scpl-20210331

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 March 31, 2021

☐ 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 Stock 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 May 5, 2021:

Class A Common Stock: 24,383,761

Class B Common Stock: 103,547,021

SCIPLAY CORPORATION

INDEX TO FINANCIAL INFORMATION

AND OTHER INFORMATION

THREE MONTHS ENDED MARCH 31, 2021


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)	5

	Consolidated Statements of Income for the Three Months Ended March 31, 2021 and 2020	5

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 3 1 , 20 21 and 20 20	6

	Condensed Consolidated Balance Sheets as of March 3 1 , 202 1 and December 31, 20 20	7

	Consolidated Statements of Changes in Stockholder s ’ Equity for the Three Months Ended March 3 1 , 202 1 and 20 20	8

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 3 1 , 202 1 and 20 20	9

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Mine Safety Disclosures	26

Item 5.	Other Information	26

Item 6.	Exhibits	27

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:

•the impact of the COVID-19 pandemic and any resulting social, political, economic and financial complications;

•our ability to attract and retain players;

•expectations of growth in total consumer spending on social gaming, including social casino gaming;

•our reliance on third-party platforms;

•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;

•our dependence on the optional purchases of coins, chips and cards to supplement the availability of periodically offered free coins, chips and cards;

•restrictions and covenants in debt agreements, including those that could result in acceleration of the maturity of our indebtedness;

•the discontinuation or replacement of LIBOR, which may adversely affect interest rates;

•fluctuations in our results due to seasonality and other factors;

•dependence on skilled employees with creative and technical backgrounds;

•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 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;

•the impact of legal and regulatory restrictions on our business, including significant opposition in some jurisdictions to interactive social gaming, including social casino gaming, and how such opposition could lead these jurisdictions to adopt legislation or impose a regulatory framework to govern interactive social gaming or social casino gaming specifically, and how this could result in a prohibition on interactive social gaming or social casino gaming 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;

•risks related 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;

•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; and

•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”).

•failure to establish and maintain adequate internal control over financial reporting;

•stock price volatility;

•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;

•our ability to complete acquisitions and integrate businesses successfully;

•our ability to pursue and execute new business initiatives;

•natural events and health crises that disrupt our operations or those of our providers or suppliers;

•changes in tax laws or tax rulings, or the examination of our tax positions;

•our dependence on certain key providers; and

•U.S. and international economic and industry conditions;

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 Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our 2020 Annual Report on Form 10-K filed with the SEC on March 1, 2021 (the “2020 Form 10-K”). 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.

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 and we do not make any representation as to the accuracy of that information. 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 under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our 2020 Form 10-K. These and other factors could cause future performance to differ materially from our assumptions and estimates.

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
	March 31,
	2021		2020
Revenue	$	151.1	$	118.3
Operating expenses:
Cost of revenue(1)	47.1		37.9
Sales and marketing(1)	34.7		28.2
General and administrative(1)	15.7		10.2
Research and development(1)	9.5		7.3
Depreciation and amortization	3.4		2.0
Restructuring and other	0.3		0.5
Operating income	40.4		32.2
Other (expense) income, net	(0.4)		0.5
Net income before income taxes	40.0		32.7
Income tax expense	2.1		1.6
Net income	37.9		31.1
Less: Net income attributable to the noncontrolling interest	32.6		26.7
Net income attributable to SciPlay	$	5.3	$	4.4

Basic and diluted net income attributable to SciPlay per share:
Basic	$	0.23	$	0.19
Diluted	$	0.21	$	0.19

Weighted average number of shares of Class A common stock used in per share calculation:
Basic shares	23.2		22.7
Diluted shares	25.1		23.7
(1) Excludes depreciation and amortization.

See accompanying notes to condensed consolidated financial statements.

SCIPLAY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in millions)


	Three Months Ended
	March 31,
	2021		2020
Net income	$	37.9	$	31.1
Other comprehensive income:
Foreign currency translation loss, net of tax	(2.6)		(0.8)
Total comprehensive income	35.3		30.3
Less: comprehensive income attributable to the noncontrolling interest	30.4		26.1
Comprehensive income attributable to SciPlay	$	4.9	$	4.2

See accompanying notes to condensed consolidated financial statements.

