.89

 
 
 
 
 
 
 
 
Weighted average number of shares of Class A common stock used in per share calculation:
 
 
 
 
 
 
 
  Basic shares
22.7

 
22.7

 
22.7

 
22.7

  Diluted shares
22.7

 
22.7

 
22.7

 
22.7

(1) Excludes depreciation and amortization.
See accompanying notes to condensed consolidated financial statements.



5


SCIPLAY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in millions)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
25.0

 
$
9.2

 
$
64.9

 
$
20.3

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation gain, net of tax
0.6

 
0.2

 
2.8

 
0.4

Comprehensive income
$
25.6

 
$
9.4

 
$
67.7

 
$
20.7

Less: comprehensive income attributable to the noncontrolling interest
23.5

 

 
37.7

 

Comprehensive income attributable to SciPlay
$
2.1

 
$
9.4

 
$
30.0

 
$
20.7

See accompanying notes to condensed consolidated financial statements.




6


SCIPLAY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except par value)
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
81.3

 
$
10.0

Accounts receivable, net (allowance for doubtful accounts of $0.4 and $1.1)
43.3

 
31.5

Prepaid expenses and other current assets
4.5

 
5.6

Total current assets
129.1

 
47.1

Non-current assets:
 
 
 
Property and equipment, net
4.3

 
1.8

Operating lease right-of-use assets
6.4

 

Goodwill
120.7

 
120.7

Intangible assets, net
11.3

 
13.6

Deferred income taxes
87.2

 
6.4

Other assets
7.8

 
5.3

Total assets
$
366.8

 
$
194.9

LIABILITIES AND STOCKHOLDERS’ EQUITY/ACCUMULATED NET PARENT INVESTMENT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
15.6

 
$
12.7

Accrued liabilities
18.3

 
28.0

Due to affiliate
5.3

 
3.7

Total current liabilities
39.2

 
44.4

Operating lease liabilities
5.6

 

Liabilities under TRA
73.7

 

Other long‑term liabilities
1.0

 
11.9

Total liabilities
119.5

 
56.3

Commitments and contingencies (see Note 8)

 

Stockholders’ equity/Accumulated net parent investment:
 
 
 
Class A common stock, par value $0.001 per share - 625.0 shares authorized, 22.7 issued and outstanding as of September 30, 2019, zero issued and outstanding as of December 31, 2018

 

Class B common stock, par value $0.001 per share - 130.0 shares authorized, 103.5 issued and outstanding as of September 30, 2019, zero issued and outstanding as of December 31, 2018
0.1

 

Additional paid-in capital
41.2

 

Accumulated net parent investment

 
140.8

Retained earnings
7.6

 

Accumulated other comprehensive income (loss)
0.1

 
(2.2
)
Total SciPlay stockholders’ equity/accumulated net parent investment
49.0

 
138.6

Noncontrolling interest
198.3

 

Total stockholders’ equity/accumulated net parent investment
247.3

 
138.6

Total liabilities and stockholders’ equity/accumulated net parent investment
$
366.8

 
$
194.9

See accompanying notes to condensed consolidated financial statements.

7


SCIPLAY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/ACCUMULATED NET PARENT INVESTMENT
(Unaudited, in millions)
 
Accumulated net parent investment
 
Class A common stock
 
Class B common stock
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Noncontrolling interest
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
December 31, 2018
$
140.8

 

 
$

 

 
$

 
$

 
$

 
$
(2.2
)
 
$

 
$
138.6

Net income
13.7

 

 

 

 

 

 

 

 

 
13.7

Transactions with Parent and affiliates, net
6.2

 

 

 

 

 

 

 

 

 
6.2

Currency translation adjustment

 

 

 

 

 

 

 
1.9

 

 
1.9

March 31, 2019
$
160.7

 

 
$

 

 
$

 
$

 
$

 
$
(0.3
)
 
$

 
$
160.4

Activity prior to IPO and organization transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
6.7

 

 

 

 

 

