UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2020
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
(State or other jurisdiction of
incorporation or organization)
83-2692460
(I.R.S. Employer Identification No.)
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
Class A Common Stock, $.001 par value
Trading Symbol(s)
SCPL
Name of each exchange on which registered
The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☒ 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 ☒ 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
Non-accelerated filer
Emerging growth company
☐
☐
☒
Accelerated filer
Smaller reporting 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 has led a report on and attestation to its management’s assessment of the effectiveness of its internal
control over nancial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting rm that prepared
or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2020, the market value of voting and non-voting common equity held by non-affiliates of the registrant was $334,866,057.
As of February 23, 2021 the registrant had 22,861,693 shares of Class A common stock outstanding and 103,547,021 shares of Class B common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement relating to the 2021 annual meeting of stockholders are incorporated by reference in Part III. The
proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the conclusion of the registrant’s fiscal year ended
December 31, 2020.
TABLE OF CONTENTS
PART I.
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data - Not applicable due to early adoption of amendment to S-K 301
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV.
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
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PART I
FORWARD-LOOKING STATEMENTS
Throughout this Annual Report on Form 10-K, 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 Annual Report on Form 10-K are generally located in the
material set forth under the headings “Business,” “Risk Factors” and “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:
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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 virtual coins, chips and bingo cards (collectively referred to as “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 (“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;
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;
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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 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; 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;
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 Part I, Item 1A “Risk Factors” in
this Annual Report on 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 Annual Report on Form 10-K 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 in "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K. These
and other factors could cause future performance to differ materially from our assumptions and estimates.
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ITEM 1. BUSINESS
General
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. For
further discussion related to the IPO, see Note 1.
We are a leading developer and publisher of digital games on mobile and web platforms. We operate in the social gaming market, which is
characterized by gameplay online, on mobile phones or on tablets that are social and competitive, and self-directed in pace and session length. We generate
substantially all of our revenue from the sale of coins, chips and cards, which players can use to play slot games, table games or bingo games. Once
obtained, coins, chips and cards (either free or purchased) cannot be redeemed for cash nor exchanged for anything other than game play within our apps.
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We currently offer seven core games, including social casino games Jackpot Party Casino , Gold Fish Casino , Hot Shot Casino and Quick Hit Slots ,
and casual games MONOPOLY Slots , Bingo Showdown and 88 Fortunes Slots , and recently added a solitaire social game targeted toward casual game
players as a part of the Come2Play, Ltd (“Come2Play”) acquisition on various platforms referenced herein. 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 across multiple platforms, including Apple, Google, Facebook, Amazon, and Microsoft. In addition to our
internally created game content, 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, including titles and content from third-party licensed brands such as MONOPOLY, JAMES BOND™, THE
FLINTSTONES™, MICHAEL JACKSON™, and PLAYBOY™. We believe our access to this content, coupled with our years of experience developing in-
house content, uniquely positions us to create compelling social games.
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Mission
Our mission is to become the #1 casual mobile gaming company in the world.
Strategy
We strive to provide high quality services to our customers. To this end we are focused on the following strategies:
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Invest in growth from existing games - We continue to invest in and grow our current games by adapting and developing our monetization and
marketing engines to improve player engagement, increase paying player conversion and drive per-player monetization. As we continue our data-
driven approach to develop our games, we believe we will be able to further monetize our existing user base and attract new players.
• Develop new games - We intend to continue to capitalize on our ability to build successful games by introducing new titles that appeal to specific
player segments and offer differentiated experiences.
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Continue international growth and expansion - We intend to further expand our global presence by incorporating our vast library of recognizable
and regionalized brands and content in our game design, customization and marketing for regional audiences. As the global mobile gaming market
expands, we believe there is an opportunity to continue to improve our reach across the rest of the world by offering more targeted content than we
currently offer and a better game play experience than is currently available to international players.
Expand into adjacent gaming markets - We intend to continue to address additional segments within the broader mobile gaming market by
expanding into adjacent areas and investing in new game markets. We believe our extensive experience in developing and operating social gaming
titles strongly positions us to enter untapped areas within the casual market, such as puzzles, card, match three and board games.
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Leverage platform to scale through select acquisitions - We expect to continue to pursue select strategic acquisitions to fuel our top line growth
and build our portfolio. We believe we can maximize the value of an acquired asset through our scalable platform and our rigorous, data-driven
acquisition, engagement and monetization model.
Research and Development
We believe our ability to attract new players and retain existing players depends in part on our ability to evolve and expand our content library by
continually developing differentiated games, systems technology and functionality to enhance player entertainment and user profitability.
Our personnel are primarily located in Cedar Falls, Iowa, Austin, Texas, and Tel Aviv, Israel. We have additional personnel located in Chicago,
Illinois; Des Moines, Iowa; Kiev, Ukraine; Bangalore, India and Pune, India, with services of the personnel located in Ukraine supplied to us through a
third-party contractor and services of the personnel located in India supplied to us through our intercompany services agreement with Scientific Games.
Intellectual Property
We consider our intellectual property rights, including our trademarks, trade dress, copyrights and trade secrets, to be, in the aggregate, material to
our business. We seek to protect our investment in research and development by seeking intellectual property protection as appropriate for our technologies
and content. We also acquire and license intellectual property from Scientific Games and third parties.
All of our games feature elements subject to copyright protection. In addition, we generally obtain trademark protection and often seek to register
trademarks for the names and designs under which we market and license our games.
We believe the value associated with both our brands and the third-party licensed brands, including those of Scientific Games, under which we
market and license our games contribute to the appeal and success of our games, and our future ability to license, acquire or develop new brand names of
similar quality is important to our continued success. Therefore, we continue to invest in the recognition of our brands and brands we license. In addition to
our own brands and those we license from Scientific Games, certain of our games are based on popular brands licensed from other third parties, such
as MONOPOLY, JAMES BOND™, THE FLINTSTONES™, MICHAEL JACKSON™, and PLAYBOY™.
For a description of the IP License Agreement, see the risk factor captioned “We rely on the ability to use the intellectual property rights of
Scientific Games and other third parties, including the third-party intellectual property rights licensed to Scientific Games that we have enjoyed as an
indirect subsidiary of Scientific Games, and we may lose the benefit of any intellectual property owned by or licensed to Scientific Games if it ceases to
hold certain minimum percentages of the voting power in our company” under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form
10-K and Note 10.
Competition
We face significant competition in all aspects of our business. Our primary social casino game competitors include Playtika, Product Madness/Big
Fish Games (subsidiaries of Aristocrat), Zynga Inc., DoubleU Games/Double Down Interactive, GSN/Bash Gaming and Huuuge Games. Our competitors
in the broader social game market include Glu Mobile, Activision Blizzard, Electronic Arts, Kabam, Rovio and Tencent Holdings. On the broadest scale,
we compete for the leisure time, attention and discretionary spending of our players versus other forms of online entertainment, including social media,
reading and other video games on the basis of a number of factors, including quality of player experience, brand awareness and reputation and access to
distribution channels.
We believe we compete favorably on these factors. Our industry and the markets for our games, however, are highly competitive, rapidly evolving,
fragmented and subject to changing technology, shifting needs and frequent introductions of new games, development platforms and services. Successful
execution of our strategy depends on our continuous ability to attract and retain players, expand the market for our games, maintain a technological edge
and offer new capabilities to players. Our relationship with Scientific Games imposes certain regulatory and operational restrictions on us due to its
business related to real money gaming. We compete with social gaming companies that do not have a similar connection to regulated real money gaming,
and many of those companies possess a base of existing players larger than ours. In some cases, we compete against gaming operators who could expand
their product lines to include social casino games and
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leverage their land-based gaming relationship with Scientific Games to license certain social casino game content that could compete with our content.
Many of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating
histories, greater financial, technical and other resources, and, in some cases, the ability to rapidly combine online platforms with full-time and temporary
employees. Internationally, local competitors may have greater brand recognition than us in their local country and a stronger understanding of local culture
and commerce. They also offer their products and services in local languages we may not offer.
Seasonality
Our results of operations can fluctuate due to seasonal trends and other factors. Player activity is generally slower in the second and third quarters
of the year, particularly during the summer months. However, due to the stay-at-home measures across the U.S. as a result of the COVID-19 pandemic, we
experienced increased player engagement starting in the second quarter of 2020. See the risk factor captioned “Our results of operations fluctuate due to
seasonality and other factors and, therefore, our periodic operating results are not guarantees of future performance” under the heading “Risk Factors” in
Part I, Item 1A of this Annual Report on Form 10-K for additional information.
Human Capital
We are a leading developer of technology-based products and services and associated content for the social gaming market. Our global reach is
made possible through the expertise, skills and dedicated efforts of our employees who serve our players across the globe.
As of December 31, 2020, we employed approximately 602 persons worldwide, which includes 332 domestic employees, 179 international
employees, and 91 full-time third-party consultants largely based in Bangalore, India; Pune, India; and Kiev, Ukraine.
In order to ensure that we are meeting our human capital objectives, we frequently utilize employee surveys to understand the effectiveness of our
employee and compensation programs and to determine where we can improve across the Company. Our latest survey, completed in fiscal 2020, indicated
an overall favorable rating of 78% in 2020, an improvement of 5% from 2019.
Safety: The health and safety of our employees is a top priority of our leaders. In light of the COVID-19 pandemic, we have implemented new
work procedures that allow employees to work from home and collaborate remotely. We have also taken measures to keep our workforce safe by
monitoring and reducing the impact of the outbreak, including putting protocols in place for responding when employees are infected and enhanced
cleaning procedures at all sites.
Compensation and Benefits: We provide a competitive and comprehensive benefits program that is aligned with our business objectives and
attempts to inspire employees to drive innovation and improve Company performance. In addition to cash compensation, we offer medical, dental and
vision plans; an employee stock purchase plan; paid time off and paid holidays; company-paid disability; life insurance; a 401(k) plan; flexible spending
accounts; employee assistance programs; and tuition reimbursement.
Government Regulation
We are subject to foreign and domestic laws and regulations that affect companies operating online, including over the internet and mobile
networks, many of which are still evolving and could be interpreted in ways that could negatively impact our business, revenue and results.
We are subject to federal, state and foreign laws related to the privacy and protection of player data. Such regulations, such as the General Data
Protections Regulation from the European Union and the California Consumer Privacy Act, which went into effect in California on January 1, 2020, and
the recently passed California Privacy Rights Act, or CPRA, are recent, untested laws and regulations that have and could further affect our operations and
business. The extent of the potential impact is unknown.
There is significant opposition in some jurisdictions to social gaming, including social casino gaming. Anti-gaming
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groups that specifically target social casino games are located in several states and countries. Such opposition could lead these jurisdictions to adopt
legislation or impose a regulatory framework to govern social gaming or social casino gaming specifically. These opposition efforts could lead to a
prohibition on social gaming or social casino gaming altogether, restrict our ability to advertise our games or substantially increase our costs to comply
with regulations, all of which could have an adverse effect on our results of operations, cash flows and financial condition. We cannot predict the
likelihood, timing, scope or terms of any such legislation or regulation or the extent to which they may affect our business.
The United States Court of Appeals for the Ninth Circuit has previously held that a social casino game produced by one of our competitors should
be considered illegal gambling under Washington state law. Similar lawsuits have been filed against other defendants, including Scientific Games. For
example, in April 2018, a putative class action lawsuit, Fife v. Scientific Games Corp., was filed in federal district court alleging substantially the same
causes of action against our social casino games. In December 2018, the federal district court assigned to the litigation denied Scientific Games' motion to
dismiss the plaintiff's complaint and, in January 2019, Scientific Games filed its answer and affirmative defenses to the putative class action complaint. See
the risk factor captioned "Legal proceedings may materially adversely affect our business and our results of operations, cash flows and financial condition"
under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K and Note 11.
In September 2018, sixteen international gambling regulators, including from Washington State, signed a declaration expressing concern over the
blurring of lines between gambling and video game products, including social casino gaming. The regulators analyzed the characteristics of video games
and social gaming and the U.K. Parliament published a report on their findings in September 2019. The report addressed the regulators’ findings as to the
potential psychosocial and financial harms of immersive technology, the potential usefulness of pattern-of-play data in understanding healthy gameplay and
supporting responsible game design. The report found that any gambling-related harms of such games should be addressed through Internet safety
legislation. As this report was published by U.K. authorities, we cannot predict the likelihood, timing, scope or terms of any actions taken as a result of the
report.
As we offer our games worldwide, foreign jurisdictions may claim we are required to comply with local laws, including in jurisdictions where we
have no local presence, offices or other equipment. For additional information about other existing or potential regulation that could affect our business, see
the risk factor captioned “Legal or regulatory restrictions could adversely impact our business and limit the growth of our operations” under the heading
“Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Executive Officers of the Company
Certain information regarding each of our executive officers is set forth below.
Name
Barry L. Cottle
Joshua J. Wilson
Michael D. Cody
Michael F. Winterscheidt
Age
Position
59 Executive Chairman of the Board of Directors
45 Chief Executive Officer
50 Chief Financial Officer
50 Chief Accounting Officer and Secretary
Barry L. Cottle has served as Executive Chairman since April 2019. Mr. Cottle has also served as President and Chief Executive Officer of
Scientific Games since June 2018. Mr. Cottle joined Scientific Games as Chief Executive, SG Interactive, in August 2015 to lead the strategy and growth
plans of the Interactive group. Before joining Scientific Games, Mr. Cottle served as Vice Chairman of Deluxe Entertainment Services Group Inc. from
February 2015 until August 2015 while concurrently serving as Senior Vice President of Technology at MacAndrews & Forbes Incorporated from February
2015 until August 2017, where he helped drive digital innovation. Prior to that, he was the Chief Revenue Officer and Executive Vice President-Games for
Zynga Inc. from January 2012 until October 2014, where he led corporate and business development, strategic partnerships, distribution, marketing and
advertising and ultimately the Social Casino group. Previously, Mr. Cottle served as the Executive Vice President-Interactive for Electronic Arts Inc. from
August 2007 to January 2012. Earlier in his career, Mr. Cottle served as the Founder/Chief Executive Officer of Quickoffice, Inc.; Chief Operating Officer
of Palm, Inc.; and Senior Vice President of Disney TeleVentures, a division of The Walt Disney Company dedicated to creating interactive online/TV
experiences.