SCIPLAY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in millions, except par value)


	As of
	March 31, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	272.0	$	268.9
Accounts receivable, net	53.3		36.6
Prepaid expenses and other current assets	13.0		5.9
Total current assets	338.3		311.4
Property and equipment, net	4.1		4.4
Operating lease right-of-use assets	7.9		8.5
Goodwill	127.8		129.8
Intangible assets and software, net	44.8		30.3
Deferred income taxes	80.5		82.5
Other assets	1.9		1.9
Total assets	$	605.3	$	568.8
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	20.6	$	23.2
Accrued liabilities	30.3		22.9
Due to affiliate	2.9		5.5
Total current liabilities	53.8		51.6

Operating lease liabilities	6.9		7.5
Liabilities under TRA	68.5		68.5
Other long-term liabilities	16.1		5.7
Total liabilities	145.3		133.3
Commitments and contingencies (see Note 8)
Stockholders’ equity:
Class A common stock, par value $0.001 per share, 625.0 shares authorized, 24.4 and 22.8 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively.	—		—
Class B common stock, par value $0.001 per share, 130.0 shares authorized, 103.5 and 103.5 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively.	0.1		0.1
Additional paid-in capital	44.2		46.1
Retained earnings	38.2		32.9
Accumulated other comprehensive income	0.5		0.9
Total SciPlay stockholders’ equity	83.0		80.0
Noncontrolling interest	377.0		355.5
Total stockholders’ equity	460.0		435.5
Total liabilities and stockholders’ equity	$	605.3	$	568.8

See accompanying notes to condensed consolidated financial statements.

SCIPLAY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited, in millions)



	Class A common stock			Class B common stock			Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Noncontrolling interest		Total
	Shares	Amount		Shares	Amount
December 31, 2020	22.8	$	—	103.5	$	0.1	$	46.1	$	32.9	$	0.9	$	355.5	$	435.5
Net income	—	—		—	—		—		5.3		—		32.6		37.9
Stock-based compensation	—	—		—	—		0.4		—		—		1.4		1.8
Vesting of RSUs, net of tax withholdings	1.6	—		—	—		(2.3)		—		—		(10.0)		(12.3)
Distributions to Parent and affiliates, net	—	—		—	—		—		—		—		(0.3)		(0.3)
Currency translation	—	—		—	—		—		—		(0.4)		(2.2)		(2.6)
March 31, 2021	24.4	$	—	103.5	$	0.1	$	44.2	$	38.2	$	0.5	$	377.0	$	460.0


	Class A common stock			Class B common stock			Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)		Noncontrolling interest		Total
	Shares	Amount		Shares	Amount
December 31, 2019	22.7	$	—	103.5	$	0.1	$	41.7	$	12.0	$	0.3	$	223.4	$	277.5
Net income	—	—		—	—		—		4.4		—		26.7		31.1
Stock-based compensation	—	—		—	—		0.2		—		—		(0.1)		0.1
Currency translation	—	—		—	—		—		—		(0.2)		(0.6)		(0.8)
March 31, 2020	22.7	$	—	103.5	$	0.1	$	41.9	$	16.4	$	0.1	$	249.4	$	307.9

SCIPLAY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in millions)


	Three Months Ended
	March 31,
	2021		2020
Net cash provided by operating activities	$	19.6	$	23.5
Cash flows from investing activities:
Capital expenditures	(2.1)		(1.2)
Net cash used in investing activities	(2.1)		(1.2)
Cash flows from financing activities:
Payments on license obligations	(1.6)		—
Distributions to Scientific Games and affiliates, net	(0.3)		—
Taxes paid related to net share settlement of equity awards	(12.3)		—
Net cash used in financing activities	(14.2)		—
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(0.2)		(0.3)
Increase in cash, cash equivalents and restricted cash	3.1		22.0
Cash, cash equivalents and restricted cash, beginning of period	268.9		110.6
Cash, cash equivalents and restricted cash, end of period	$	272.0	$	132.6

Supplemental cash flow information:
Cash paid for income taxes	$	3.8	$	—
Cash paid for contingent consideration included in operating activities	—		4.0
Supplemental non-cash transactions:
Non-cash additions to intangible assets related to license agreements	$	16.1	$	—

See accompanying notes to condensed consolidated financial statements.

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 “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”). 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 consolidated statements of income, consolidated statements of comprehensive income, condensed consolidated balance sheets, consolidated statements of changes in stockholders’ equity, 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 2020 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 2020 Form 10-K, except as noted below.