 

 

 

 
6.7

Transactions with Parent and affiliates, net
3.0

 

 

 

 

 

 

 

 

 
3.0

May 7, 2019
$
170.4

 
$

 
$

 
$

 
$

 
$

 
$

 
$
(0.3
)
 
$

 
$
170.1

Effects of the IPO and organization transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of Class A common stock in the IPO, net of underwriting discount and offering costs

 
22.7

 

 

 

 
59.9

 

 

 
272.9

 
332.8

Issuance of Class B common stock

 

 

 
103.5

 
0.1

 

 

 

 

 
0.1

Allocation of SGC equity to noncontrolling interests
(170.4
)
 

 

 

 

 
30.7

 

 
0.2

 
139.5

 

Distributions to Parent and affiliates, net

 

 

 

 

 
(56.1
)
 

 

 
(255.6
)
 
(311.7
)
Net effect of tax-related organization transactions and other

 

 

 

 

 
5.6

 

 

 

 
5.6

Activity subsequent to the IPO and organization transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 

 

 
5.6

 

 
13.9

 
19.5

Stock-based compensation

 

 

 

 

 
0.8

 

 

 
3.1

 
3.9

Currency translation adjustment

 

 

 

 

 

 

 
0.1

 
0.2

 
0.3

June 30, 2019
$

 
22.7

 
$

 
103.5

 
$
0.1

 
$
40.9

 
$
5.6

 
$


$
174.0

 
$
220.6

Net income

 

 

 

 

 
 
 
2.0

 

 
23.0

 
25.0

Stock-based compensation

 

 

 

 

 
0.4

 

 

 
1.1

 
1.5

Currency translation adjustment and other

 

 

 

 

 
(0.1
)
 

 
0.1

 
0.2

 
0.2

September 30, 2019
$

 
22.7

 
$

 
103.5

 
$
0.1

 
$
41.2

 
$
7.6

 
$
0.1

 
$
198.3

 
$
247.3


8


 
Accumulated net parent investment
 
Class A common stock
 
Class B common stock
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive loss
 
Noncontrolling interest
 
Total
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
December 31, 2017
$
161.4

 

 
$

 

 
$

 
$

 
$

 
$
1.6

 
$

 
$
163.0

Net loss
(1.1
)
 

 

 

 

 

 

 

 

 
(1.1
)
Dividend distributions
(17.4
)
 

 

 

 

 

 

 

 

 
(17.4
)
March 31, 2018
$
142.9

 

 
$

 

 
$

 
$

 
$

 
$
1.6

 
$


$
144.5

Net Income
12.2

 

 

 

 

 

 

 

 

 
12.2

Dividend distributions
(13.3
)
 

 

 

 

 

 

 

 

 
(13.3
)
Transactions with Parent and affiliates, net
6.0

 

 

 

 

 

 

 

 

 
6.0

Currency translation adjustment

 

 

 

 

 

 

 
0.2

 

 
0.2

June 30, 2018
$
147.8

 
$

 
$

 
$

 
$

 
$

 
$

 
$
1.8

 
$

 
$
149.6

Net income
9.2

 

 

 

 

 

 

 

 

 
9.2

Dividend distributions
(23.2
)
 

 

 

 

 

 

 

 

 
(23.2
)
Transactions with Parent and affiliates, net
1.9

 

 

 

 

 

 

 

 

 
1.9

Currency translation adjustment

 

 

 

 

 

 

 
0.2

 

 
0.2

September 30, 2018
$
135.7

 
$

 
$

 
$

 
$

 
$

 
$

 
$
2.0

 
$

 
$
137.7

See accompanying notes to condensed consolidated financial statements.