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Joshua J. Wilson has served as Chief Executive Officer since April 2019. Mr. Wilson has also served as Chief Operating Officer and Senior Vice
President for our business since April 2016 to drive marketing, technology, production and product management for our business, after previously serving
as the Vice President of Product and Operations, Vice President of Product and Executive Director Social Gaming Products. From June 2012 to December
2013, Mr. Wilson was Senior Director of Social Products and Director of Social Gaming for WMS, which was acquired by Scientific Games in 2013,
overseeing web development, analytics and road mapping while creating a business intelligence system and launching our social casino games Jackpot
Party Casino and Gold Fish Casino. Mr. Wilson served with Phantom EFX, LLC from March 2001 to June 2012, when Phantom was acquired by WMS, as
the Director of Online Gaming and Engineering Supervisor.
Michael D. Cody has served as Chief Financial Officer since April 2019. Mr. Cody has also served as Chief Financial Officer for our business
since September 2015, providing both operational and financial support to the business and assisting on strategic and tactical matters. Prior to joining
Scientific Games in 2015, Mr. Cody served at Churchill Downs Interactive as Vice President, Finance from October 2006 through July 2014 and then as
Vice President Operations from July 2014 through September 2015. Mr. Cody previously served as Vice President, Finance for Arlington Park for six
years.
Michael F. Winterscheidt has served as Chief Accounting Officer and Secretary since April 2019. Mr. Winterscheidt has also served as Senior
Vice President and Chief Accounting Officer of Scientific Games since February 2019. From February 2017 to February 2019, he served as Chief
Accounting Officer of Scientific Games, and from July 2016 to February 2017, as its Vice President and Corporate Controller. Prior to joining Scientific
Games, Mr. Winterscheidt served at Caesars Entertainment Corporation from October 2014 through July 2016, ending his tenure as Vice President and
Corporate Controller. Prior to that, he had leadership roles leading the corporate accounting and financial reporting organizations of Delta Airlines, Inc. and
Microsoft Corporation. He was previously a manager in the audit practice of the global accounting firm of Arthur Andersen LLP.
Access to Public Filings
We file annual reports, quarterly reports, current reports, proxy statements and other documents with the Securities and Exchange Commission
(“SEC”) under the Exchange Act. The SEC maintains an Internet site that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC at www.sec.gov.
We make the following information, among others, available free of charge through the Investors link on our website at
https://www.sciplay.com/investors/sec-filings/ and we use our website 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):
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our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as
reasonably practicable after they are filed electronically with or furnished to the SEC;
Section 16 ownership reports filed by our executive officers, directors and 10% stockholders on Forms 3, 4 and 5 and amendments to those reports
as soon as reasonably practicable after they are filed electronically with the SEC; and
our Code of Business Conduct, which applies to all of our officers, directors and employees (which is also our required code of ethics applicable
to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer in keeping with the Sarbanes-Oxley Act of 2002).
The above details about our website and its content are only for information. The contents of our website are not, nor shall they be deemed to be,
incorporated by reference in this Annual Report on Form 10-K.
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ITEM 1A. RISK FACTORS
The risks described below are not the only risks facing us. Please be aware that additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial could also materially and adversely affect our business operations. You should also refer to the other
information contained in our periodic reports, including the Forward-Looking Statements section, our consolidated financial statements and the
related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for a further discussion of the risks,
uncertainties and assumptions relating to our business. Except where the context otherwise indicates, references below to the “Company,” “we,”
“our,” “ours” and “us” include all of our subsidiaries.
Risk Factors Summary
The following is a summary of some of the risks and uncertainties that could materially adversely affect our business, financial condition and
results of operations. You should read this summary together with the more detailed description of each risk factor contained below.
Risks Related to Our Business and Industry
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The recent COVID-19 pandemic and similar health epidemics, contagious disease outbreaks and public perception thereof, could significantly
disrupt our operations and adversely affect our business, results of operations, cash flows or financial condition.
• Our growth depends on our ability to attract and retain players, and the loss of our players, or failure to attract new players, could materially and
adversely affect our business.
• We rely on third-party platforms to make our games available to players and to collect revenue.
• A small number of games has generated a majority of our revenue, and we must continue to launch and enhance games that attract and retain a
significant number of paying players in order to grow our revenue and sustain our competitive position. We rely on a small percentage of our
players for nearly all of our revenue.
• Our success depends upon our ability to adapt to, and offer games that keep pace with, changing technology and evolving industry standards.
• We operate in a highly competitive industry, and our success depends on our ability to effectively compete.
•
The Revolver we entered into in connection with the IPO imposes certain restrictions that may affect our ability to operate our business and make
payments on our indebtedness.
• We rely on skilled employees with creative and technical backgrounds.
Risks Related to Our Technology
• We rely on the ability to use the intellectual property rights of Scientific Games and other third parties, including the third-party intellectual
property rights licensed to Scientific Games that we have enjoyed as an indirect subsidiary of Scientific Games, and we may lose the benefit of
any intellectual property owned by or licensed to Scientific Games if it ceases to hold certain minimum percentages of the voting power in our
company.
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The intellectual property rights of others may prevent us from developing new games, entering new markets or may expose us to liability or costly
litigation.
• Our success depends on the security and integrity of the games we offer, and security breaches or other disruptions could compromise our
information or the information of our players and expose us to liability, which would cause our business and reputation to suffer.
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If we sustain cyber-attacks or other privacy or data security incidents that result in security breaches, we could suffer a loss of sales and increased
costs, exposure to significant liability, reputational harm, regulatory fines or punishment and other negative consequences.
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Risks Related to Legal and Regulatory Factors
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Legal or regulatory restrictions could adversely impact our business and limit the growth of our operations. We may share part of the regulatory
burdens of our parent, Scientific Games.
• Data privacy and security laws and regulations in the jurisdictions in which we do business could increase the cost of our operations and subject us
to possible sanctions and other penalties. Our business depends on the protection of our proprietary information and our owned and licensed
intellectual property.
Risks Related to Our Relationship with Scientific Games
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Scientific Games controls the direction of our business, and the concentrated ownership of our common stock will prevent you and other
stockholders from influencing significant decisions.
If Scientific Games causes the SG Members to sell a controlling interest in our company to a third party in a private transaction, holders of our
Class A common stock may not realize any change-of-control premium on shares of our Class A common stock, and we may become subject to
the control of a presently unknown third party.
Scientific Games’ interests may conflict with our interests and the interests of our stockholders. Conflicts of interest between Scientific Games and
us could be resolved in a manner unfavorable to us and our public stockholders.
• Our articles of incorporation limit Scientific Games’ and its directors’ and officers’ liability to us or our stockholders for breach of fiduciary duty
and could also prevent us from benefiting from corporate opportunities that might otherwise have been available to us.
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Third parties may seek to hold us responsible for liabilities of Scientific Games, which could result in a decrease in our income.
• We are a “controlled company” within the meaning of the NASDAQ rules and, as a result, qualify for, and rely on, exemptions from certain
corporate governance requirements.
• We rely on our access to Scientific Games’ brands and reputation, some of Scientific Games’ relationships, and the brands and reputations of
unaffiliated third parties.
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The services that we receive from Scientific Games may not be sufficient for us to operate our business, and we would likely incur significant
incremental costs if we lost access to Scientific Games’ services.
• Our historical financial results are not necessarily representative of the results we have or may achieve as a standalone company and may not be a
reliable indicator of our future results.
Risks Related to Our Organizational Structure and the TRA
• Our sole material asset is our interest in SciPlay Parent LLC, and, accordingly, we depend on distributions from SciPlay Parent LLC to pay our
taxes and expenses, including payments under the TRA. SciPlay Parent LLC’s ability to make such distributions have been and may be subject to
various limitations and restrictions.
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The TRA with the SG Members requires us to make cash payments to the SG Members in respect of certain tax benefits to which we may become
entitled, and the payments we are required to make have been and will be substantial.
In certain cases, future payments under the TRA to the SG Members may be accelerated or significantly exceed the actual benefits we realize in
respect of the tax attributes subject to the TRA.
• We will not be reimbursed for any payments made to the SG Members under the TRA in the event that any tax benefits are disallowed.
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Risks Related to Ownership of Our Class A Common Stock
• We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies
will make our common stock less attractive to investors.
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The dual class structure of our common stock may adversely affect the trading price or liquidity of our Class A common stock or may dilute our
stockholders’ economic interest in SciPlay.
You should carefully consider the following risks and other information in this Annual Report on Form 10-K in evaluating us and our Class A
common stock. The risk factors generally have been separated into seven groups: risks related to our business and industry, risks relating to our technology,
risks related to legal and regulatory factors, risks related to our relationship with Scientific Games, risks related to our organizational structure and the
TRA, risks related to ownership of our Class A Common Stock and general risks.
Risks Related to Our Business and Industry
The recent COVID-19 pandemic and similar health epidemics, contagious disease outbreaks and public perception thereof, could significantly disrupt
our operations and adversely affect our business, results of operations, cash flows or financial condition.
The recent outbreak of a novel strain of coronavirus, COVID-19, and public perception thereof, have contributed to consumer unease and may
lead to decreased discretionary spending, which may have a negative effect on us. Other future health epidemics or contagious disease outbreaks could do
the same. We cannot predict the ultimate effects that the outbreak of COVID-19, any resulting social, political and economic conditions and decrease in
discretionary spending may have on us, as they would be expected to impact our consumers and business partners in varied ways in different communities.
Our revenue is driven by players’ disposable incomes and level of social casino gaming activity. The recent outbreak of COVID-19 has led to economic
and financial uncertainty for many consumers and may reduce the disposable incomes of social casino game players resulting in a lower number of players
purchasing coins, chips or cards, or in players purchasing fewer coins, chips or cards, which would negatively impact our results of operations, cash flows
and financial condition. The extent to which we are able to sustain the increased player engagement that we experienced during the first half of 2020 as a
result of the stay at home measures across the U.S. is uncertain, as player engagement has already and may continue to recede. The recession of player
engagement, as a result of the discontinuation of stay at home measures or otherwise, could adversely affect our results of operations and financial
condition. Furthermore, this outbreak of COVID-19 has caused, and may continue to cause us and certain of our business partners, including Scientific
Games, who provides services to us under the Intercompany Service Agreement, to implement temporary adjustment of work schemes allowing employees
to work from home and collaborate remotely. We have taken measures to monitor and reduce the impact of the outbreak, including putting in place a global
crisis monitoring team, protocols for responding when employees are infected and enhanced cleaning procedures at all sites but there can be no assurance
these will be sufficient to mitigate the risks faced by our and our partners’ work forces. We may experience lower work efficiency and productivity, which
may adversely affect our service quality, and our business operations have been and could be disrupted when and/or if our employees have been or are
suspected of infection, since this has caused and may cause our employees to be quarantined and/or our offices to be temporarily shut down. In addition, as
we have reopened our offices following appropriate precautions and guidelines, the risk of spreading the virus could increase and we may experience
further disruptions to our business operations if our employees contract the virus from each other. We will continue to incur costs for our operations, and
our revenues during this period are difficult to predict. As a result of any of the above developments, our business has been and our results of operations,
cash flows or financial condition may be adversely affected by the COVID-19 outbreak. The extent to which this outbreak impacts our results of operations
will depend on future developments, which are highly uncertain and unpredictable, including new information which may emerge concerning the severity
and duration of this outbreak and the actions taken by governmental authorities and us to contain it or treat its impact.
Our growth depends on our ability to attract and retain players, and the loss of our players, or failure to attract new players, could materially and
adversely affect our business.
Our ability to achieve growth in revenue in the future will depend, in large part, upon our ability to attract new players to our games, and retain
existing players of our games. Achieving growth in our community of players may require us to increasingly engage in sophisticated and costly sales and
marketing efforts that may not result in additional players.
In addition, our ability to increase the number of players of our games will depend on continued player adoption of social casino gaming and other
forms of casual gaming. Growth in the social gaming industry and the level of demand for and
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market acceptance of our games are subject to a high degree of uncertainty. We cannot assure that player adoption of social gaming and our games will
continue or exceed current growth rates, or that the industry will achieve more widespread acceptance.
Additionally, as technological or regulatory standards change and we modify our technology platform to comply with those standards, we may
need players to take certain actions to continue playing, such as downloading a new game client, performing age gating checks or accepting new privacy
policies or terms and conditions. Players may stop using our games and related services at any time, including if the quality of the player experience on our
platform, including our support capabilities in the event of a problem, does not meet their expectations or keep pace with the quality of the player
experience generally offered by competitive games and services. In addition, expenditures by players tend to fluctuate seasonally, particularly during the
summer months, and may reflect overall economic conditions.
We face competition for leisure time, attention and discretionary spending of our players. Other forms of leisure time activities, such as offline,
traditional online, personal computer and console games, television, movies, sports and the internet, are much larger and more well-established options for
consumers. Consumer tastes and preferences for leisure time activities are also subject to sudden or unpredictable change on account of new innovations. If
consumers do not find our games to be compelling or if other existing or new leisure time activities are perceived by our players to offer greater variety,
affordability, interactivity and overall enjoyment, our business could be materially and adversely affected.
We rely on third-party platforms to make our games available to players and to collect revenue.
Our social gaming offerings operate through Apple, Google, Facebook and Amazon, which also serve as significant online distribution platforms
for our games, with some of our games available on Microsoft. Substantially all of our revenue was generated by players using those platforms.