Minimum guarantees under licensing agreements

We enter into long-term license agreements with third parties in which we are obligated to pay a minimum guaranteed amount of royalties, typically periodically over the life of the contract. These license agreements provide us with access to a portfolio of major brands to be used across our games. We account for the minimum guaranteed obligations within Current liabilities and Other long-term liabilities at the onset of the license arrangement and record a corresponding licensed asset within intangible assets, net. The licensed intangible assets related to the minimum guaranteed obligations are amortized over the term of the license agreement with the amortization expense recorded in Depreciation and amortization. The long-term liability related to the minimum guaranteed obligations is reduced as royalty payments are made as required

under the license agreement. We assess the recoverability of license agreements whenever events arise or circumstances change that indicate the carrying value of the licensed asset may not be recoverable. Recoverability of the licensed asset and the amount of impairment, if any, are determined using our policy for intangible assets with finite useful lives.

Amortization expense related to these licenses and recorded in Depreciation and amortization for the three months ended March 31, 2021 and 2020 were $1.2 million and $0.2 million, respectively.

The following are our total minimum guaranteed obligations for the periods presented:


	As of
	March 31,		December 31,
	2021		2020



Current liabilities	$	6.5	$	2.6
Other long-term liabilities	10.8		0.3
Total minimum guarantee obligation	$	17.3	$	2.9
Weighted average remaining term (in years)	4.0		2.4

New Accounting Guidance - Not Yet Adopted

The FASB issued ASU No. 2020-04 and subsequently ASU No. 2021-01, Reference Rate Reform (Topic 848) in March 2020 and January 2021, respectively. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, including derivative instruments impacted by changes in the interest rates used for discounting cash flows for computing variable margin settlements, subject to meeting certain criteria, that reference LIBOR or other reference rates expected to be discontinued, in 2022 or potentially 2023 (pending possible extension). The ASUs establish certain contract modification principles that entities can apply in other areas that may be affected by reference rate reform and certain elective hedge accounting expedients and exceptions. The ASUs may be applied prospectively. We do not expect the adoption of this standard to have a material impact 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 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:


	Three Months Ended
	March 31,
	2021		2020
Mobile	$	132.8	$	101.2
Web and other	18.3		17.1
Total revenue	$	151.1	$	118.3

The following table presents our revenue disaggregated based on the geographical location of our players:


	Three Months Ended
	March 31,
	2021		2020
North America(1)	$	138.5	$	108.0
International	12.6		10.3
Total revenue	$	151.1	$	118.3
(1) North America revenue includes revenue derived from the U.S., Canada and Mexico.

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:


	Accounts Receivable		Contract Assets(1)		Contract Liabilities(2)
Beginning of period balance	$	36.6	$	0.2	$	0.6
Balance as of March 31, 2021	53.3		0.2		0.5
(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 three months ended March 31, 2021 and 2020, we recognized $0.5 million and $0.4 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		Accounts Receivable Concentration
	Three Months Ended		March 31,	December 31,
	March 31, 2021	March 31, 2020	2021	2020
Apple	46.8%	46.0%	62.6%	49.2%
Google	37.3%	36.2%	26.5%	35.4%
Facebook	12.1%	14.5%	8.1%	11.5%

(2) Intangible Assets and Software, net and Goodwill

The following table presents certain information regarding our intangible assets and software:


	Gross Carrying Amount		Accumulated Amortization		Net Balance
Balance as of March 31, 2021
Intellectual property	$	41.0	$	(36.5)	$	4.5
Customer relationships	30.3		(20.3)		10.0
Software	23.8		(14.6)		9.2
Licenses	23.7		(4.7)		19.0
Brand names	5.9		(3.8)		2.1
Total intangible assets and software	$	124.7	$	(79.9)	$	44.8

Balance as of December 31, 2020
Intellectual property	$	42.2	$	(37.2)	$	5.0
Customer relationships	30.5		(19.8)		10.7
Software	21.9		(13.8)		8.1
Licenses	7.7		(3.5)		4.2
Brand names	6.1		(3.8)		2.3
Total intangible assets and software	$	108.4	$	(78.1)	$	30.3

The following reflects amortization expense related to intangible assets and software included within depreciation and amortization:


