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”). The IPO was completed on May 7, 2019. 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.
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 (“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 consolidated financial statements should be read in conjunction with the consolidated financial statements and related Notes included in our 2019 Form 10-K. Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.
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 (the “Operating Agreement”), 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 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.
Significant Accounting Policies
There have been no changes to our significant accounting policies described within the Notes of our 2019 Form 10-K.
New Accounting Guidance
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes, a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also
simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted. We early adopted this standard effective January 1, 2020. The adoption of this guidance did not have a material effect on our consolidated financial statements.
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 “coins, chips and cards”), 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 Microsoft. 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:
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Three Months Ended
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Six Months Ended
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June 30,
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|
June 30,
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2020
|
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2019
|
|
2020
|
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2019
|
|
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Mobile
|
$
|
144.3
|
|
|
$
|
98.2
|
|
|
$
|
245.5
|
|
|
$
|
195.1
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Web
|
21.3
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|
19.9
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|
|
38.4
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|
|
41.4
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Total revenue
|
$
|
165.6
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|
|
$
|
118.1
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|
|
$
|
283.9
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|
$
|
236.5
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|
|
The following table presents our revenue disaggregated based on the geographical location of our players:
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2020(1)
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2019(2)
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2020(1)
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2019(2)
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North America
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$
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152.6
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|
$
|
111.1
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|
|
$
|
260.6
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|
|
$
|
219.5
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International
|
13.0
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7.0
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23.3
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17.0
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Total revenue
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$
|
165.6
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|
|
$
|
118.1
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|
|
$
|
283.9
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|
|
$
|
236.5
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|
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|
(1) For the three and six months ended June 30, 2020, North America revenue includes revenue derived from the U.S., Canada and Mexico. As a result of enhancements in the technologies and processes we use to obtain customer data, beginning with the first quarter of 2020, geographical location is now determined based on player location as reported by the platform provider.
(2) For the three and six months ended June 30, 2019, revenue is disaggregated between the U.S. and International. Revenues are assumed to be derived from the U.S. when data on geographical location was not available. We did not recast revenue for this period as it was deemed impractical due to lack of availability of similar data.
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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 coins, chips and cards is made at purchase, and such payments are non-refundable in accordance with our standard terms of service. 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:
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Accounts Receivable
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Contract Assets(1)
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Contract Liabilities(2)
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Beginning of period balance
|
$
|
32.1
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|
|
$
|
0.2
|
|
|
$
|
0.6
|
|
Balance as of June 30, 2020
|
53.2
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|
|
0.2
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|
|
0.8
|
|
(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.
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During the six months ended June 30, 2020 and 2019, we recognized $0.5 million and $0.6 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:
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Revenue
Concentration
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Three Months Ended
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|
Six Months Ended
|
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|
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|
|
|
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|
|
June 30, 2020
|
|
June 30, 2019
|
|
June 30, 2020
|
|
June 30, 2019
|
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Apple
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45.5
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%
|
|
44.0
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%
|
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45.7
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%
|
|
43.4
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%
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Google
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38.4
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%
|
|
35.4
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%
|
|
37.5
|
%
|
|
35.6
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%
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Facebook
|
12.8
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%
|
|
16.9
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%
|
|
13.5
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%
|
|
17.5
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%
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|
Accounts
Receivable
Concentration as of
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|
|
|
June 30,
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|
December 31,
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2020
|
|
2019
|
Apple
|
63.8
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%
|
|
42.7
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%
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Google
|
25.5
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%
|
|
33.1
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%
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Facebook
|
8.4
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%
|
|
20.9
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%
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Acquisitions
On June 22, 2020, we completed the acquisition of all of the issued and outstanding capital stock of privately held mobile and social game company Come2Play, Ltd. (“Come2Play”), which expands our existing portfolio of social games. Come2Play offers Backgammon and Solitaire social games targeted towards casual game players on some of the same platforms in which we currently offer our existing games. The total purchase consideration was $17.8 million including $3.7 million in contingent acquisition consideration. Our preliminary allocation of the purchase price resulted in $12.7 million allocated to acquired intangible assets, which includes $6.8 million in customer relationships, $4.1 million in intellectual property, and $1.8 million in brand names, which have useful lives of seven, five and seven years, respectively, an immaterial amount of net working capital and $6.4 million in excess purchase price allocated to goodwill. The factors contributing to the recognition of goodwill are based on expected synergies resulting from this acquisition, including the expansion of the games portfolio. None of the resultant goodwill is expected to be deductible for income tax purposes. The results of operations from Come2Play have been included in our consolidated statement of income since the date of acquisition, which results were not material for the periods presented nor any historical periods. The fair value of intangible assets was determined using a combination of the royalty savings method and excess earnings method, and considered the Level 3 hierarchy as established by ASC 820.