9


SCIPLAY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
 
Nine Months Ended
 
September 30,
 
2019
 
2018
Net cash provided by operating activities
$
60.3

 
$
44.1

Cash flows from investing activities:
 
 
 
  Capital expenditures
(6.5
)
 
(2.2
)
Net cash used in investing activities
(6.5
)
 
(2.2
)
Cash flows from financing activities:
 
 
 
  Net proceeds from issuance of Class A common stock
341.7

 

  Net proceeds from issuance of Class B common stock
0.1

 

  Distributions to Scientific Games and affiliates, net
(311.7
)
 
(53.9
)
  Payments of deferred offering costs
(9.1
)
 

  Payments of contingent consideration
(1.8
)
 

  Payments on license obligations
(1.0
)
 

  Payments of debt issuance costs
(1.1
)
 

Net cash provided by (used in) financing activities
17.1

 
(53.9
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
0.4

 
(0.1
)
Increase (decrease) in cash, cash equivalents and restricted cash
71.3

 
(12.1
)
Cash, cash equivalents and restricted cash, beginning of period
10.0

 
16.8

Cash, cash equivalents and restricted cash, end of period
$
81.3

 
$
4.7

 
 
 
 
Supplemental cash flow information:
 
 
 
  Cash paid for income taxes
$
0.7

 
$
1.7

Cash paid for contingent consideration included in operating activities
22.2

 

Payment for Scientific Games’ intellectual property license included in Distributions to Scientific Games and affiliates, net
255.0

 

See accompanying notes to condensed consolidated financial statements.


10


SCIPLAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in USD, table amounts in millions, except per share amounts)

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

Background and Nature of Operations

     SciPlay Corporation was formed as a Nevada corporation on November 30, 2018 as a subsidiary of Scientific Games Corporation (“Scientific Games”, “SGC”, and “the Parent”) for the purpose of completing a public offering and related transactions (collectively referred to herein as the “IPO”) in order to carry on the business of SciPlay Parent LLC and its subsidiaries (collectively referred to as “SciPlay”, the “Company”, “we”, “us”, and “our”). As the managing member of SciPlay Parent LLC, SciPlay operates and controls all of the business affairs of SciPlay Parent LLC and its subsidiaries.

We develop, market and operate a portfolio of social games played on various mobile and web platforms, including Jackpot Party Casino, Quick Hit Slots, Gold Fish Casino, Hot Shot Casino, Bingo Showdown, MONOPOLY Slots, and 88 Fortunes Slots, among others. Our games are available in various formats. We have one operating segment with one business activity, developing and monetizing social games.

    The following are our material subsidiaries:

SciPlay Parent Company, LLC (Nevada)
SciPlay Holding Company, LLC (Nevada) (“SciPlay Holding”)
Phantom EFX, LLC (Nevada)
Dragonplay Ltd (Israel)
Spicerack Media, LLC (Nevada)
Initial Public Offering
On May 7, 2019, we completed the offering of 22,720,000 shares of Class A common stock at a public offering price of $16.00 per share (the “Offering”), after giving effect to the underwriters’ partial exercise of their over-allotment option on June 4, 2019. We received $341.7 million in proceeds, net of underwriting discount, but before offering expenses of $9.3 million.

In connection with the closing of the Offering and partial exercise of over-allotment option, we consummated the following organizational transactions:

We amended and restated the SciPlay Parent LLC Operating Agreement (the “Operating Agreement”) to, among other things:

(i) provide for a single class of SciPlay Parent LLC common units (the “LLC Interests”);

(ii) exchange all of SG Social Holding Company I, LLC’s (“SG Holding I”) and SG Social Holding Company, LLC’s (each a wholly owned subsidiary of Scientific Games and collectively, the “SG Members”) existing member’s interests in SciPlay Parent LLC for LLC Interests;

(iii) provide for the right of the SG Members to have their LLC Interests redeemed or exchanged for shares of our Class A common stock or, at our option, cash; and

(iv) appoint SciPlay as the sole manager of SciPlay Parent LLC. 