Consequently, our expansion and prospects depend on our continued relationships with these providers, and any emerging platform providers that
are widely adopted by our target player base. We are subject to the standard terms and conditions that these platform providers have for application
developers, which govern the promotion, distribution and operation of games and other applications on their platforms, and which the platform providers
can change unilaterally on short or without notice. Our business would be harmed if:
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the platform providers discontinue or limit our access to their platforms;
governments or private parties, such as internet providers, impose bandwidth restrictions or increase charges or restrict or prohibit access to those
platforms;
the platforms decline in popularity;
the platforms modify their current discovery mechanisms, communication channels available to developers, respective terms of service or other
policies, including fees;
the platforms impose restrictions or make it more difficult for players to buy coins, chips or cards; or
the platforms change how the personal information of players is made available to developers or develop their own competitive offerings.
If alternative platforms increase in popularity, we could be adversely impacted if we fail to create compatible versions of our games in a timely
manner, or if we fail to establish a relationship with such alternative platforms. Likewise, if our platform providers alter their operating platforms, we could
be adversely impacted as our offerings may not be compatible with the altered platforms or may require significant and costly modifications in order to
become compatible. If our platform providers were to develop competitive offerings, either on their own or in cooperation with one or more competitors,
our growth prospects could be negatively impacted. If our platform providers do not perform their obligations in accordance with our platform agreements,
we could be adversely impacted.
In the past, some of these platform providers have been unavailable for short periods of time or experienced issues with their features that permit
our players to purchase coins, chips or cards. For example, in the second and third quarters of 2018, we were negatively impacted by data privacy
protection changes implemented by Facebook, which impaired our players’ ability to access their previously acquired coins, chips or cards and purchase
additional coins, chips or cards. If similar events recur on a prolonged basis or other similar issues arise that impact players’ ability to download our games,
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access social features or purchase coins, chips or cards, it could have a material adverse effect on our revenue, operating results and brand.
A small number of games has generated a majority of our revenue, and we must continue to launch and enhance games that attract and retain a
significant number of paying players in order to grow our revenue and sustain our competitive position.
Historically, we have depended on a small number of games for a majority of our revenue, and we expect that this dependency will continue for
the foreseeable future. In particular, Jackpot Party Casino has accounted for a substantial portion of our revenue since its launch in 2012, including 44% of
our revenue in 2018, 48% of our revenue in 2019, and 52% of our revenue in 2020, and we expect it to continue to do so over the next several years. Our
growth depends on our ability to consistently launch new games that achieve significant popularity. Each of our games generally requires significant
research and development, engineering, marketing and other resources to develop, launch and sustain via regular upgrades and expansions, and such costs
on average have increased. In the future, we may be forced to reduce our research and development and marketing expenses in order to support other
business priorities, which would harm our ability to attract new players and expand our player base and game community. Our ability to successfully and
timely launch, sustain and expand games and attract and retain paying players largely depends on our ability to:
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anticipate and effectively respond to changing game player interests and preferences;
anticipate or respond to changes in the competitive landscape;
develop, sustain and expand games that are fun, interesting and compelling to play and on which players want to spend money;
retain rights to the intellectual property rights of third parties, including Scientific Games;
build and maintain our brand and reputation;
effectively market new games and enhancements to our existing players and new players;
• minimize launch delays and cost overruns on new games and game expansions;
• minimize downtime and other technical difficulties; and
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acquire high-quality assets, personnel and companies.
It is difficult to consistently anticipate player demand on a large scale, particularly as we develop new games in new markets, including the
international markets and new mobile platforms. If we do not successfully launch games that attract and retain a significant number of paying players and
extend the life of our existing games, our market share, reputation and financial results could be harmed. In addition, if the popularity of Jackpot Party
Casino or any of our other top games decreases significantly, that would have a material adverse effect on our results of operations, cash flows and
financial condition.
Moreover, it is difficult to predict the problems we may encounter in innovating and introducing new games, and we may need to devote
significant resources to the creation, support and maintenance of our games and services. Under the IP License Agreement, our right to use any intellectual
property created or acquired by SG Gaming, Inc. (formerly known as Bally Gaming, Inc.) (“SG Gaming”) or its affiliates, or licensed by third parties to SG
Gaming, after the third anniversary of the date of the IP License Agreement, will be limited to use in our currently available games. This limit will also
extend to derivative works of, or improvements to, intellectual property licensed to us under the IP License Agreement that are developed after the third
anniversary of the date of the IP License Agreement (including by us), as such derivative works and improvements will be assigned to SG Gaming and
licensed back to us pursuant to the terms of the IP License Agreement. We cannot assure that we will be able to obtain a license for the use of any such
intellectual property in our new games on commercially reasonable terms, if at all.
We cannot assure that our initiatives to improve our player experience will always be successful. We also cannot predict whether our new games
or service offerings will be well received by players, or whether improving our technology will be successful or sufficient to offset the costs incurred to
develop and market these games, services or technology.
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We rely on a small percentage of our players for nearly all of our revenue.
A small percentage of our players account for nearly all of our revenue. For example, 5.5%, 6.0% and 7.1% of our players made purchases in our
games, in 2018, 2019, and 2020, respectively. However, we lose paying players in the ordinary course of business, and they may stop making purchases in
our games or playing our games altogether at any time. In order to sustain or increase our revenue levels, we must attract new paying players or increase
the amount our players pay. To retain paying players, we must devote significant resources so that the games they play retain their interest and attract them
to our other games. Our new games may also attract players away from our existing games. If we fail to grow or sustain the number of our paying players,
or if the rate at which we add paying players declines or if the average amount our paying players pay declines, our results of operations, cash flows and
financial condition could be adversely impacted.
Our success depends upon our ability to adapt to, and offer games that keep pace with, changing technology and evolving industry standards.
Our success depends upon our ability to attract and retain players, which is largely driven by maintaining and increasing the quantity and quality
of social games. To satisfy players, we need to continue to improve their experience and innovate and introduce games that players find useful and that
cause them to return to our suite of games more frequently. This includes continuing to improve our technology to optimize search results for our games,
tailoring our game offerings to additional geographic and market segments, and improving the user-friendliness of our games and our ability to provide
high-quality support. Our ability to anticipate or respond to changing technology and evolving industry standards and to develop and introduce new and
enhanced games on a timely basis or at all is a significant factor affecting our ability to remain competitive and expand and attract new players. We cannot
assure that we will achieve the necessary technological advances or have the financial resources needed to introduce new games on a timely basis or at all.
Our players depend on our support organization to resolve any issues relating to our games. Our ability to provide effective support is largely
dependent on our ability to attract, resource, and retain employees who are not only qualified to support players of our games, but are also well versed in
our games. Any failure to maintain high-quality support, or a market perception that we do not maintain high-quality support, could harm our reputation,
adversely affect our ability to sell coins, chips or cards within our games to existing and prospective players, and could adversely impact our results of
operations, cash flows and financial condition.
We operate in a highly competitive industry, and our success depends on our ability to effectively compete.
Social gaming, which includes social casino gaming and from which we derive substantially all of our revenue, is a rapidly evolving industry with
low barriers to entry. Businesses can easily launch online or mobile platforms and applications at nominal cost by using commercially available software or
partnering with various established companies in these markets. The market for our games is also characterized by rapid technological developments,
frequent launches of new games, changes in player needs and behavior, disruption by innovative entrants and evolving business models and industry
standards. As a result, our industry is constantly changing games and business models in order to adopt and optimize new technologies, increase cost
efficiency and adapt to player preferences.
Successful execution of our strategy depends on our continuous ability to attract and retain players, adapt to the emergence of new mobile
hardware or operating systems, expand the market for our games, maintain a technological edge and offer new capabilities to players. We also compete
with social gaming companies, including those that offer social casino games such as Playtika, Zynga, DoubleU and others, that have no connection to
regulated real money gaming, and many of those companies have a base of existing players that is larger than ours. In some cases, we compete against real
money gaming operators who have expanded their games to include social casino games and have in the past leveraged their land-based gaming
relationship with Scientific Games to license social casino game content from Scientific Games, although such rights are limited in scope by the IP License
Agreement. In those cases, customers of such real money gaming operators may choose to play our content as it is offered by the operator and not as it is
offered by our social casino games, detrimentally impacting our results.
Some of our current and potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating
histories, local language capabilities, greater financial, technical, and other resources and, in some cases, the ability to rapidly combine online platforms
with traditional staffing and contingent worker solutions. These companies may use these advantages to develop different platforms and services to
compete with our games, spend more on advertising and brand marketing, invest more in research and development or respond more quickly and
effectively than we
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do to new or changing opportunities, technologies, standards, regulatory conditions or player preferences or requirements. As a result, our players may
decide to stop playing our games or switch to our competitors’ games.
Moreover, current and future competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with
others, including our current or future third-party suppliers. By doing so, these competitors may increase their ability to meet the needs of existing or
prospective freelancers and players. These developments could limit our ability to obtain revenue from existing and new buyers. If we are unable to
compete effectively, successfully and at reasonable cost against our existing and future competitors, our results of operations, cash flows and financial
condition could be adversely impacted.
We offer players regular free play and frequent discounts for purchases of coins, chips or cards to extend play in connection with our business. We
cannot assure that competitive pressure will not cause us to increase the incentives that we offer to our players, which could adversely impact our results of
operations, cash flows and financial condition.
Our free-to-play business model depends on the optional purchases of coins, chips or cards to supplement the availability of periodically offered free
coins, chips or cards.
We derive nearly all of our revenue from the sale of coins, chips or cards used to play our games. Our games are available to players for free, and
we generally generate revenue from them only if they voluntarily purchase coins, chips or cards above and beyond the level of free coins, chips or cards
provided periodically as part of the game. If we fail to offer games that attract purchases of coins, chips or cards, or if we fail to properly manage the
economics of free versus paid coins, chips or cards, our business, financial condition and results of operations could be materially and adversely affected.
The Revolver we entered into in connection with the IPO imposes certain restrictions that may affect our ability to operate our business and make
payments on our indebtedness.
In connection with the IPO, we entered into a $150.0 million revolving credit agreement (the “Revolver”), which 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. In addition, we are required 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. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity, Capital Resources and Working Capital-Revolving Credit Facility” in Part II, Item 7 of this
Annual Report on Form 10-K for additional information. The Revolver limits our ability to make certain payments, including dividends or distributions on
SciPlay Parent LLC’s equity and other restricted payments, provided, however, that payments in respect of certain tax distributions under the Operating
Agreement and certain payments under the TRA are permitted, and payments to SciPlay Parent LLC’s direct or indirect parent made on or prior to the
closing date of the Revolver in an amount not to exceed the net cash proceeds of the IPO are permitted, among other customary exceptions.
Moreover, the new Revolver requires us to dedicate a portion of our cash flow from operations to interest payments, thereby reducing the
availability of cash flow to fund working capital, capital expenditures and other general corporate purposes; increasing our vulnerability to adverse general
economic, industry or competitive developments or conditions; and limiting our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate or in pursuing our strategic objectives.
We may be exposed to the risk of increased interest rates.
The Revolver has variable rates of interest, some of which use the London Inter-Bank Offered Rate (“LIBOR”) as a benchmark. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity, Capital Resources and Working Capital-Revolving
Credit Facility” in Part II, Item 7 of this Annual Report on Form 10-K for additional information. The U.K. Financial Conduct Authority intends to phase
out LIBOR by the end of 2021. In addition, other regulators have suggested reforming or replacing other benchmark rates. The discontinuation, reform or
replacement of LIBOR or any other benchmark rates may have an unpredictable impact on contractual mechanics in the credit markets or cause disruption
to the broader financial markets. Uncertainty as to the nature of such potential discontinuation, reform or replacement may negatively impact the cost of our
variable rate debt, and our business, prospects, financial condition and results of operations could be materially and adversely affected. We may in the
future pursue amendments to the credit agreement governing the Revolver to provide for a transition mechanism or other reference rate in anticipation of
LIBOR’s discontinuation, but we may not be able to reach agreement with our lenders on any such amendments. As a result, additional
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financing to replace any of our LIBOR-based debt may be unavailable, more expensive or restricted by the terms of our outstanding indebtedness.
We may require additional capital to meet our financial obligations and support business growth, and this capital may not be available on acceptable
terms or at all.
Based on our current plans and market conditions, we believe that cash flows generated from our operations, the proceeds from the IPO and
borrowing capacity under the Revolver will be sufficient to satisfy our anticipated cash requirements in the ordinary course of business for the foreseeable
future. However, we intend to continue to make significant investments to support our business growth and may require additional funds to respond to
business challenges, including the need to develop new games and features or enhance our existing games, improve our operating infrastructure or acquire
complementary businesses, personnel and technologies. Accordingly, we may need to engage in equity or debt financings in addition to our Revolver to
secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer
significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A
common stock. Any debt financing we secure in the future could include restrictive covenants relating to our capital raising activities and other financial
and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential
acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing
on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be
significantly impaired, and our business may be harmed.
Our results of operations fluctuate due to seasonality and other factors and, therefore, our periodic operating results are not guarantees of future
performance.
Our results of operations can fluctuate due to seasonal trends and other factors. Player activity is generally slower in the second and third quarters
of the year, particularly during the summer months. Certain other seasonal trends and factors that may cause our results to fluctuate include:
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the geographies where we operate;
holiday and vacation seasons;
climate and weather;
economic and political conditions, including conditions related to the impact of the COVID-19 pandemic and government measures to mitigate its
effects; and
timing of the release of new games.
In light of the foregoing, results for any quarter are not necessarily indicative of the results that may be achieved in another quarter or for the full
fiscal year. We cannot assure that the seasonal trends and other factors that have impacted our historical results will repeat in future periods as we cannot
influence or forecast many of these factors.
We rely on skilled employees with creative and technical backgrounds.