(2) Intangible Assets and Software, net
The following table presents certain information regarding our intangible assets and software:
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Gross
Carrying
Amount
|
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Accumulated
Amortization
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Net
Balance
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|
|
Balance as of June 30, 2020
|
|
|
|
|
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|
|
Intellectual property
|
$
|
39.9
|
|
|
$
|
(34.2)
|
|
|
|
$
|
5.7
|
|
|
Customer relationships
|
30.0
|
|
|
(18.6)
|
|
|
|
11.4
|
|
|
Software
|
19.2
|
|
|
(12.2)
|
|
|
|
7.0
|
|
|
Licenses
|
5.3
|
|
|
(2.8)
|
|
|
|
2.5
|
|
|
Brand names
|
5.7
|
|
|
(3.4)
|
|
|
|
2.3
|
|
|
Total intangible assets and software
|
$
|
100.1
|
|
|
$
|
(71.2)
|
|
|
|
$
|
28.9
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
|
|
|
|
|
|
|
Intellectual property
|
$
|
35.4
|
|
|
$
|
(33.4)
|
|
|
|
$
|
2.0
|
|
|
Customer relationships
|
23.2
|
|
|
(18.0)
|
|
|
|
5.2
|
|
|
Software
|
16.8
|
|
|
(10.3)
|
|
|
|
6.5
|
|
|
Licenses
|
5.1
|
|
|
(2.4)
|
|
|
|
2.7
|
|
|
Brand names
|
3.9
|
|
|
(3.3)
|
|
|
|
0.6
|
|
|
Total intangible assets and software
|
$
|
84.4
|
|
|
$
|
(67.4)
|
|
|
|
$
|
17.0
|
|
|
The following reflects amortization expense related to intangible assets and software included within depreciation and amortization:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
Amortization expense
|
$
|
1.8
|
|
|
$
|
1.5
|
|
|
$
|
3.5
|
|
|
$
|
3.1
|
|
|
|
|
|
(3) Leases
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:
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|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
December 31, 2019
|
Operating lease right-of-use assets(1)
|
$
|
5.4
|
|
|
$
|
6.0
|
|
Accrued liabilities
|
1.6
|
|
|
1.9
|
|
Operating lease liabilities
|
4.8
|
|
|
5.2
|
|
Total operating lease liabilities
|
$
|
6.4
|
|
|
$
|
7.1
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows for operating leases for the six months ended June 30, 2020 and 2019
|
$
|
1.2
|
|
|
$
|
1.0
|
|
Weighted average remaining lease term, units in years
|
3.9
|
|
4.2
|
Weighted average discount rate
|
5.0
|
%
|
|
5.0
|
%
|
(1) Right-of-use assets obtained in exchange for lease obligations for the six months ended June 30, 2020 were immaterial.
|
|
|
|
Lease liability maturities:
|
|
|
|
|
|
|
Operating Leases
|
Remainder of 2020
|
$
|
1.0
|
|
2021
|
1.8
|
|
2022
|
1.9
|
|
2023
|
1.4
|
|
2024
|
1.0
|
|
Less: Imputed Interest
|
(0.7)
|
|
Total
|
$
|
6.4
|
|
As of June 30, 2020, we did not have material additional operating leases that have not yet commenced.
(4) Income Taxes
We hold an economic interest of 18% in SciPlay Parent LLC subsequent to the IPO. The 82% economic interest that we do not own represents a noncontrolling interest for financial reporting purposes. SciPlay Parent LLC is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As such, SciPlay Parent LLC is not subject to income tax in most jurisdictions, and SciPlay Parent LLC’s members, of which we are one, are liable for income taxes based on their allocable share of SciPlay Parent LLC’s taxable income. The effective income tax rates for the three and six months ended June 30, 2020 were 6.0% and 5.6%, respectively, and (2.7)% and 9.1% for the three and six months ended June 30, 2019, respectively. The effective income tax rates were determined using an estimated annual effective tax rate after considering any discrete items for such periods.