We amended and restated our articles of incorporation to, among other things, provide for Class A common stock and Class B common stock; 

11


    
We used the net proceeds from the Offering and underwriters’ exercise of the over-allotment option after deducting the underwriting discount, as follows: 
    
 
Amount
Note
To acquire 20,725,319 LLC Interests from SG Holding I
$
311.7

(A)
To acquire 1,994,681 newly issued LLC Interests from SciPlay Parent LLC
30.0

(B)
Net proceeds after deducting underwriting discount
$
341.7

 
 
 
 
(A) SG Holding I subsequently used these proceeds as follows:
 
 
Acquire IP License from Parent (“Upfront License Payment”)(1)
$
255.0

 
Distributed as a dividend to Scientific Games
56.7

 
 
$
311.7

 
(B) SciPlay Parent LLC subsequently used the proceeds as follows:
 
 
Fees and expenses incurred in connection with the IPO
$
9.3

 
General corporate purposes, including a portion of contingent acquisition consideration
20.7

 
 
$
30.0

 
(1) Per the Assignment Agreement, dated May 7, 2019, SG Holding I assigned its rights, duties, obligations and interest under the IP License Agreement to SciPlay.


We issued shares of Class B common stock to the SG Members, on a one-to-one basis with the number of LLC Interests owned by the SG Members following the IPO; 

As a result of the transactions described above, the SG Members own 82.0% of the outstanding shares and LLC Interests and 97.9% of the combined voting power; and

We and the SG Members entered into the TRA, and we and the SG Members entered into the registration rights agreement, dated May 7, 2019 (“Registration Rights Agreement”).

Our corporate structure following the IPO is commonly referred to as an “Up-C” structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure will allow the SG Members to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “passthrough” entity, for U.S. income tax purposes following the IPO. One of these benefits is that future taxable income of SciPlay Parent LLC that is allocated to the SG Members will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the SciPlay Parent LLC entity level. Additionally, because the SG Members may exchange or redeem their LLC Interests for newly issued shares of our Class A common stock on a one-for-one basis or, at our option, for cash, the Up-C structure also provides the SG Members with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. 

We will receive the same benefits as the SG Members on account of our ownership of LLC Interests in an entity treated as a partnership, or “passthrough” entity, for U.S. income tax purposes. As the SG Members redeem or exchange their LLC Interests, we will obtain a step-up in tax basis in our share of SciPlay Parent LLC assets. This step-up in tax basis will provide us with certain tax benefits, such as future depreciation and amortization deductions that can reduce the taxable income allocable to us. The TRA provides for the payment by us to the SG Members of 85% of the amount of tax benefits, if any, that we actually realize (or in some cases are deemed to realize) as a result of (i) increases in the tax basis of assets of SciPlay Parent LLC (a) in connection with the IPO, (b) resulting from any redemptions or exchanges of LLC Interests pursuant to the Operating Agreement or (c) resulting from certain distributions (or deemed distributions) by SciPlay Parent LLC and (ii) certain other tax benefits related to our making of payments under the TRA.

Variable Interest Entities (“VIE”) and Consolidation
              Subsequent to the IPO, our sole material asset is our member’s interest in SciPlay Parent LLC. In accordance with the Operating Agreement of SciPlay Parent LLC, we have all management powers over the business and affairs of SciPlay Parent LLC and to conduct, direct and exercise full control over the activities of SciPlay Parent LLC. Class A common stock issued in the IPO do not hold majority voting rights but hold 100% of the economic interest in the Company, which results in

12


SciPlay Parent LLC being considered a VIE. Due to our power to control the activities most directly affecting the results of SciPlay Parent LLC, we are considered the primary beneficiary of the VIE. Accordingly, beginning with the IPO, we consolidate the financial results of SciPlay Parent LLC and its subsidiaries.

Basis of Presentation
              The accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). SG Social Holding Company II, LLC is SciPlay’s predecessor for financial reporting purposes, and accordingly, for all periods presented prior to May 7, 2019, the financial statements represent the financial statements of the predecessor. All intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, we have made all adjustments necessary to present fairly our condensed consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in stockholders’ equity/accumulated net parent investment, and condensed consolidated statements of cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These unaudited financial statements should be read in conjunction with the financial statements and related notes of SciPlay Corporation and SG Social Holding Company II, LLC in our prospectus dated May 2, 2019, filed with the SEC on May 6, 2019 pursuant to Rule 424(b) of the Securities Act of 1933, as amended (referred to herein as the “Prospectus”). Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.