We rely on our highly skilled, technically trained and creative employees to develop new technologies and create innovative games. Such
employees, particularly game designers, engineers and project managers with desirable skill sets are in high demand, and we devote significant resources to
identifying, hiring, training, successfully integrating and retaining these employees. A lack of skilled technical workers could delay or negatively impact
our business plans, ability to compete, results of operations, cash flows and financial condition. We employ personnel internationally, particularly in game
development operations in Israel and Ukraine, and are subject to additional risks customarily associated with foreign operations, such as labor and
employment related risks. See also “Our foreign operations expose us to business and legal risks” in Part I, Item 1A.
Risks Related to Our Technology
We rely on the ability to use the intellectual property rights of Scientific Games and other third parties, including the third-party intellectual property
rights licensed to Scientific Games that we have enjoyed as an indirect subsidiary of
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Scientific Games, and we may lose the benefit of any intellectual property owned by or licensed to Scientific Games if it ceases to hold certain minimum
percentages of the voting power in our company.
Substantially all of our games rely on products, technologies and other intellectual property that are licensed from Scientific Games and other third
parties. Since September 2016, we have been party to an intercompany license agreement with Scientific Games pursuant to which we receive the right to
use certain patents, brands, trademarks and other intellectual property owned by or licensed to Scientific Games. In addition, as an indirect subsidiary of
Scientific Games, we benefit from intellectual property licensed to Scientific Games for the benefit of it and its subsidiaries. Under the IP License
Agreement and as a subsidiary of Scientific Games, we expect, but cannot guarantee, that we will be able to continue to receive those rights on favorable or
reasonable terms, and licensors may have approval rights over any future sublicenses by Scientific Games. The IP License Agreement has a change of
control provision that requires SG Gaming’s consent, not to be unreasonably withheld, in the event of changes of control of our company that are not
initiated by Scientific Games. SG Gaming could reasonably withhold its consent, and therefore have the right to terminate the IP License Agreement, if, for
example, a competitor of Scientific Games were to acquire more than 50% of the voting power in our company. If SG Gaming were to exercise this
termination right, we would lose the benefit of any intellectual property licensed to us under the IP License Agreement, which is essential to our business,
including any intellectual property that we develop, to the extent it is an improvement, enhancement, modification, or derivative work of any intellectual
property licensed to us under the IP License Agreement.
Any transaction that results in Scientific Games ceasing to hold at least 50% of the voting power in our company will be considered a change of
control transaction requiring SG Gaming’s consent, except for: (i) transactions initiated by Scientific Games, or (ii) decreases in voting power resulting
from (a) Scientific Games selling any ownership interests in our company, either privately or through additional public offerings, or (b) any future issuance
of additional shares of our capital stock. In addition, our rights to any third-party intellectual property licensed to SG Gaming or its affiliates and
sublicensed to us under the IP License Agreement are subject to any change of control provisions in the applicable third-party license.
Further, even absent termination of the IP License Agreement, if Scientific Games ceases to hold at least 50% of the voting power in our company,
or such other percentage as may be required by a specific third-party license between the applicable third party and Scientific Games, we may also lose the
benefit of any intellectual property licensed to Scientific Games for the benefit of it or its subsidiaries. We have little control over future amendments or
renewals of third-party licenses to which we are not a party, and such amendments and renewals may affect the ability of Scientific Games to sublicense
such third-party intellectual property rights to us, or our ability to benefit directly from such intellectual property without a sublicense as a subsidiary of
Scientific Games.
The future success of our business will depend, in part, on our ability to obtain, retain or expand licenses for technologies and services in a
competitive market. We cannot assure that these third-party licenses, including the IP License Agreement, or support for such licensed technologies and
services, will continue to be available to us on commercially reasonable terms, if at all. In the event that we lose the benefit of, or cannot renew and/or
expand existing licenses, we may be required to discontinue or limit our use of the technologies and services that include or incorporate the licensed
intellectual property. In addition, while we are controlled by Scientific Games, we may not have the leverage to negotiate amendments to the IP License
Agreement, if required, on terms as favorable to us as those we would negotiate with an unaffiliated third party.
Some of our license agreements contain minimum guaranteed royalty payments to the third party, and other agreements are sublicenses where
such payment obligations are passed on to us by the sublicensor, including under the IP License Agreement. If we are unable to generate sufficient revenue
to offset the minimum guaranteed royalty payments, it could have a material adverse effect on our results of operations, cash flows and financial condition.
Our license agreements, including both direct licenses and sublicensing arrangements, typically contain customary restrictions on our ability to use or
transfer the licensed rights, including in connection with certain strategic transactions, such as a change of control of the licensee. Although we believe that
we are complying with our obligations under these license agreements and do not believe them to be in jeopardy of being terminated, we cannot assure that
any or all of these license agreements in fact will remain in effect. Under certain of these agreements, the licensor has the right to audit our use of their
intellectual property. Disputes with licensors over uses or terms could result in the payment of additional royalties or penalties by us, cancellation or non-
renewal of the underlying license or litigation.
Our business depends on the protection of our proprietary information and our owned and licensed intellectual property.
We believe that our success depends, in part, on protecting our owned and licensed intellectual property in the U.S. and in foreign countries. Our
intellectual property includes certain trademarks and copyrights relating to our games, and
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proprietary or confidential information that is not subject to formal intellectual property protection. Intellectual property that is significant to our business is
owned by Scientific Games and other third parties. Our success may depend, in part, on our and our licensors’ ability to protect the trademarks, trade dress,
names, logos or symbols under which we market our games and to obtain and maintain patent, copyright and other intellectual property protection for the
technologies, designs, software and innovations used in our games and our business. We cannot assure that we will be able to build and maintain consumer
value in our trademarks, copyrights or other intellectual property protection in our technologies, designs, software and innovations or that any patent,
trademark, copyright or other intellectual property right will provide us with competitive advantages.
We also rely on trade secrets and proprietary knowledge. We enter into confidentiality agreements with our employees and independent
contractors regarding our trade secrets and proprietary information, but we cannot assure that the obligation to maintain the confidentiality of our trade
secrets and proprietary information will be honored.
In the future we may make claims of infringement against third parties, or make claims that third-party intellectual property rights are invalid or
unenforceable. These claims could:
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cause us to incur greater costs and expenses in the protection of our intellectual property;
potentially negatively impact our intellectual property rights, for example, by causing one or more of our intellectual property rights to be ruled or
rendered unenforceable or invalid; or
divert management’s attention and our resources.
The intellectual property rights of others may prevent us from developing new games, entering new markets or may expose us to liability or costly
litigation.
Our success depends in part on our ability to continually adapt our games to incorporate new technologies and to expand into markets that may be
created by new technologies. If technologies are protected by the intellectual property rights of our competitors or other third parties, we may be prevented
from introducing games based on these technologies or expanding into markets created by these technologies.
We cannot assure that our business activities and games will not infringe upon the proprietary rights of others, or that other parties will not assert
infringement claims against us. A successful claim of infringement by a third party against us, our games or one of our licensees in connection with the use
of our technologies, or an unsuccessful claim of infringement made by us against a third party or its products or games, could adversely affect our business
or cause us financial harm. Any such claim and any resulting litigation, should it occur, could:
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be expensive and time-consuming to defend or require us to pay significant amounts in damages;
result in invalidation of our proprietary rights or render our proprietary rights unenforceable;
cause us to cease making, licensing or using games that incorporate the intellectual property;
require us to redesign, reengineer or rebrand our games or limit our ability to bring new games to the market in the future;
require us to enter into costly or burdensome royalty, licensing or settlement agreements in order to obtain the right to use a product or process;
impact the commercial viability of the games that are the subject of the claim during the pendency of such claim; or
require us to stop selling the infringing games.
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Our success depends on the security and integrity of the games we offer, and security breaches or other disruptions could compromise our information
or the information of our players and expose us to liability, which would cause our business and reputation to suffer.
We believe that our success depends, in large part, on providing secure games to our players. Our business sometimes involves the storage,
processing and transmission of players’ proprietary, confidential and personal information. We also maintain certain other proprietary and confidential
information relating to our business and personal information of our personnel. Our games and systems are designed with security features to prevent
fraudulent activity. However, we cannot guarantee that these security features will effectively stop all fraudulent activity. Despite our security measures, our
games are vulnerable to attacks by hackers, players, vendors or employees or breached due to malfeasance or other disruptions. Any security breach or
incident that we experience could result in unauthorized access to, misuse of, or unauthorized acquisition of our or our players’ data, the loss, corruption or
alteration of this data, interruptions in our operations, or damage to our computers or systems or those of our players or third-party platforms. Any of these
could expose us to claims, litigation, fines and potential liability.
An increasing number of online services have disclosed security breaches, some of which have involved sophisticated and highly targeted attacks
on portions of their services. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently
and often are not foreseeable or recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate
preventative measures. If an actual or perceived breach of our security occurs, public perception of the effectiveness of our security measures and brand
could be harmed, and we could lose players. Data security breaches and other data security incidents may also result from non-technical means, for
example, actions by employees or contractors. Any compromise of our security could result in a violation of applicable privacy and other laws, regulatory
or other governmental investigations, enforcement actions, and legal and financial exposure, including potential contractual liability that is not always
limited to the amounts covered by our insurance. Any such compromise could also result in damage to our reputation and a loss of confidence in our
security measures. Any of these effects could have a material adverse impact on our results of operations, cash flows and financial condition.
Our ability to prevent anomalies and monitor and ensure the quality and integrity of our games and software is periodically reviewed and
enhanced, but may not be sufficient to prevent future attacks, breaches or disruptions. Similarly, we regularly assess the adequacy of our security systems,
including the security of our games and software to protect against any material loss to any of our players and the integrity of our games to players.
However, we cannot assure that our business will not be affected by a security breach.
If we sustain cyber-attacks or other privacy or data security incidents that result in security breaches, we could suffer a loss of sales and increased
costs, exposure to significant liability, reputational harm, regulatory fines or punishment and other negative consequences.
Our information technology systems and infrastructure are subject to cyber-attacks, viruses, malicious software, break-ins, theft, computer
hacking, employee error or malfeasance or other security breaches. Hackers and data thieves are increasingly sophisticated and operate large-scale and
complex automated attacks. Threats to our information technology systems and infrastructure include:
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experienced computer programmers and hackers who are able to penetrate our security controls and misappropriate or compromise sensitive
personal, proprietary or confidential information, create system disruptions or cause shutdowns or who are able to develop and deploy malicious
software programs that attack our systems or otherwise exploit any security vulnerabilities;
security incidents, acts of vandalism or theft, coordinated attacks by activist entities, misplaced or lost data, human errors or other similar events
that could negatively affect our systems and the data stored on those systems, and the data of our business partners;
third parties, such as hosted solution providers, that provide services to us are also a source of security risk in the event of a failure of their own
security systems and infrastructure.
The costs to eliminate or address the foregoing security threats and vulnerabilities before or after a cyber incident could be significant. Our
remediation efforts may not be successful and could result in interruptions, delays or cessation of service, and loss of existing or potential suppliers or
players. As threats related to cyber-attacks develop and grow, we may also find it necessary to make further investments to protect our data and
infrastructure, which may impact our results of
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operations. Although we have insurance coverage for protecting against damages resulting from cyber-attacks, it may not be sufficient to cover all possible
claims, and we may suffer losses that could have a material adverse effect on our business. We could also be negatively impacted by existing and proposed
U.S. and non-U.S. laws and regulations, and government policies and practices related to cybersecurity, data privacy, data localization and data protection.
In addition, the platforms on which we distribute games may encourage, or require, compliance with certain security standards, such as the
voluntary cybersecurity framework released by the National Institute of Standards and Technology (NIST), which consists of controls designed to identify
and manage cyber-security risks, and we could be negatively impacted to the extent we are unable to comply with such standards.
We rely on information technology and other systems, and any failures in our systems or errors, defects or disruptions in our games could diminish our
brand and reputation, subject us to liability and could disrupt our business and adversely impact our results.
We rely on information technology systems that are important to the operation of our business, some of which are managed by third parties. These
third parties are typically under no obligation to renew agreements and there is no guarantee that we will be able to renew these agreements on
commercially reasonable terms, or at all. These systems are used to process, transmit and store electronic information, to manage and support our business
operations and to maintain internal control over our financial reporting. In addition, we collect and store certain data, including proprietary business
information, and may have access to confidential or personal information in certain of our businesses that is subject to privacy and security laws, and
regulations. We could encounter difficulties in developing new systems, maintaining and upgrading current systems and preventing security breaches.
Among other things, our systems are susceptible to damage, outages, disruptions or shutdowns due to fire, floods, power loss, break-ins, cyber-attacks,
network penetration, denial of service attacks and similar events. Failures in our systems or unauthorized access to or tampering with our systems and
databases could have a material adverse effect on our business, reputation, results of operations, cash flows and financial condition. Any failures in our
computer systems or telecommunications services could affect our ability to operate our games or otherwise conduct business.
A meaningful portion of our game traffic is hosted by third-party data centers, such as Amazon Web Services (“AWS”). Such third parties provide
us with computing and storage capacity, and AWS is under no obligation to renew the agreements related to these services with us on commercially
reasonable terms or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our data center operators is acquired,
we may be required to transfer our servers and other infrastructure to new data center facilities and we may incur significant costs and possible lengthy
service interruptions in connection with doing so, potentially causing harm to our reputation. If a game is unavailable or operates more slowly than
anticipated when a player attempts to access it, that player may stop playing the game and be less likely to return to the game.
Portions of our information technology infrastructure, including those operated by third parties, may experience interruptions, delays or cessations
of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in
implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive and
resource-intensive. We have no control over third parties that provide services to us and those parties could suffer problems or make decisions adverse to
our business. We have contingency plans in place to prevent or mitigate the impact of these events. However, such disruptions could materially and
adversely impact our ability to deliver games to players and interrupt other processes. If our information systems do not allow us to transmit accurate
information, even for a short period of time, to key decision-makers, the ability to manage our business could be disrupted and our results of operations,
cash flows and financial condition could be materially and adversely affected. Failure to properly or adequately address these issues could impact our
ability to perform necessary business operations, which could materially and adversely affect our reputation, competitive position, results of operations,
cash flows and financial condition.