	Three Months Ended
	March 31,
	2021		2020
Amortization expense	$	3.0	$	1.7

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


	Total
Balance as of December 31, 2020	$	129.8
Foreign currency adjustments	(2.0)
Balance as of March 31, 2021	$	127.8

(3) Leases

Our operating leases primarily consist of real estate leases such as offices. Our leases have remaining terms of approximately 4 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:


	March 31,			December 31,
	2021			2020
Operating lease right-of-use assets	$	7.9		$	8.5
Accrued liabilities	2.1			2.0
Operating lease liabilities	6.9			7.5
Total operating lease liabilities	$	9.0		$	9.5

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases for the three months ended March 31, 2021 and 2020, respectively	$	0.6		$	0.6
Weighted average remaining lease term, years	4.0			4.3
Weighted average discount rate	5.0		%	5.0		%

Lease liability maturities:


	Operating Leases
Remainder of 2021	$	1.8
2022	2.5
2023	2.5
2024	2.4
2025	0.7
Thereafter	—
Less: Imputed Interest	(0.9)
Total	$	9.0

As of March 31, 2021, we did not have material additional operating leases that have not yet commenced.

(4) Income Taxes

We hold an economic interest of 19.1% in SciPlay Parent LLC subsequent to the IPO. The 80.9% 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 months ended March 31, 2021 and 2020 were 5.3% and 4.9%, 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.

TRA

During the three months ended March 31, 2021 and 2020, there were no payments made to Scientific Games pursuant to the TRA. As of March 31, 2021 and December 31, 2020, the total TRA liability was $72.5 million, of which $4.0 million was included in Accrued liabilities.

(5) Related Party Transactions

The following is the summary of expenses paid to Scientific Games and settled in cash:


	Three Months Ended
	March 31,
	2021		2020		Financial Statement Line Item
Royalties to Scientific Games for third-party IP	$	0.7	$	1.7	Cost of revenue
Parent services	1.5		1.4		General and administrative

Distributions to Scientific Games and affiliates, net(1)	0.3		—		Noncontrolling interest
(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.

The following is the summary of balances due to affiliates:


	March 31, 2021		December 31, 2020
Royalties to Scientific Games for third-party IP	$	1.2	$	2.5
Parent services	0.8		0.8
Reimbursable expenses to Scientific Games and its subsidiaries	0.9		2.2
	$	2.9	$	5.5

Parent Equity Awards

See Note 6 for disclosures related to Parent’s equity awards.

(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 19.1% economic interest in SciPlay Parent LLC. The remaining 80.9% 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:


	Three Months Ended
	March 31,
	2021		2020


SciPlay awards	$	1.7	$	(0.1)
Parent awards	0.1		0.2
Total	$	1.8	$	0.1

As of March 31, 2021, we had $9.4 million in unrecognized stock-based compensation expense that is expected to be recognized over a weighted-average expected vesting period of 1.4 years, of which $3.1 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 net income attributable to SciPlay divided by the basic weighted average number 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 months ended March 31, 2021 and 2020.

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 therefore a separate presentation of EPS of Class B common stock under the two-class method has not been presented.


	Three Months Ended
	March 31, 2021		March 31, 2020
Numerator:
Net income	$	37.9	$	31.1
Less: net income attributable to the noncontrolling interest	32.6		26.7
Net income attributable to SciPlay	$	5.3	$	4.4
Denominator:
Weighted average shares of Class A common stock for basic EPS	23.2		22.7
Effect of dilutive securities:
Stock-based compensation grants	1.9		1.0
Weighted average shares of Class A common stock for diluted EPS	25.1		23.7
Basic and diluted net income attributable to SciPlay per share:
Basic	$	0.23	$	0.19
Diluted	$	0.21	$	0.19

(8) Litigation

From time to time, we are subject to various claims, complaints and legal actions in the normal course of business. There have been no material changes to these matters since our 2020 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.