Use of Estimates
              The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and the accompanying notes. Actual results may differ materially from our estimates.

Significant Accounting Policies
There have been no changes to our significant accounting policies described within the SciPlay Corporation’s financial statement and SG Social Holding Company II, LLC’s consolidated financial statements and related notes in the Prospectus, other than the adoption of ASC 842 described in Note 3.
New Accounting Guidance‑ Adopted
The FASB issued ASU No. 2016-02, Leases (Topic 842) in 2016. ASU 2016-02 combined with all subsequent amendments (collectively, “ASC 842”) requires balance sheet recognition for all leases with a lease term greater than one year to be recorded as a lease liability (on a discounted basis) with a corresponding right-of-use asset. This guidance also expands the required quantitative and qualitative disclosures for lease arrangements and gives rise to other changes impacting certain aspects of lessee and lessor accounting. We adopted ASC 842 as of January 1, 2019 using the optional transition method provided by ASU 2018-11 and applied the lessee package of practical expedients. During the first quarter of 2019, the FASB issued ASU 2019-01, Leases (Topic 842) to amend ASU 2016-02. This amendment exempts both lessees and lessors from having to provide certain prior year interim disclosure information in the fiscal year in which a company adopts the new leases standard. We have provided the related transition disclosures as of the beginning of 2019 in accordance with ASU 2019-1. See Note 3 for our lease accounting policy and the impact of our adoption of ASC 842.

The FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”) in 2018. The standard allows companies to make an election to reclassify from AOCI to retained earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. Our adoption of this guidance did not have an effect on our consolidated financial statements.

New Accounting Guidance‑ Not yet adopted
The FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) in 2016. The new guidance replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new guidance will be effective for us beginning January 1, 2020. Application of the amendments is through a

13


cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact of adopting this guidance.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures on fair value measurements in ASC 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The new guidance will be effective for us beginning January 1, 2020. We are currently evaluating the impact of adopting this guidance.

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

Revenue Recognition
We generate revenue from the sale of virtual coins, chips and bingo cards (collectively referred to as “virtual currency”), which players can use to play casino‑style slot games, table games and bingo games (i.e., spin in the case of slot games, bet in the case of table games and use of bingo cards in the case of bingo games). We distribute our games through various global social web and mobile platforms such as Facebook, Apple, Google, Amazon, and other web and mobile platforms. The games are primarily WMS, Bally, Barcrest™, and SHFL® branded games. In addition, we also offer third‑party branded games and original content.
Disaggregation of Revenue
We believe disaggregation of our revenue on the basis of platform and geographical locations of our players is appropriate because the nature and the number of players generating revenue could vary on such basis, which represent different economic risk profiles.
The following table presents our revenue disaggregated by type of platform:

Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,

2019
 
2018
 
2019
 
2018
Mobile
$
97.7

 
$
82.8

 
$
292.8

 
$
232.1

Web
18.7

 
22.5

 
60.1

 
70.3

Other

 

 

 
0.1

Total revenue
$
116.4

 
$
105.3

 
$
352.9

 
$
302.5

The following table presents our revenue disaggregated based on the geographical location of our players:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
U.S.(1)   
$
108.8

 
$
96.2

 
$
328.3

 
$
275.6

International
7.6

 
9.1

 
24.6

 
26.9

Total revenue
$
116.4

 
$
105.3

 
$
352.9

 
$
302.5

(1) Geographic location is estimated to be derived from the U.S. when data is not available.


Contract Assets, Contract Liabilities and Other Disclosures
We receive customer payments based on the payment terms established in our contracts. Payment for the purchase of virtual currency is made at purchase, and such payments are non‑refundable in accordance with our standard terms of service.