Substantially all of our games rely on data transferred over the internet. Access to the internet in a timely fashion is necessary to provide a
satisfactory player experience to the players of our games. Third parties, such as telecommunications companies, could prevent access to the internet or
limit the speed of our data transmissions, with or without reason, causing an adverse impact on our player experience that may materially and adversely
affect our reputation, competitive position, results of operations, cash flows and financial condition. In addition, telecommunications companies may
implement certain measures, such as increased cost or restrictions based on the type or amount of data transmitted, that would impact consumers’ ability to
access our games, which could materially and adversely affect our reputation, competitive position, results of operations, cash flows and financial
condition. Furthermore, internet penetration may be adversely affected by difficult global economic conditions or the cancellation of government programs
to expand broadband access.
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Our games and other software applications and systems, and the third-party platforms upon which they are made available could contain undetected
errors.
Our games and other software applications and systems, as well as the third-party platforms upon which they are made available, could contain
undetected errors that could adversely affect the performance of our games. For example, these errors could prevent the player from making in-app
purchases of coins, chips or cards, which could harm our operating results. They could also harm the overall game-playing experience for our players,
which could cause players to reduce their playing time or in-game purchases, discontinue playing our games altogether, or not recommend our games to
other players. Such errors could also result in our games being non-compliant with applicable laws or create legal liability for us.
Resolving such errors could disrupt our operations, cause us to divert resources from other projects, or harm our operating results.
Some of our players may obtain coins, chips or cards used in, or otherwise alter the intended game play of, our games through hacking or other
unauthorized methods, resulting in a negative impact to our revenue.
Unauthorized operators may develop “hacks” that enable players to alter the intended game play or obtain unfair advantages in our games. For
example, although we do not permit the exchange of coins, chips or cards between accounts or with third parties, it is possible that unauthorized operators
could offer “hacks” that allow players to obtain coins, chips or cards through unauthorized methods, potentially having a negative impact on the amount of
revenue we collect from players. We could change our business model and allow authorized trading in the future, which could result in additional
opportunities for players to obtain coins, chips or cards for use in our games through unauthorized methods.
Additionally, unrelated third parties may attempt to scam our players with fake offers for coins, chips or cards or other game benefits. These scams
may harm the experience of our players, disrupt the virtual economies of our games and reduce the demand for coins, chips or cards, which may result in
increased costs to combat such programs and scams, a loss of revenue from the sale of coins, chips or cards and a loss of players.
Risks Related to Legal and Regulatory Factors
Legal or regulatory restrictions could adversely impact our business and limit the growth of our operations.
There is significant opposition in some jurisdictions to interactive social gaming, including social casino gaming. Some states or countries have
anti-gaming groups that specifically target social casino games. Such opposition could lead these jurisdictions to adopt legislation or impose a regulatory
framework to govern interactive social gaming or social casino gaming specifically. These 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, all of which
could have an adverse effect on our results of operations, cash flows and financial condition. We cannot predict the likelihood, timing, scope or terms of
any such legislation or regulation or the extent to which they may affect our business.
In 2018, the United States Court of Appeals for the Ninth Circuit decided that a social casino game produced by one of our competitors should be
considered illegal gambling under Washington state law. Similar lawsuits have been filed against other defendants, including Scientific Games. For
example, in April 2018, a putative class action lawsuit was filed in federal district court alleging substantially the same causes of action against our social
casino games. In December 2018, the federal district court assigned to the litigation denied Scientific Games’ motion to dismiss the plaintiff’s complaint
and, in January 2019, Scientific Games filed its answer and affirmative defenses to the putative class action complaint. See “Legal proceedings may
materially adversely affect our business and our results of operations, cash flows and financial condition” and Note 11.
In September 2018, sixteen international gambling regulators, including from Washington State, signed a declaration expressing concern over the
blurring of lines between gambling and video game products, including social casino gaming. The regulators analyzed the characteristics of video games
and social gaming and the U.K. Parliament published a report on their findings in September 2019. The report addressed the regulators’ findings as to the
potential psychosocial and financial harms of immersive technology, the potential usefulness of pattern-of-play data in understanding healthy gameplay and
supporting responsible game design. The report found that any gambling-related harms of such games should be addressed through Internet safety
legislation. As this report was published by U.K. authorities, we cannot predict the likelihood, timing, scope or terms of any actions taken as a result of the
report.
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In May 2019, the World Health Organization adopted a new edition of its International Classification of Diseases, which lists gaming addiction as
a disorder. The American Psychiatric Association (“APA”) and U.S. regulators have yet to decide whether gaming addiction should be considered a
behavioral disorder, but the APA has noted that research and the debate on its classification are ongoing. Certain countries, including China and South
Korea, have enacted regulations, such as imposing both gaming curfews and spending limits for minors, and established treatment programs aimed at
addressing gaming addiction. We cannot predict the likelihood, timing, scope or terms of any similar regulations in the markets in which we operate, or the
extent to which implementation of such regulations may adversely affect our reputation and business.
Consumer protection and health concerns regarding games such as ours have been raised in the past and may again be raised in the future. Such
concerns could lead to increased scrutiny over the manner in which our games are designed, developed, distributed and presented. We cannot predict the
likelihood, timing or scope of any concern reaching a level that will impact our business, or whether we would suffer any adverse impacts to our results of
operations, cash flows and financial condition.
We may share part of the regulatory burdens of our parent, Scientific Games.
The majority of our voting power is held by wholly owned subsidiaries of Scientific Games, and we entered into the Intercompany Services
Agreement, the IP License Agreement, the Registration Rights Agreement and the TRA with one or more of Scientific Games and its affiliates. Scientific
Games and its affiliates hold many privileged licenses in jurisdictions around the world, allowing them to operate as gambling equipment and service
suppliers. Regulators that issue such licenses have broad investigative powers and could ask for information from our majority stockholder, the entities
from which we license intellectual property and their affiliates. Scientific Games and its affiliates, including SciPlay Parent LLC and its subsidiaries, will
be obligated to cooperate with the investigations of such regulators. Such licenses may limit the operations and activities of subsidiaries and affiliates of
Scientific Games, including SciPlay Parent LLC and its subsidiaries.
Data privacy and security laws and regulations in the jurisdictions in which we do business could increase the cost of our operations and subject us to
possible sanctions and other penalties.
We collect, process, store, use and share data, some of which contains personal information. Our business is therefore subject to a number of
federal, state, local and foreign laws and regulations governing data privacy and security, including with respect to the collection, storage, use,
transmission, sharing and protection of personal information and other consumer data. Such laws and regulations may be inconsistent among states,
countries or between states and countries or conflict with other rules. In particular, the European Union, or EU, has adopted strict data privacy and security
regulations. Following certain developments in the EU, including the EU’s General Data Protection Regulation (“GDPR”), data privacy and security
compliance in the EU are increasingly complex and challenging. The GDPR created new compliance obligations applicable to our business and some of
our players and imposed increased financial penalties for noncompliance (including possible fines of up to four percent of global annual revenue for the
preceding financial year or €20 million (whichever is higher) for the most serious violations). Compliance with the GDPR and similar regulations increases
our operational costs and can impact operational efficiencies.
The scope of data privacy and security regulations worldwide continues to evolve, and we believe that the adoption of increasingly restrictive
regulations in this area is likely within the U.S. and other jurisdictions. For example, the California Consumer Privacy Act (“CCPA”) went into effect on
January 1, 2020. This law, among other things, requires new disclosures to California consumers, imposes new rules for collecting or using information
about minors, and affords consumers new abilities to opt out of certain disclosures of personal information. It remains unclear how courts will interpret the
CCPA. The U.S. Congress may also pass a law to preempt all or part of the CCPA. Further, California recently passed the California Privacy Rights Act, or
CPRA, which amends the CCPA to provide more comprehensive privacy protections to consumers once it becomes effective in January 2023. The effects
of the CCPA and CPRA may be significant and the CCPA required us to update our policies to include CCPA specific clauses and procedures. A number of
other proposals related to data privacy or security are pending before federal, state, and foreign legislative and regulatory bodies. For example, the
European Union is contemplating the adoption of the Regulation on Privacy and Electronic Communications, expected in 2021, that would govern data
privacy and the protection of personal data in electronic communications, in particular for direct marketing purposes. Efforts to comply with these and
other data privacy and security restrictions that may be enacted has required us to modify our data processing practices and policies and could cause us to
further modify our practices and policies in the future and may increase the cost of our operations. Failure to comply with such restrictions could subject us
to criminal and civil sanctions and other penalties. In part due to the uncertainty of the legal climate, complying with regulations, and any applicable rules
or guidance from self-regulatory organizations relating to privacy, data protection, information security and consumer protection, may result in substantial
costs and may necessitate changes to our business practices, which may
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compromise our growth strategy, adversely affect our ability to attract or retain players, and otherwise adversely affect our business, financial condition and
operating results.
Any failure or perceived failure by us to comply with our posted privacy policies, our privacy-related obligations to players or other third parties,
or any other legal obligations or regulatory requirements relating to privacy, data protection, or information security may result in governmental
investigations or enforcement actions, litigation, claims, or public statements against us by consumer advocacy groups or others and could result in
significant liability, cause our players to lose trust in us, and otherwise materially and adversely affect our reputation and business. Furthermore, the costs
of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to us may limit the adoption and use of, and
reduce the overall demand for, our games. Additionally, if third parties we work with violate applicable laws, regulations, or agreements, such violations
may put our players’ data at risk, could result in governmental investigations or enforcement actions, fines, litigation, claims or public statements against us
by consumer advocacy groups or others and could result in significant liability, cause our players to lose trust in us and otherwise materially and adversely
affect our reputation and business. Further, public scrutiny of, or complaints about, technology companies or their data handling or data protection
practices, even if unrelated to our business, industry or operations, may lead to increased scrutiny of technology companies, including us, and may cause
government agencies to enact additional regulatory requirements, or to modify their enforcement or investigation activities, which may increase our costs
and risks.
Our foreign operations expose us to business and legal risks.
We generate a portion of our revenue from operations outside of the U.S. For the years ended December 31, 2020, 2019 and 2018, we derived
approximately 14.8%, 15.1% and 8.6%, respectively, of our revenue from sales to players outside of the U.S. We also have significant operations, including
game development operations, in Israel.
Our operations in foreign jurisdictions may subject us to additional risks customarily associated with such 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; compliance with applicable anti-money laundering, anti-bribery and anti-corruption laws, including the Foreign Corrupt
Practices Act and other anti-corruption laws that generally prohibit U.S. persons and companies and their agents from offering, promising, authorizing or
making improper payments to foreign government officials for the purpose of obtaining or retaining business; and compliance with applicable sanctions
regimes regarding dealings with certain persons or countries. Certain of these laws also contain provisions that require accurate record keeping and further
require companies to devise and maintain an adequate system of internal accounting controls.
Although we have policies and controls in place that are designed to ensure compliance with these laws, if those controls are ineffective or an
employee or intermediary fails to comply with the applicable regulations, we may be subject to criminal and civil sanctions and other penalties. Any such
violation could disrupt our business and adversely affect our reputation, results of operations, cash flows and financial condition. In addition, our
international business operations could be interrupted and negatively affected by terrorist activity, political unrest or other economic or political
uncertainties. Moreover, foreign jurisdictions could impose tariffs, quotas, trade barriers and other similar restrictions on our international sales.
Further, our ability to expand successfully in foreign jurisdictions involves other risks, including difficulties in integrating foreign operations, risks
associated with entering jurisdictions in which we may have little experience and the day-to-day management of a growing and increasingly geographically
diverse company. We may not realize the operating efficiencies, competitive advantages or financial results that we anticipate from our investments in
foreign jurisdictions.
Risks Related to Our Relationship with Scientific Games
Scientific Games controls the direction of our business, and the concentrated ownership of our common stock will prevent you and other stockholders
from influencing significant decisions.
Scientific Games, through its indirect wholly owned subsidiaries, the SG Members, controls shares representing a majority of our combined voting
power. The SG Members own all of our outstanding Class B common stock, which represents 81.9% of our total outstanding shares of common stock and
97.8% of the combined voting power of both classes of our outstanding common stock. On all matters submitted to a vote of our stockholders, our Class B
common stock entitles its owners to ten votes per share (for so long as the number of shares of our common stock beneficially owned by the SG Members
and their affiliates represents at least 10% of our outstanding shares of common stock and, thereafter, one vote per
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share), and our Class A common stock entitles its owners to one vote per share. As long as Scientific Games continues to control shares representing a
majority of our combined voting power, it will generally be able to determine the outcome of all corporate actions requiring stockholder approval,
including the election of directors (unless supermajority approval of such matter is required by applicable law). Even if Scientific Games were to control
less than a majority of our combined voting power, it may be able to influence the outcome of corporate actions so long as it owns a significant portion of
our combined voting power. If Scientific Games does not cause the SG Members to dispose of their shares of our common stock, Scientific Games could
retain control over us for an extended period of time or indefinitely.
Investors will not be able to affect the outcome of any stockholder vote while Scientific Games controls the majority of our combined voting
power (or, in the case of removal of directors, two-thirds of our combined voting power). Due to its ownership and rights under our articles of incorporation
and our bylaws, Scientific Games is able to control, indirectly through the SG Members and subject to applicable law, the composition of our board of
directors, which in turn is able to control all matters affecting us, including, among other things:
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any determination with respect to our business direction and policies, including the appointment and removal of officers and, in the event of a
vacancy on our board of directors, additional or replacement directors;
any determinations with respect to mergers, business combinations or disposition of assets;
determination of our management policies;
determination of the composition of the committees on our board of directors;
our financing policy;
our compensation and benefit programs and other human resources policy decisions;
termination of, changes to or determinations under our agreements with Scientific Games;
changes to any other agreements that may adversely affect us;
the payment of dividends on our Class A common stock; and
determinations with respect to our tax returns.