Our effective tax rate differs from the statutory rate of 21% primarily because we generally do not record income taxes for the noncontrolling interest portion of U.S. pre-tax income. Additionally, the periods prior to the IPO are presented using historical results of operations and cost basis of the assets and liabilities as if we operated on a standalone basis during those periods, and the tax provision is calculated as if we completed separate tax returns apart from our Parent (“Separate-return Method’’). Certain legal entities that are included in these financial statements under the Separate-return Method were included in tax filings of affiliated entities that are not part of these financial statements. U.S. federal, state and local income tax provision of $1.8 million and $6.5 million for the three and six months ended June 30, 2019, respectively, is included in the income tax expense under the Separate-return Method for the 2019 periods prior to the IPO.
TRA
During the three months ended June 30, 2020, payments totaling $2.5 million were made to Scientific Games pursuant to the TRA. As of June 30, 2020 and December 31, 2019, the total TRA liability was $71.3 million and $75.3 million, respectively, of which $4.0 million and $2.6 million, respectively, was included in Accrued liabilities.
(5) Related Party Transactions
The following is the summary of amounts paid to Scientific Games and settled in cash:
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|
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|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Financial Statement Line Item
|
Royalties for Scientific Games IP
|
$
|
—
|
|
|
$
|
2.9
|
|
|
$
|
—
|
|
|
$
|
10.2
|
|
|
Cost of revenue
|
Royalties to Scientific Games for third-party IP
|
2.0
|
|
|
1.8
|
|
|
3.7
|
|
|
4.4
|
|
|
Cost of revenue
|
Parent services
|
1.0
|
|
|
1.2
|
|
|
2.4
|
|
|
2.6
|
|
|
General and administrative
|
TRA payments (see Note 4)(1)
|
2.5
|
|
|
—
|
|
|
2.5
|
|
|
—
|
|
|
Accrued liabilities
|
Distributions to Parent and affiliates, net(1)
|
11.6
|
|
|
—
|
|
|
11.6
|
|
|
—
|
|
|
Noncontrolling interest
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(1) Under the terms of the Operating Agreement, SciPlay Corporation relies on distributions from SciPlay Parent LLC to pay its obligations under the TRA and any other tax obligations. All distributions must be on a pari-passu basis, thus initiating a pro-rata distribution to Parent and affiliates.
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The following is the summary of balances due to affiliates:
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June 30, 2020
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December 31, 2019
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Royalties under intercompany IP License Agreement
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$
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1.1
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$
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0.5
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Parent services
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0.7
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0.8
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Reimbursable expenses to Scientific Games and its subsidiaries
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1.2
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1.4
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$
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3.0
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$
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2.7
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(6) Stockholders’ Equity and Noncontrolling Interest
Noncontrolling Interest
We are a holding company, and our sole material assets are LLC Interests that we purchased from SciPlay Parent LLC and SG Holding I, representing an aggregate 18.0% economic interest in SciPlay Parent LLC. The remaining 82.0% economic interest in SciPlay Parent LLC is owned indirectly by SGC, through the ownership of LLC Interests by the indirect wholly owned subsidiaries of SGC, the SG Members.
Stock-Based Compensation
The following table summarizes stock-based compensation expense that is included in general and administrative expenses:
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2020
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2019
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2020
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2019
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Related to SciPlay equity awards
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$
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5.0
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$
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3.7
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$
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4.9
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$
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3.7
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Related to the Parent’s equity awards
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0.1
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0.2
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0.3
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2.9
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Total
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$
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5.1
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$
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3.9
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$
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5.2
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$
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6.6
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As of June 30, 2020, we had $9.5 million in unrecognized stock-based compensation expense that is expected to be recognized over a weighted-average expected vesting period of one year, of which $5.2 million relates to performance-based restricted stock units.
(7) Earnings per Share
The table below sets forth a calculation of basic earnings per share ("EPS") based on dividing net income attributable to SciPlay by the basic weighted average number of shares of Class A common stock outstanding during the period. Diluted EPS of Class A common stock is computed by dividing net income attributable to SciPlay by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to all potentially dilutive securities, using the treasury stock method. No material number of restricted stock units was excluded from the calculation of diluted weighted-average common shares outstanding.