14


Such payments are initially recorded as a contract liability, and revenue is subsequently recognized as we satisfy our performance obligations.
The following table summarizes our opening and closing balances in contract assets, contract liabilities and accounts receivable:
 
Accounts Receivable
 
Contract Assets(1)
 
Contract Liabilities(2)
Beginning of period balance
$
31.5

 
$
0.2

 
$
0.7

Balance as of September 30, 2019
43.3

 
0.2

 
0.6

(1) Contract assets are included within Prepaid expenses and other current assets in our consolidated balance sheets.
(2) Contract liabilities are included within Accrued liabilities in our consolidated balance sheets.

During the nine months ended September 30, 2019 and 2018, we recognized $0.7 million and $1.5 million, respectively, of revenue that was included in the opening contract liability balance. Substantially all of our unsatisfied performance obligations relate to contracts with an original expected length of one year or less.

Concentration of Credit Risk
Our revenue and accounts receivable are generated via certain platform providers, which subject us to a concentration of credit risk. The following tables summarize the percentage of revenues and accounts receivable generated via our platform providers in excess of 10% of our total revenues and total accounts receivable:
 
Revenue
Concentration
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Apple
45.5
%
 
41.9
%
 
44.1
%
 
41.7
%
Google
35.0
%
 
33.1
%
 
35.4
%
 
31.4
%
Facebook
16.0
%
 
21.3
%
 
17.0
%
 
23.0
%
 
Accounts
Receivable
Concentration
 
September 30,
 
December 31,
 
2019
 
2018
Apple
57.6
%
 
38.6
%
Google
22.2
%
 
31.3
%
Facebook
16.3
%
 
23.7
%


Contingent Acquisition Consideration
The contingent consideration liability is recorded at fair value on the acquisition date as part of the consideration transferred and is remeasured each reporting period. The changes in fair value of contingent acquisition consideration as a result of remeasurement are included in contingent acquisition consideration expenses. The inputs used to measure the fair value of contingent consideration liability primarily consist of projected earnings‑based measures and probability of achievement (categorized as Level 3 in the fair value hierarchy as established by ASC 820). During the second quarter of 2019, we agreed with the Spicerack selling shareholders to pay them $31.0 million in total contingent acquisition consideration. We paid $3.0 million and $24.0 million during the three and nine months ended September 30, 2019 with the remaining balance to be fully paid by February 2020. The following table summarizes our contingent acquisition consideration liabilities:

15


 
September 30,
 
December 31,
 
2019
 
2018
Contingent acquisition consideration included in accrued liabilities
$
7.0

 
$
18.8

Contingent acquisition consideration included in other long-term liabilities

 
10.5


Deferred Offering Costs
Through September 30, 2019, we incurred $9.3 million in costs directly related to pursuing the Offering. These costs were charged against the gross offering proceeds.

Revolving Credit Facility
In connection with the IPO, SciPlay Holding, a wholly owned subsidiary of SciPlay Parent LLC, as the borrower, SciPlay Parent LLC, as a guarantor, the subsidiary guarantors party thereto, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent, entered into a $150.0 million revolving credit agreement (the “Revolver”) that matures in May 2024. The interest rate is either Adjusted LIBOR (as defined in the Revolver) plus 2.250% (with one 0.250% leverage-based step-down to the margin and one 0.250% leverage-based step-up to the margin) or ABR (as defined in the Revolver) plus 1.250% (with one 0.250% leverage-based step-down to the margin and one 0.250% leverage-based step-up to the margin) at our option. We are required to pay to the lenders a commitment fee of 0.500% per annum on the average daily unused portion of the revolving commitments through maturity, which will be the five-year anniversary of the closing date of the Revolver, which fee varies based on the total net leverage ratio and is subject to a floor of 0.375%. The Revolver provides for up to $15.0 million in letter of credit issuances, which requires customary issuance and administration fees, and a fronting fee of 0.125%.