Because Scientific Games’ interests may differ from ours or from those of our other stockholders, actions that Scientific Games takes with respect
to us, as our controlling stockholder, may not be favorable to us or our other stockholders.
If Scientific Games causes the SG Members to sell a controlling interest in our company to a third party in a private transaction, holders of our Class A
common stock may not realize any change-of-control premium on shares of our Class A common stock, and we may become subject to the control of a
presently unknown third party.
Scientific Games, through its indirect wholly owned subsidiaries, the SG Members, holds approximately 97.8% of our combined voting power.
Scientific Games has the ability, should it choose to do so, to cause the SG Members to sell some or all of their shares of our common stock and the LLC
Interests the SG Members hold in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of our company. See
Note 1 for additional information.
The ability of Scientific Games to cause the SG Members to privately sell their shares of our common stock and the LLC Interests the SG
Members hold, with no requirement for a concurrent offer to be made to acquire all of our shares that will be publicly traded hereafter, could prevent our
stockholders from realizing any change-of- control premium on our stockholders’ shares of our common stock that may otherwise accrue to Scientific
Games on its private sale of our common stock and the LLC Interests it holds. Additionally, if Scientific Games causes the SG Members to privately sell
shares representing a significant portion of our common stock, we may become subject to the control of a presently unknown third party. Such third party
may have conflicts of interest with those of other stockholders. In addition, if Scientific Games causes the SG Members to sell a controlling interest in our
company to a third party, any debt financing (including the Revolver) we secure in the future may be subject to acceleration, Scientific Games may
terminate the Intercompany Services Agreement,
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the IP License Agreement and other arrangements, and our other relationships and agreements, including our license agreements, could be impacted, all of
which may adversely affect our ability to run our business as described herein and may have a material adverse effect on our results of operations, cash
flows and financial condition.
Scientific Games’ interests may conflict with our interests and the interests of our stockholders. Conflicts of interest between Scientific Games and us
could be resolved in a manner unfavorable to us and our public stockholders.
Various conflicts of interest between us and Scientific Games exist and could arise. See Note 10 for additional information. Ownership interests of
directors or officers of Scientific Games in our common stock and ownership interests of our directors and officers in the stock of Scientific Games, or a
person’s service either as a director or officer of both companies, could create or appear to create conflicts of interest when those directors and officers are
faced with decisions relating to our company. These decisions could include:
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corporate opportunities;
the impact that operating decisions for our business may have on Scientific Games’ consolidated financial statements;
differences in tax positions between Scientific Games and us, especially in light of the TRA (see “Risks Related to Our Organizational Structure
and the TRA”);
the impact that operating or capital decisions (including the incurrence of indebtedness) for our business may have on Scientific Games’ current or
future indebtedness or the covenants under that indebtedness;
future, potential commercial arrangements between Scientific Games and us or between Scientific Games and third parties;
business combinations involving us;
our dividend policy;
• management stock ownership; and
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the intercompany agreements between Scientific Games and us.
Furthermore, disputes may arise between Scientific Games and us relating to our past and ongoing relationship and these conflicts of interest may
make it more difficult for us to favorably resolve such disputes, including those related to:
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tax, employee benefits, indemnification and other matters arising from the IPO;
the nature, quality and pricing of services Scientific Games agrees to provide to us;
sales or other disposals by the SG Members of all or a portion of their ownership interests in SciPlay Parent LLC or us; and
business combinations involving us.
We may not be able to resolve any conflicts, and even if we do, the resolution may be less favorable to us than if we were dealing with an
unaffiliated party. While we are controlled by Scientific Games, we may not have the leverage to negotiate amendments to our agreements with Scientific
Games, if required, on terms as favorable to us as those we would negotiate with an unaffiliated third party.
Certain of our directors and executive officers may have actual or potential conflicts of interest because of their positions with Scientific Games.
Barry L. Cottle is Chairman of our board of directors and also serves as President and Chief Executive Officer at Scientific Games. Our chief
accounting officer Michael F. Winterscheidt also holds an executive officer position with Scientific Games. In addition, these individuals may own
Scientific Games common stock, options to purchase Scientific
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Games common stock or other Scientific Games equity awards. These individuals’ holdings of Scientific Games’ common stock, options to purchase
Scientific Games common stock or other equity awards may be significant for some of these persons compared to these persons’ total assets. Their
positions at Scientific Games and the ownership of any Scientific Games equity or equity awards creates, or may create the appearance of, conflicts of
interest when these individuals are faced with decisions that could have different implications for Scientific Games than the decisions have for us.
Our articles of incorporation limit Scientific Games’ and its directors’ and officers’ liability to us or our stockholders for breach of fiduciary duty and
could also prevent us from benefiting from corporate opportunities that might otherwise have been available to us.
Our articles of incorporation provide that, subject to any contractual provision to the contrary, Scientific Games has no obligation to refrain from:
•
•
•
engaging in the same or similar business activities or lines of business as we do;
doing business with any of our clients, consumers, vendors or lessors;
employing or otherwise engaging any of our officers or employees; or
• making investments in any property in which we may make investments.
Under our articles of incorporation, neither Scientific Games nor any officer or director of Scientific Games, except as provided in our articles of
incorporation, is liable to us or to our stockholders for breach of any fiduciary duty by reason of any of these activities.
Additionally, our articles of incorporation include a “corporate opportunity” provision in which we renounce any interests or expectancy in
corporate opportunities which become known to (i) any of our directors or officers who are also directors, officers, employees or other affiliates of
Scientific Games or its affiliates (except that we and our subsidiaries shall not be deemed affiliates of Scientific Games or its affiliates for the purposes of
the provision), or dual persons, or (ii) Scientific Games itself, and which relate to the business of Scientific Games or may constitute a corporate
opportunity for both Scientific Games and us. Generally, neither Scientific Games nor our directors or officers who are also dual persons is liable to us or
our stockholders for breach of any fiduciary duty by reason of the fact that any such person pursues or acquires any corporate opportunity for the account of
Scientific Games or its affiliates, directs, recommends, sells, assigns or otherwise transfers such corporate opportunity to Scientific Games or its affiliates,
or does not communicate information regarding such corporate opportunity to us. The corporate opportunity provision may exacerbate conflicts of interest
between Scientific Games and us because the provision effectively permits one of our directors or officers who also serves as a director, officer, employee
or other affiliate of Scientific Games to choose to direct a corporate opportunity to Scientific Games instead of us.
Scientific Games is not restricted from competing with us in the social gaming business, including as a result of acquiring a company that operates
a social gaming business. Due to the significant resources of Scientific Games, including its intellectual property (all of which Scientific Games will retain
and certain of which it licenses to us under the IP License Agreement), financial resources, name recognition and know-how resulting from the previous
management of our business, Scientific Games could have a significant competitive advantage over us should it decide to utilize these resources to engage
in the type of business we conduct, which may cause our operating results and financial condition to be materially adversely affected.
Third parties may seek to hold us responsible for liabilities of Scientific Games, which could result in a decrease in our income.
Third parties may seek to hold us responsible for Scientific Games’ liabilities. If those liabilities are significant and we are ultimately held liable
for them, we cannot assure that we will be able to recover the full amount of our losses from Scientific Games.
We are a “controlled company” within the meaning of the NASDAQ rules and, as a result, qualify for, and rely on, exemptions from certain corporate
governance requirements.
Scientific Games controls a majority of our combined voting power. As a result, we are a “controlled company” within the meaning of the
corporate governance standards of the NASDAQ rules. Under these rules, a listed company of
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which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with
certain corporate governance requirements, including:
•
•
•
the requirement that a majority of its board of directors consist of independent directors;
the requirement that its director nominations be made, or recommended to the full board of directors, by its independent directors or by a
nominations committee that is comprised entirely of independent directors and that it adopt a written charter or board resolution addressing the
nominations process; and
the requirement that it have a compensation committee that is composed entirely of independent directors with a written charter addressing the
committee’s purpose and responsibilities.
As a “controlled company”, our stockholders do not have the same protections afforded to stockholders of companies that are subject to all of the
corporate governance requirements of the NASDAQ rules. We may choose to rely on additional exemptions in the future so long as we qualify as a
“controlled company”.
We may not achieve some or all of the anticipated benefits of being a standalone public company.
We may not be able to achieve all of the anticipated strategic and financial benefits expected as a result of being a standalone public company, or
such benefits may be delayed or not occur at all. These anticipated benefits include the following:
•
•
•
•
•
allowing investors to evaluate the distinct merits, performance and future prospects of our business, independent of Scientific Games’ other
businesses;
improving our strategic and operational flexibility and increasing management focus as we continue to implement our strategic plan and allowing
us to respond more effectively to different player needs and the competitive environment for our business;
allowing us to adopt a capital structure better suited to our financial profile and business needs, without competing for capital with Scientific
Games’ other businesses;
creating an independent equity structure that will facilitate our ability to effect future acquisitions utilizing our capital stock; and
facilitating incentive compensation arrangements for employees more directly tied to the performance of our business, and enhancing employee
hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth
objectives of our business.
We may not achieve the anticipated benefits of being a standalone public company for a variety of reasons, and it could adversely affect our
operating results and financial condition.
We rely on our access to Scientific Games’ brands and reputation, some of Scientific Games’ relationships, and the brands and reputations of
unaffiliated third parties.
We believe the association with Scientific Games has contributed to our building relationships with our players due to its recognized brands and
products, as well as resources such as Scientific Games’ intellectual property and access to third parties’ intellectual property. Any perceived or actual loss
of Scientific Games’ scale, capital base and financial strength may prompt business partners to reprice, modify or terminate their relationships with us.
For more detail regarding our reliance on access to intellectual property owned by Scientific Games, see “We rely on the ability to use the
intellectual property rights of Scientific Games and other third parties, including the third-party intellectual property rights licensed to Scientific Games that
we have enjoyed as an indirect subsidiary of Scientific Games, and we may lose the benefit of any intellectual property owned by or licensed to Scientific
Games if it ceases to hold certain minimum percentages of the voting power in our company.”
In addition, we believe that the success of certain of our games depends on the popularity of intellectual property or brands of third parties that are
incorporated into their player experience. For example, the success of our MONOPOLY Slots
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game is based in part on the strength of the MONOPOLY brand, which is owned and managed by unaffiliated third parties. We cannot assure the continued
popularity of any of the intellectual property or brands that are incorporated into our games, and a loss of such popularity may result in decreased interest in
our games.
The services that we receive from Scientific Games may not be sufficient for us to operate our business, and we would likely incur significant
incremental costs if we lost access to Scientific Games’ services.
We have obtained, and will need to continue to obtain, services from Scientific Games relating to many important corporate functions under an
intercompany services agreement. Our financial statements reflect charges for these services based on the intercompany services agreement we entered into
in September 2016. Many of these services are governed by a new intercompany services agreement entered into in connection with the IPO
(“Intercompany Services Agreement”) with Scientific Games. Under the Intercompany Services Agreement, we are able to continue to use these Scientific
Games services for a fixed term established on a service-by-service basis. We generally have the right to terminate a service before its stated termination
date if we give notice to Scientific Games. Partial reduction in the provision of any service will require Scientific Games’ consent. In addition, either party
is able to terminate the Intercompany Services Agreement due to a material breach of the other party, upon prior written notice, subject to limited cure
periods. We pay Scientific Games mutually agreed-upon fees for these services, which is based on Scientific Games’ costs of providing the services.
If we lost access to the services provided to us by Scientific Games under the Intercompany Services Agreement, we would need to replicate or
replace certain functions, systems and infrastructure. We may also need to make investments or hire additional employees to operate without the same
access to Scientific Games’ existing operational and administrative infrastructure. These initiatives may be costly to implement. Due to the scope and
complexity of the underlying projects relative to these efforts, the amount of total costs could be materially higher than our estimate, and the timing of the
incurrence of these costs could be subject to change.
We may not be able to replace these services or enter into appropriate third-party agreements on terms and conditions, including cost, comparable
to those that we have received in the past and will continue to receive from Scientific Games under the Intercompany Services Agreement.
Additionally, if the Intercompany Services Agreement is terminated, we may be unable to sustain the services at the same levels or obtain the
same benefits as when we were receiving such services and benefits from Scientific Games. If we have to operate these functions separately, if we do not
have our own adequate systems and business functions in place or if we are unable to obtain them from other providers, we may not be able to operate our
business effectively or at comparable costs, and our profitability may decline. In addition, we have historically received informal support from Scientific
Games, which may not be addressed in our Intercompany Services Agreement. The level of this informal support could diminish or be eliminated.
While we are controlled by Scientific Games, we may not have the leverage to negotiate amendments to our agreements with Scientific Games, if
required, on terms as favorable to us as those we would negotiate with an unaffiliated third party.
Our historical financial results are not necessarily representative of the results we have or may achieve as a standalone company and may not be a
reliable indicator of our future results.
Certain of our historical financial results included in this Annual Report on Form 10-K do not reflect the financial condition, results of operations
or cash flows we would have achieved as a standalone company during the periods presented or those we will achieve in the future. This is primarily the
result of the following factors:
•
•
•
certain of our historical financial results reflect charges for certain support functions that are provided on a centralized basis within Scientific
Games, such as expenses for business technology, facilities, legal, finance, human resources, business development, public affairs and
procurement under a prior intercompany services agreement, and we entered into a new Intercompany Services Agreement in connection with the
IPO;
certain of our historical financial results reflect charges for the use of certain proprietary and third-party intellectual property licensed or
sublicensed from Scientific Games under a prior intercompany intellectual property license agreement, and we have entered into a new IP License
Agreement in connection with the IPO;
our cost of debt and our capital structure are and may be different from that reflected in our historical financial statements; and
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• we have incurred and continue to incur additional ongoing costs as a result of the IPO, including costs related to public company reporting,
investor relations and compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);
Our financial condition and future results of operations could be materially different from amounts reflected in our historical financial statements
included elsewhere in this Annual Report on Form 10-K, so it may be difficult for investors to compare our future results to historical results or to evaluate
our relative performance or trends in our business.