Washington State Matter

On April 17, 2018, a plaintiff, Sheryl Fife, filed a putative class action complaint, Fife v. Scientific Games Corporation, against SGC in the United States District Court for the Western District of Washington. The plaintiff seeks to represent a putative class of all persons in the State of Washington who purchased and allegedly lost virtual coins playing SGC’s online social casino games, including but not limited to Jackpot Party Casino and Gold Fish Casino. The complaint asserts claims for alleged violations of Washington’s Recovery of Money Lost at Gambling Act, Washington’s consumer protection statute, and for unjust enrichment, and seeks unspecified money damages (including treble damages as appropriate), the award of reasonable attorneys’ fees and costs, pre- and post-judgment interest, and injunctive and/or declaratory relief. On July 2, 2018, SGC filed a motion to dismiss the plaintiff’s complaint with prejudice, which the trial court denied on December 18, 2018. SGC filed its answer to the putative class action complaint on January 18, 2019. On August 24, 2020, the trial court granted plaintiff’s motion for leave to amend her complaint and to substitute a new plaintiff, Donna Reed, for the initial plaintiff, and re-captioned the matter Reed v. Scientific Games Corporation. On August 25, 2020, the plaintiff filed a first amended complaint against SGC, asserting the same claims, and seeking the same relief, as the complaint filed by Sheryl Fife. On September 8, 2020, SGC filed a motion to compel arbitration of plaintiff’s claims and to dismiss the action, or, in the alternative, to transfer the action to the United States District Court for the District of Nevada, and that motion is fully-briefed and pending before the trial court. On April 9, 2021, the plaintiff filed a motion to certify the putative class and for a preliminary injunction. Although the case was brought against Scientific Games, pursuant to the

Intercompany Services Agreement, we would expect to cover or contribute to any damage awards due to the matter arising as a result of our business.

We are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible loss.

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.

On August 28, 2020, the court issued an oral ruling granting in part and denying in part the defendants’ motion to dismiss. On December 14, 2020, plaintiffs in the consolidated action filed a motion to certify the putative class. That motion is not yet fully-briefed.

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 was pending in the SciPlay IPO matter in New York state court. On September 29, 2020, the trial court entered a stipulated order that extended the stay pending a ruling on class certification in the SciPlay IPO matter in New York state court.

Based on our assessment under ASC 410 and ASC 450 and consideration of the two SciPlay IPO matters above, we determined that both loss and insurance proceeds loss recovery, which we believe is recoverable under our insurance policy, are deemed probable and reasonably estimable. As a result, we recorded approximately $8.0 million in Accrued liabilities and Prepaid expenses and other current assets as of March 31, 2021, with no material impact on our statement of income for the three month period ended March 31, 2021.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to enhance the reader’s understanding of our operations and current business environment from management’s perspective and should be read in conjunction with the description of our business included under Part I, Item 1 “Condensed Consolidated Financial Statements” and Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and under Part I, Item 1 “Business”, Item 1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2020 Form 10-K. The terms “we” and “our” as used herein refer to SciPlay and its consolidated subsidiaries.

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the disclosures and information contained and referenced under “Forward-Looking Statements” and “Risk Factors” included in this Quarterly Report on Form 10-Q and “Risk Factors” included in our 2020 Form 10-K.

You can access our filings with the SEC through the SEC website at https://www.sec.gov or through our website, and we strongly encourage you to do so. We routinely post information that may be important to investors on our website at https://www.sciplay.com/investors/, and we use this website address as a means of disclosing material information to the public in a broad, non-exclusionary manner for purposes of the SEC’s Regulation Fair Disclosure (Reg FD). The contents of our website are not incorporated by reference in this Form 10-Q and shall not be deemed “filed” under the Securities Exchange Act of 1934, as amended.

BUSINESS OVERVIEW

We are a leading developer and publisher of digital games on mobile and web platforms. We currently offer seven core games, including social casino games Jackpot Party Casino®, Quick Hit Slots®, Gold Fish Casino® and Hot Shot Casino®, and casual games, MONOPOLY Slots®, Bingo Showdown® and 88 Fortunes Slots®, and we recently added a solitaire social game targeted toward casual game players as a part of the Come2Play acquisition on various platforms referenced herein. We currently plan to launch an additional casual game in 2022. Our social casino games typically include slots-style game play and occasionally include table games-style game play, while our casual games blend slots-style or bingo game play with adventure game features. All of our games are offered and played on multiple platforms, including Apple, Google, Facebook, Amazon, and Microsoft. In addition to our internally created games, our content library includes recognizable, real-world slot and table games content from Scientific Games. This content allows players who like playing land-based slot machines to enjoy some of those same titles in our free-to-play games. We have access to Scientific Games’ library of more than 1,500 iconic casino titles. We also have access to content from third-party licensed brands such as MONOPOLY™, JAMES BOND™, THE FLINTSTONES™, MICHAEL JACKSON™, and PLAYBOY™.