The Revolver contains covenants that, among other things, restrict our ability to incur additional indebtedness; incur liens; sell, transfer or dispose of property and assets; invest; make dividends or distributions or other restricted payments; and engage in affiliate transactions, with the exception of certain payments under the TRA and payments in respect of certain tax distributions under the Operating Agreement. In addition, the Revolver requires us to maintain a maximum total net leverage ratio not to exceed 2.50:1.00 and to maintain a minimum fixed charge coverage ratio of no less than 4.00:1.00. Such covenants are tested quarterly at the end of each fiscal quarter.
    
The Revolver is secured by a (i) first priority pledge of the equity securities of SciPlay Holding, SciPlay Parent LLC’s restricted subsidiaries and each subsidiary guarantor party thereto and (ii) first priority security interests in, and mortgages on, substantially all tangible and intangible personal property and material fee-owned real property of SciPlay Parent LLC, SciPlay Holding and each subsidiary guarantor party thereto, in each case, subject to customary exceptions.

(2) Goodwill and Intangible Assets, net
Goodwill
$107.9 million of goodwill reflected in these financial statements was allocated based on an estimate of the relative fair value that existed at the time of origination of goodwill in connection with the Parent’s acquisitions of WMS Industries, Inc. (“WMS”) and Bally Technologies, Inc. (“Bally”). The carrying value of goodwill increased by $12.8 million, as a result of the April 7, 2017 Spicerack acquisition.
Intangible Assets, net
Intangible assets reflected in these financial statements were allocated based on an estimate of the relative fair value that existed at the time of origination of intangible assets in connection with Parent’s acquisitions of WMS and Bally.
The following table presents certain information regarding our intangible assets:

16


 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Balance
Balance as of September 30, 2019
 
 
 
 
 
Amortizable intangible assets:
 
 
 
 
 
Intellectual property
$
35.2

 
$
(32.9
)
 
$
2.3

Customer relationships
23.2

 
(17.7
)
 
5.5

Licenses
5.1

 
(2.2
)
 
2.9

Brand names
3.9

 
(3.3
)
 
0.6

 
$
67.4

 
$
(56.1
)
 
$
11.3

 
 
 
 
 
 
Balance as of December 31, 2018
 
 
 
 
 
Amortizable intangible assets:
 
 
 
 
 
Intellectual property
$
33.0

 
$
(30.1
)
 
$
2.9

Customer relationships
23.2

 
(16.8
)
 
6.4

Licenses
5.1

 
(1.5
)
 
3.6

Brand names
3.7

 
(3.0
)
 
0.7

 
$
65.0

 
$
(51.4
)
 
$
13.6



The following reflects amortization expense related to intangible assets included within depreciation and amortization:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Amortization expense(1)
$
0.8

 
$
0.9

 
$
2.3

 
$
10.5

(1) Nine months ended September 30, 2018 includes $8.1 million in accelerated amortization of certain Dragonplay intellectual property recorded as a result of a change in estimate of the remaining useful lives.


(3) Leases
On January 1, 2019, we adopted ASC 842 using the optional transition method provided by ASU 2018-11. Our operating leases primarily consist of real estate leases such as offices. Our leases have remaining terms of 1 year to 5 years. We do not have any finance leases. Our total variable and short term lease payments and operating lease expenses were immaterial for all periods presented.

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

17


 
September 30, 2019
Operating lease right-of-use assets(1)
$
6.4

   Accrued liabilities
1.9

   Operating lease liabilities
5.6

Total operating lease liabilities
$
7.5

 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
   Operating cash flows from operating leases for the nine months ended September 30, 2019
$
1.4

Weighted average remaining lease term, years
4.0

Weighted average discount rate
5.0
%
(1) Right-of-use assets obtained in exchange for lease obligations for the nine months ended September 30, 2019 were immaterial.

Lease liability maturities:
 
Operating Leases
Remainder of 2019
$
0.6

2020
2.1

2021
1.7

2022
1.7