Risks Related to Our Organizational Structure and the TRA
Our sole material asset is our interest in SciPlay Parent LLC, and, accordingly, we depend on distributions from SciPlay Parent LLC to pay our taxes
and expenses, including payments under the TRA. SciPlay Parent LLC’s ability to make such distributions have been and may be subject to various
limitations and restrictions.
We are a holding company and have no material assets other than our ownership of LLC Interests of SciPlay Parent LLC. As such, we have no
independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if
any, is dependent upon the financial results and cash flows of SciPlay Parent LLC and its subsidiaries and distributions we receive from SciPlay Parent
LLC. We cannot assure that our subsidiaries will generate sufficient cash flow to distribute funds to us or that applicable state law and contractual
restrictions will permit such distributions.
SciPlay Parent LLC is treated as a partnership for U.S. federal income tax purposes and, as such, generally is not subject to any entity-level U.S.
federal income tax. Instead, taxable income is allocated to holders of LLC Interests, including us. Accordingly, we will incur income taxes on our allocable
share of any net taxable income of SciPlay Parent LLC. Under the terms of the Operating Agreement, SciPlay Parent LLC is obligated to make tax
distributions to holders of LLC Interests, including us. In addition to tax expenses, we also incur expenses related to our operations, including payments
under the TRA, which we expect to be substantial. We intend, as its sole manager, to cause SciPlay Parent LLC to make cash distributions to the owners of
LLC Interests in an amount sufficient to (i) fund all or part of such members’ tax obligations in respect of taxable income allocated to such members and
(ii) cover our operating expenses, including ordinary course payments under the TRA. However, SciPlay Parent LLC’s ability to make such distributions
may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which
SciPlay Parent LLC is then a party, or any applicable law, or that would have the effect of rendering SciPlay Parent LLC insolvent. Moreover, the terms
governing the Revolver generally do not permit SciPlay Parent LLC, as a guarantor of the Revolver, to make distributions sufficient to allow us to make
early termination payments under the TRA. If we do not have sufficient funds to pay tax or other liabilities or to fund our operations, we may have to
borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such
lenders. To the extent that we are unable to make payments under the TRA for any reason, the unpaid amounts will accrue interest until paid. Our failure to
make any payment required under the TRA (including any accrued and unpaid interest) within 30 calendar days of the date on which the payment is
required to be made will constitute a material breach of a material obligation under the TRA, which will terminate the TRA and accelerate future payments
thereunder, unless the applicable payment is not made because (i) we are prohibited from making such payment under the terms of the TRA or the terms
governing certain of our secured indebtedness or (ii) we do not have, and cannot use commercially reasonable efforts to obtain, sufficient funds to make
such payment. Any late payments will continue to accrue interest at one-month LIBOR plus 500 basis points until such payments are made. It will also
constitute a material breach of a material obligation under the TRA if we make a distribution of cash or other property (other than shares of our Class A
common stock) to our stockholders or use cash or other property to repurchase any of our capital stock (including our Class A common stock), in each case
while any outstanding payments under the TRA are unpaid. In addition, if SciPlay Parent LLC does not have sufficient funds to make distributions, our
ability to declare and pay cash dividends will also be restricted or impaired.
The TRA with the SG Members requires us to make cash payments to the SG Members in respect of certain tax benefits to which we may become
entitled, and the payments we are required to make have been and will be substantial.
We are a party to the TRA with the SG Members and SciPlay Parent LLC. Under the TRA, we are required to make cash payments to the SG
Members equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (1) the increases
in the tax basis of assets of SciPlay Parent LLC (a) in connection with the IPO, including as a result of the Upfront License Payment, (b) resulting from any
redemptions or exchanges of LLC Interests by the SG Members pursuant to the Operating Agreement or (c) resulting from certain distributions (or deemed
distributions) by SciPlay Parent LLC and (2) certain other tax benefits related to our making of
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payments under the TRA. We expect that the amount of the cash payments that we will be required to make under the TRA will be substantial. Any
payments made by us to the SG Members under the TRA will generally reduce the amount of cash that might have otherwise been available to us. In
addition, we are obligated to use commercially reasonable efforts to avoid entering into any agreements that could be reasonably anticipated to materially
delay the timing of the making of any payments under the TRA, which could limit our ability to pursue strategic transactions. Furthermore, our future
obligations to make payments under the TRA could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use
some or all of the tax benefits that are the subject of the TRA.
The actual amount and timing of any payments under the TRA will vary depending upon a number of factors, including the timing of redemptions
or exchanges by the SG Members, the amount of gain recognized by the SG Members, the amount and timing of the taxable income we generate, and the
applicable tax rates and laws. Such aggregate cash payments made to the SG Members in 2020 was $2.5 million.
In certain cases, future payments under the TRA to the SG Members may be accelerated or significantly exceed the actual benefits we realize in respect
of the tax attributes subject to the TRA.
The TRA provides that if (i) we materially breach any of our material obligations under the TRA, including if we make any distribution of cash or
property (other than shares of our Class A common stock) to our stockholders or any repurchase of our capital stock (including our Class A common stock)
before all our payment obligations under the TRA have been satisfied for all prior taxable years, (ii) certain mergers, asset sales, other forms of business
combination or other changes of control (including under certain material indebtedness of SciPlay Parent LLC or its subsidiaries) were to occur, or (iii) we
elect an early termination of the TRA, then our future obligations, or our successor’s future obligations, under the TRA to make payments thereunder
would accelerate and become due and payable, based on certain assumptions, including an assumption that we would have sufficient taxable income to
fully utilize all potential future tax benefits that are subject to the TRA, and an assumption that, as of the effective date of the acceleration, any SG Member
that has LLC Interests not yet exchanged shall be deemed to have exchanged such LLC Interests on such date, even if we do not receive the corresponding
tax benefits until a later date when the LLC Interests are actually exchanged.
As a result of the foregoing, we would be required to make an immediate cash payment equal to the estimated present value of the anticipated
future tax benefits that are the subject of the TRA, which payment may be made significantly in advance of the actual realization, if any, of those future tax
benefits and, therefore, we could be required to make payments under the TRA that are greater than the specified percentage of the actual tax benefits we
ultimately realize. In addition, to the extent that we are unable to make payments under the TRA for any reason, the unpaid amounts will accrue interest
until paid. Our failure to make any payment required under the TRA (including any accrued and unpaid interest) within 30 calendar days of the date on
which the payment is required to be made will constitute a material breach of a material obligation under the TRA, which will terminate the TRA and
accelerate future payments thereunder, unless the applicable payment is not made because (i) we are prohibited from making such payment under the terms
of the TRA or the terms governing certain of our secured indebtedness or (ii) we do not have, and cannot use commercially reasonable efforts to obtain,
sufficient funds to make such payment. In these situations, our obligations under the TRA could have a substantial negative impact on our liquidity and
could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. We
cannot assure that we will be able to fund or finance our obligations under the TRA.
We will not be reimbursed for any payments made to the SG Members under the TRA in the event that any tax benefits are disallowed.
Payments under the TRA are based on the tax reporting positions that we determine, and the IRS or another tax authority may challenge all or part
of the tax basis increases, as well as other related tax positions we take, and a court could sustain any such challenge. Our ability to settle or to forgo
contesting such challenges may be restricted by the rights of the SG Members pursuant to the TRA, and such restrictions apply for as long as the TRA
remains in effect. In addition, we will not be reimbursed for any cash payments previously made to the SG Members under the TRA in the event that any
tax benefits initially claimed by us and for which payment has been made to the SG Members are subsequently challenged by a taxing authority and are
ultimately disallowed. Instead, any excess cash payments made by us to the SG Members will be netted against any future cash payments that we might
otherwise be required to make to the SG Members under the terms of the TRA. However, we might not determine that we have effectively made an excess
cash payment to the SG Members for a number of years following the initial time of such payment. As a result, payments could be made under the TRA in
excess of the tax savings that we realize in respect of the tax attributes with respect to the SG Members that are the subject of the TRA.
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If we were deemed to be an investment company under the Investment Company Act of 1940 as a result of our ownership of SciPlay Parent LLC,
applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our
business.
Under Sections 3(a)(1)(A) and (C) of the Investment Company Act of 1940, as amended (the “1940 Act”), a company generally will be deemed to
be an “investment company” for purposes of the 1940 Act if (1) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the
business of investing, reinvesting or trading in securities or (2) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding
or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of
U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in
either of those sections of the 1940 Act.
As the sole manager of SciPlay Parent LLC, we control SciPlay Parent LLC. On that basis, we believe that our interest in SciPlay Parent LLC is
not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of SciPlay Parent LLC, our
interest in SciPlay Parent LLC could be deemed an “investment security” for purposes of the 1940 Act.
We and SciPlay Parent LLC intend to conduct our operations so that we are not be deemed an investment company. However, if we were to be
deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with
affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
Risks Related to Ownership of Our Class A Common Stock
We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will
make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we could be an emerging growth company for up to five years following
the completion of the IPO. For as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies, including, but not limited to: (i) not being required to comply with the auditor
attestation requirements of Section 404, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements
and (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden
parachute payments not previously approved. In addition, as an emerging growth company, we are only required to provide two years of audited financial
statements and two years of selected financial data 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”). We currently intend to take advantage of each of the reduced reporting
requirements and exemptions described above. We cannot predict if investors will find our shares less attractive as a result of our taking advantage of these
exemptions. If some investors find our shares less attractive as a result, there may be a less active trading market for our shares and our stock price may be
more volatile.
Our status as an emerging growth company will end as soon as any of the following takes place:
the last day of the fiscal year in which we have more than $1.07 billion in annual revenue;
the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates;
the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or
the last day of the fiscal year ending after the fifth anniversary of the completion of the IPO.
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•
•
The dual class structure of our common stock may adversely affect the trading price or liquidity of our Class A common stock.
On matters submitted to a vote of our stockholders, our Class B common stock has ten votes per share (for so long as the number of shares of our
common stock beneficially owned by the SG Members and their affiliates represents at least 10% of our outstanding shares of common stock and,
thereafter, one vote per share) and our Class A common stock has one
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vote per share. These differences in voting rights may adversely affect the market price of our Class A common stock to the extent that any current or
future investor in our common stock ascribes value to the voting rights associated with the Class B common stock. The existence of dual classes of our
common stock could result in less liquidity for any such class than if there were only one class of our capital stock.
In addition, S&P Dow Jones and FTSE Russell announced changes to their eligibility criteria for inclusion of shares of public companies on
certain indices that will exclude companies with multiple classes of shares of common stock from being added to such indices. In addition, several
shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our common stock
may prevent the inclusion of our Class A common stock in such indices and may cause shareholder advisory firms to publish negative commentary about
our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less
active trading market for our Class A common stock. Any actions or publications by shareholder advisory firms critical of our corporate governance
practices or capital structure could also adversely affect the value of our Class A common stock.
The requirements of being a public company require significant resources and management attention and affect our ability to attract and retain
executive management and qualified board members.
As a public company, we incur legal, accounting and other expenses that we did not previously incur before becoming a public company. We are
subject to the Exchange Act, including the reporting requirements thereunder, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, the NASDAQ rules and other applicable securities rules and regulations. Compliance with these rules and regulations has increased our
legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources,
particularly after we are no longer an “emerging growth company.”
Pursuant to Section 404, once we are no longer an emerging growth company, we may be required to furnish an attestation report on internal
control over financial reporting issued by our independent registered public accounting firm. When our independent registered public accounting firm is
required to undertake an assessment of our internal control over financial reporting, the cost of complying with Section 404 will significantly increase, and
management’s attention may be diverted from other business concerns, which could adversely affect our business and results of operations. We may need to
hire more employees in the future or engage outside consultants to comply with the requirements of Section 404, which will further increase our cost and
expense. In addition, enhanced legal and regulatory regimes and heightened standards relating to corporate governance and disclosure for public companies
result in increased legal and financial compliance costs and make some activities more time-consuming.
If we fail to maintain effective internal control over financial reporting and disclosure controls and procedures, we may suffer harm to our reputation
and investor confidence level.
If we fail to implement the requirements of Section 404(b) in the required timeframe once we are no longer an emerging growth company, we may
be subject to sanctions or investigations by regulatory authorities, including the SEC and the NASDAQ. Furthermore, if we are unable to continue to
conclude that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial
reports, the market price of shares of our Class A common stock could decline, and we could be subject to sanctions or investigations by regulatory
authorities. Failure to maintain effective internal control over financial reporting and disclosure controls and procedures required of public companies or
when necessary implement new or improved controls that provide reasonable assurance of the reliability of the financial reporting and preparation of our
financial statements for external use could also restrict our future access to the capital markets. As of December 31, 2020, we have concluded that our
internal control over financial reporting was effective based on criteria outlined in Part II, Item 9A “Controls and Procedures” of this Annual Report on
Form 10-K, however, we cannot assure that material weaknesses will not be identified in the future.
The SG Members have the right to have their LLC Interests redeemed or exchanged into shares of Class A common stock, which, if exercised, will
dilute our stockholders’ economic interest in SciPlay.
We have an aggregate of 602,138,807 shares of Class A common stock authorized but unissued, including 103,547,021 shares of Class A common
stock issuable upon redemption or exchange of LLC Interests that are held by the SG Members. SciPlay Parent LLC entered into the Operating Agreement
and, subject to certain restrictions set forth therein, the SG Members are entitled to have their LLC Interests redeemed or exchanged for shares of our Class
A common stock or, at our option, cash.
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Shares of our Class B common stock will be canceled on a one-for-one basis whenever the SG Members’ LLC Interests are so redeemed or
exchanged. While any redemption or exchange of LLC Interests and corresponding cancellation of our Class B common stock will reduce the SG
Members’ economic interest in SciPlay Parent LLC and its voting interest in us, the related issuance of our Class A common stock will dilute our
stockholders’ economic interest in SciPlay. We cannot predict the timing or size of any future issuances of our Class A common stock resulting from the
redemption or exchange of LLC Interests.