For the three and six months ended June 30, 2019 we only included net income attributable to SciPlay generated from May 7, 2019 to June 30, 2019, the period following our IPO in which we had outstanding Class A common stock.
We excluded Class B common stock from the computation of basic and diluted EPS, as holders of Class B common stock do not have economic interest in us and separate presentation of EPS of Class B common stock under the two-class method has not been presented.
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Three Months Ended
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Six Months Ended
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June 30, 2020
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June 30, 2019
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June 30, 2020
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June 30, 2019
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Numerator:
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Net income
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$
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48.8
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$
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26.2
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$
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79.9
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$
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39.9
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Less: net income attributable to SG Social Holding Company II, LLC prior to IPO
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—
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6.7
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—
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20.4
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Less: net income attributable to the noncontrolling interest
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42.2
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13.9
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68.9
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13.9
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Net income attributable to SciPlay
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$
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6.6
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$
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5.6
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$
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11.0
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$
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5.6
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Denominator:
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Weighted average shares of Class A common stock for basic EPS
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22.8
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22.7
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22.7
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22.7
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Effect of dilutive securities:
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Stock-based compensation grants
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1.4
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—
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1.5
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—
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Weighted average shares of Class A common stock for diluted EPS
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24.2
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22.7
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24.2
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22.7
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Net income attributable to SciPlay per share of Class A common stock - basic
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$
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0.29
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$
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0.25
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$
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0.48
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$
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0.25
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Net income attributable to SciPlay per share of Class A common stock - diluted
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$
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0.27
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$
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0.25
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$
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0.45
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$
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0.25
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(8) Litigation
From time to time, we are subject to various claims, complaints and legal actions in the normal course of business, including the Washington State Matter described in Note 11 within our 2019 Form 10-K. There have been no material changes to these matters since our 2019 Form 10-K was filed with the SEC, except as described below. In addition, we may receive notifications alleging infringement of patent or other intellectual property rights.
SciPlay IPO Matter (New York)
On or about October 14, 2019, the Police Retirement System of St. Louis filed a putative class action complaint in New York state court against SciPlay, certain of its executives and directors, and SciPlay’s underwriters with respect to its initial public offering (the “PRS Action”). The complaint was amended on November 18, 2019. The plaintiff seeks to represent a class of all persons or entities who acquired Class A common stock of SciPlay pursuant and/or traceable to the Registration Statement filed and issued in connection with SciPlay’s initial public offering, which commenced on or about May 3, 2019. The complaint asserts claims for alleged violations of Sections 11 and 15 of the Securities Act, 15 U.S.C. § 77, and seeks certification of the putative class; compensatory damages of at least $146.0 million, and the award of the plaintiff’s and the class’s reasonable costs and expenses incurred in the action.
On or about December 9, 2019, Hongwei Li filed a putative class action complaint in New York state court asserting substantively similar causes of action under the Securities Act of 1933 and substantially similar factual allegations as those alleged in the PRS Action (the “Li Action”). On December 18, 2019, the New York state court entered a stipulated order consolidating the PRS Action and the Li Action into a single lawsuit. On December 23, 2019, the defendants moved to dismiss the consolidated action.
We are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible loss, if any. We believe that the claims in the lawsuit are without merit, and intend to vigorously defend against them.
SciPlay IPO Matter (Nevada)
On or about November 4, 2019, plaintiff John Good filed a putative class action complaint in Nevada state court against SciPlay, certain of its executives and directors, SGC, and SciPlay’s underwriters with respect to SciPlay’s initial public offering. The plaintiff seeks to represent a class of all persons who purchased Class A common stock of SciPlay in or traceable to SciPlay’s initial public offering that it completed on or about May 7, 2019. The complaint asserts claims for alleged violations of Sections 11 and 15 of the Securities Act, 15 U.S.C. § 77, and seeks certification of the putative class; compensatory damages, and the award of the plaintiff’s and the class’s reasonable costs and expenses incurred in the action. On February 27, 2020, the trial court entered a stipulated order that, among other things, stayed the lawsuit pending entry of an order resolving the motion to dismiss that is pending in the SciPlay IPO matter in New York state court.
We are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible losses, if any. We believe that the claims in the lawsuit are without merit, and intend to vigorously defend against them.
For additional information regarding our pending litigation matters, see Note 11 in our 2019 Form 10-K.