We generate substantially all of our revenue from the sale of coins, chips and cards, which players of our games can use to play casino-style slot games and table games and bingo games. Players who install our games receive free coins, chips or cards upon the initial launch of the game and additional free coins, chips or cards at specific time intervals. Players may exhaust the coins, chips or cards that they receive for free and may choose to purchase additional coins, chips or cards in order to extend their time of game play.

Recent Events

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 are implementing measures to prevent its spread, including the temporary closure of all non-essential businesses and travel restrictions. Many of our current and potential players may have significantly more free time to play our games, however they may also experience sustained consumer unease and have lower discretionary income. While the increased player engagement we experienced during the first half of 2020 as a result of the stay at home measures across the U.S. has begun to recede, we are still seeing a higher number of paying players compared to the three months ended March 31, 2020. We are not able to predict and quantify the ultimate impact of further COVID-19 developments on our results of operations in future periods.

RESULTS OF OPERATIONS

Summary of Results of Operations


	Three Months Ended
	March 31,						Variance
($ in millions)	2021			2020			2021 vs. 2020
Revenue	$	151.1		$	118.3		$	32.8		28	%
Operating expenses	110.7			86.1			24.6			29	%
Operating income	40.4			32.2			8.2			25	%
Net income	37.9			31.1			6.8			22	%
Net income attributable to SciPlay	5.3			4.4			0.9			20	%
AEBITDA	$	45.9		$	34.8		$	11.1		32	%
Net income margin	25.1		%	26.3		%	(1.2)		pp	nm
AEBITDA margin	30.4		%	29.4		%	1.0		pp	nm
pp = percentage points. nm = not meaningful.

Non-GAAP Financial Measures

Adjusted EBITDA, or AEBITDA, as used herein, is a non-GAAP financial measure that is presented as supplemental disclosure and is reconciled to net income attributable to SciPlay as the most directly comparable GAAP measure as set forth in the below table. We define AEBITDA to include net income attributable to SciPlay before: (1) net income attributable to noncontrolling interest; (2) interest expense; (3) income tax expense; (4) depreciation and amortization; (5) restructuring and other, which includes charges or expenses attributable to: (a) employee severance; (b) management changes; (c) restructuring and integration; (d) M&A and other, which includes: (i) M&A transaction costs; (ii) purchase accounting adjustments; (iii) unusual items (including certain legal settlements) and (iv) other non-cash items; (e) contingent acquisition consideration and (f) cost-savings initiatives; (6) stock-based compensation; (7) loss (gain) on debt financing transactions; and (8) other expense (income) including foreign currency (gains) and losses. We also use AEBITDA margin, a non-GAAP measure, which we calculate as AEBITDA as a percentage of revenue.

Our management uses AEBITDA and AEBITDA margin to, among other things: (i) monitor and evaluate the performance of our business operations; (ii) facilitate our management’s internal comparisons of our historical operating performance and (iii) analyze and evaluate financial and strategic planning decisions regarding future operating investments and operating budgets. In addition, our management uses AEBITDA and AEBITDA margin to facilitate management’s external comparisons of our results to the historical operating performance of other companies that may have different capital structures and debt levels.

Our management believes that AEBITDA and AEBITDA margin are useful as they provide investors with information regarding our financial condition and operating performance that is an integral part of our management’s reporting and planning processes. In particular, our management believes that AEBITDA is helpful because this non-GAAP financial measure eliminates the effects of restructuring, transaction, integration or other items that management believes have less bearing on our ongoing underlying operating performance. Management believes AEBITDA margin is useful as it provides investors with information regarding the underlying operating performance and margin generated by our business operations.

The following table reconciles Net income attributable to SciPlay to AEBITDA and AEBITDA margin:


	Three Months Ended
	March 31,
($ in millions, except percentages)	2021		2020
Net income attributable to SciPlay	$	5.3	$	4.4
Net income attributable to noncontrolling interest	32.6		26.7
Net income	37.9		31.1
Restructuring and other	0.3		0.5
Depreciation and amortization	3.4		2.0
Income tax expense	2.1		1.6
Stock-based compensation	1.8		0.1
Other expense (income), net	0.4		(0.5)
AEBITDA	$	45.9

SEC Form 10-Q filed by SciPlay Corporation