Future issuances or resales of Class A common stock by the SG Members or others, or the perception that such issuances or resales may occur, could
cause the market price of our Class A common shares to decline.
We entered into the Registration Rights Agreement with the SG Members, pursuant to which the shares of Class A common stock issued to the SG
Members upon redemption or exchange of LLC Interests will be eligible for resale, subject to certain limitations set forth therein. Any shares issued under
our equity incentive plans pursuant to one or more effective registration statements will be eligible for sale in the public market, except to the extent that
they are restricted by lock-up agreements and subject to compliance with Rule 144 in the case of our affiliates.
We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares of our
Class A common stock, including upon the redemption or exchange of LLC Interests, may have on the market price of our Class A common stock. Sales or
distributions of substantial amounts of our Class A common stock, including shares issued in connection with an acquisition, or the perception that such
sales or distributions could occur, may cause the market price of our Class A common stock to decline.
We do not currently intend to pay dividends on our Class A common stock.
We have never paid any cash dividends on our common stock and do not presently intend to pay cash dividends on our common stock. However,
we reconsider our dividend policy on a regular basis and may determine in the future to declare or pay cash dividends on our common stock. Therefore, our
stockholders may not receive any dividends on their Class A common stock for the foreseeable future, and the success of an investment in our Class A
common stock will depend upon any future appreciation in its value. Moreover, any ability to pay dividends will be restricted by the terms of the Revolver,
and may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us or our subsidiaries.
Consequently, investors may need to sell all or part of their holdings of our Class A common stock after price appreciation, which may never occur, as the
only way to realize any future gains on their investment.
Provisions in our articles of incorporation, bylaws and Nevada law may prevent or delay an acquisition of us, which could decrease the trading price of
our Class A common stock.
Our articles of incorporation and bylaws contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids and
to encourage prospective acquirers to negotiate with our board of directors rather than to attempt an unsolicited bid to acquire our company. These
provisions include:
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•
•
•
•
rules regarding how our stockholders may present proposals or nominate directors for election at stockholder meetings;
empowering only the board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the
number of directors or otherwise;
the absence of cumulative voting rights in the election of directors;
limiting the ability of stockholders to act by written consent or to call special meetings after Scientific Games ceases to beneficially own, directly
or indirectly, more than 50% of our combined voting power; and
the right of our board of directors to issue preferred stock without stockholder approval.
These provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many
stockholders. Nevada law could also prevent attempts by our stockholders to replace or remove our current management and incumbent directors. As a
result, stockholders may be limited in their ability to obtain a premium for their shares or control our management or board.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or
35
could otherwise adversely affect holders of our Class A common stock, which could depress the price of our Class A common stock.
Our articles of incorporation authorize us to issue one or more series of preferred stock. Our board of directors will have the authority to determine
the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of
such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights
superior to the rights of our Class A common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage
bids for our Class A common stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of
the holders of our Class A common stock.
General Risk Factors
We are and may be in the future subject to securities class action, which may harm our business and operating results.
Companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We are and may
be the target of this type of litigation in the future. Securities litigation against us may result in substantial costs and damages, and divert management’s
attention from other business concerns, which may seriously harm our business, results of operations, financial condition or cash flows. For additional
information regarding our litigation, see Note 11.
We may also be called on to defend ourselves against lawsuits relating to our business operations. Some of these claims may seek significant
damage amounts due to the nature of our business. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any
such proceedings. A future unfavorable outcome in a legal proceeding could have an adverse impact on our business, financial condition and results of
operations. In addition, current and future litigation, regardless of its merits, could result in substantial legal fees, settlement or judgment costs and a
diversion of management’s attention and resources that are needed to successfully run our business. For additional information regarding our litigation, see
Note 11.
Our inability to complete acquisitions and integrate those businesses successfully could limit our growth or disrupt our plans and operations.
From time to time, we pursue strategic acquisitions, such as our acquisition of Come2Play in June 2020. Our ability to succeed in implementing
our strategy will depend to some degree upon our ability to identify and complete commercially viable acquisitions. We cannot assure that acquisition
opportunities will be available on acceptable terms or at all, or that we will be able to obtain necessary financing or regulatory approvals to complete
potential acquisitions.
We may not be able to successfully integrate any businesses that we acquire or do so within the intended timeframes. We could face significant
challenges in managing and integrating our acquisitions and our combined operations, including acquired assets, operations and personnel. In addition, the
expected cost synergies associated with such acquisitions may not be fully realized in the anticipated amounts or within the contemplated timeframes or
cost expectations, which could result in increased costs and have an adverse effect on our prospects, results of operations, cash flows and financial
condition. We would expect to incur incremental costs and capital expenditures related to integration activities.
Acquisition transactions may disrupt our ongoing business. The integration of acquisitions requires significant time and focus from management
and might divert attention from the day-to-day operations of the combined business or delay the achievement of our strategic objectives.
Failure in pursuing or executing new business initiatives could have a material adverse impact on our business and future growth.
Our growth strategy includes evaluating, considering and effectively executing new business initiatives, which can be difficult. Management may
not properly ascertain or assess the risks of new initiatives, and subsequent events may alter the risks that were evaluated at the time we decided to execute
any new initiative. In particular, initiatives may be subject to intense competition due to low barriers to entry and the difficulty of differentiating games.
Entering into any new initiative can also divert our management’s attention from other business issues and opportunities. Failure to effectively identify,
pursue and execute new business initiatives, may adversely affect our reputation, business, financial condition and results of operations.
36
Our business may suffer if we do not successfully manage our current and potential future growth.
We have grown significantly in recent years and we intend to continue to expand the scope and geographic reach of the games we provide. Our
total revenue increased to $582.2 million in 2020, from $465.8 million in 2019, and $416.2 million in 2018. Our anticipated future growth will likely place
significant demands on our management and operations. Our success in managing our growth will depend, to a significant degree, on the ability of our
executive officers and other members of senior management to operate effectively, and on our ability to improve and develop our financial and
management information systems, controls and procedures. In addition, we will likely have to successfully adapt our existing systems and introduce new
systems, expand, train and manage our employees and improve and expand our sales and marketing capabilities.
If we are unable to properly and prudently manage our operations as they continue to grow, or if the quality of our games deteriorates due to
mismanagement, our brand name and reputation could be severely harmed, and our business, prospects, financial condition and results of operations could
be adversely affected.
We are subject to risks related to corporate and social responsibility and reputation.
Many factors influence our reputation including the perception held by our customers, business partners and other key stakeholders. Our business
faces increasing scrutiny related to environmental, social and governance activities. We risk damage to our reputation if we fail to act responsibly in a
number of areas, such as diversity and inclusion, sustainability and social responsibility. Any harm to our reputation could impact employee engagement
and retention, our corporate culture and the willingness of customers and our partners to do business with us, which could have a material adverse effect on
our business, results of operations and cash flows.
Our results of operations, cash flows and financial condition could be affected by natural events in the locations in which we or our key providers or
suppliers operate.
We may be impacted by severe weather and other geological events, including hurricanes, earthquakes, floods or tsunamis that could disrupt our
operations or the operations of our key providers or suppliers. Natural disasters or other disruptions at any of our facilities or our key providers’ or
suppliers’ facilities, such as AWS, Apple, Google, Facebook, Amazon and Microsoft, may impair the operation, development or provision of our games.
While we insure against certain business interruption risks, we cannot assure that such insurance will compensate us for any losses incurred as a result of
natural or other disasters. Any serious disruption to our operations, or those of our key providers or suppliers could have a material adverse effect on our
results of operations, cash flows and financial condition.
Changes in tax laws or tax rulings, or the examination of our tax positions, could materially affect our financial condition and results of operations.
Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. Our existing
corporate structure and intercompany arrangements have been implemented in a manner we believe is in compliance with current prevailing tax laws.
However, the tax benefits that we intend to eventually derive could be undermined due to future changes in tax laws. In addition, the taxing
authorities in the U.S. and other jurisdictions where we do business regularly examine income and other tax returns and we expect that they may examine
our income and other tax returns. The ultimate outcome of these examinations cannot be predicted with certainty.
Legal proceedings may materially adversely affect our business and our results of operations, cash flows and financial condition.
We have been party to, are currently party to, and in the future may become subject to additional, legal proceedings in the operation of our
business, including, but not limited to, with respect to consumer protection, gambling-related matters, employee matters, alleged service and system
malfunctions, alleged intellectual property infringement, claims relating to our contracts, licenses and strategic investments, alleged breaches of fiduciary
duties, alleged breaches of other certain governance documents and alleged violations of the securities laws in connection with the IPO. See Note 11 for
additional information.
For example, in 2018, the United States Court of Appeals for the Ninth Circuit decided that a social casino game produced by one of our
competitors should be considered illegal gambling under Washington state law. In April 2018, a
37
putative class action lawsuit, Sheryl Fife v. Scientific Games Corp., was filed against our parent, Scientific Games, in federal district court that is directed
against certain of our social casino games, including Jackpot Party Casino. The plaintiff alleges substantially the same causes of action against our social
casino games that are alleged with respect to Big Fish Casino, including the allegation that our social casino games violate Washington State gambling
laws. In December 2018, the federal district court assigned to the litigation denied Scientific Games’ motion to dismiss the plaintiff’s complaint. In January
2019, Scientific Games filed its answer and affirmative defenses to the putative class action complaint. See Note 11 for further discussion. We may incur
significant expense defending this lawsuit or any other lawsuit to which we may be a party. 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. If the plaintiff were to obtain a judgment in her favor in this lawsuit, then our results in Washington could be negatively impacted, and we could
be restricted from operating social casino games in Washington. Additional legal proceedings targeting our social casino games and claiming violations of
state or federal laws also could occur, based on the unique and particular laws of each jurisdiction. We cannot predict the likelihood, timing or scope of the
consequences of such an outcome, or the outcome of any other legal proceedings to which we may be a party, any of which could have a material adverse
effect on our results of operations, cash flows or financial condition.
Our insurance may not provide adequate levels of coverage against claims.
We believe that we maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot
be insured against or that we believe are not economically reasonable to insure. Moreover, any loss incurred could exceed policy limits and policy
payments made to us may not be made on a timely basis. Such losses could adversely affect our business prospects, results of operations, cash flows and
financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We occupy approximately 60,419 square feet of space in the U.S. and approximately 48,152 square feet of space internationally. We believe that
these facilities are adequate for our business as presently conducted. Set forth below is an overview of the principal leased real estate properties:
Location
Sq. Ft
Tenancy
Austin, Texas
Cedar Falls, Iowa
Tel Aviv, Israel
ITEM 3. LEGAL PROCEEDINGS
25,087 Lease
35,332 Lease
48,152 Lease
For a description of our legal proceedings, see Note 11, which is incorporated by reference into this Item 3 of this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
PART II
Market for Our Common Stock
Our outstanding common stock is listed for trading on the Nasdaq Global Select Market under the symbol “SCPL”. On February 23, 2021, the
closing sale price for our common stock on the Nasdaq Global Select Market was $19.44 per share. There was one holder of record of our Class A common
stock and two holders of record of our Class B common stock
38
as of February 23, 2021. This does not include the number of stockholders who hold shares of our common stock through banks, brokers or other financial
institutions.
Dividend Policy
We have never paid any cash dividends on our common stock and do not presently intend to pay cash dividends on our common stock in the
foreseeable future. Further, under the terms of certain of our debt agreements, we are limited in our ability to pay cash dividends or make certain other
restricted payments (other than stock dividends) on our common stock. For further discussion related to dividend restrictions, see Note 1.
Stockholder Return Performance Graph
The following graph compares the cumulative total stockholder return over the seven-quarters ended December 31, 2020 of our then outstanding
common stock, the NASDAQ Composite Index and indices of our peer group companies that operate in industries or lines of business similar to ours.
Our peer group companies consist of Zynga Inc. (NASDAQ: ZNGA), Tencent Holdings Ltd. (OTC Market: TCTZF), Rovio Entertainment Oyj
(OTC Market: ROVVF), Glu Mobile Inc. (NASDAQ: GLUU), Electronic Arts Inc. (NASDAQ: EA), Doubleu Games Co Ltd (Korea Exchange: 192080),
Changyou.com Ltd (NASDAQ: CYOU) and Activision Blizzard Inc (NASDAQ: ATVI).
The companies in our peer group have been weighted based on their relative market capitalization each quarter. The graph assumes that $100 was
invested in our then outstanding common stock, the NASDAQ Composite Index and the peer group indices at the beginning of the seven-quarter period
and that all dividends were reinvested. The comparisons are not intended to be indicative of future performance of our common stock.
39
5/7/2019
6/19
9/19
12/19
3/20
6/20
SciPlay Corporation
NASDAQ Composite
Peer Group
$
$
$
100.00 $
100.00 $
100.00 $
91.34 $
99.14 $
97.57 $
71.29 $
99.31 $
91.37 $
81.88 $
111.69 $
104.96 $
63.46 $
96.11 $
106.65 $
98.80 $
125.85 $
139.16 $
9/20
108.06 $
139.99 $
145.75 $
12/20
92.27
161.86
155.43
ITEM 6. SELECTED FINANCIAL DATA
We early adopted the new amendment to Regulation S-K Item 301, which eliminates Selected Financial Data.
ITEM 7. 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 and should be read
in conjunction with the description of our business (see Part I, Item 1 of this Annual Report on Form 10-K) and our Consolidated Financial Statements and
Notes (see Part IV, Item 15 of this Annual Report on Form 10-K).
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
40
conjunction with the disclosures and information contained and referenced under “Forward-Looking Statements” and “Risk Factors” included in this
Annual Report on Form 10-K.
BUSINESS OVERVIEW
On May 7, 2019, we completed the IPO as described in Note 1.
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, Gold Fish Casino, Hot Shot Casino and Quick Hit Slots, and casual games MONOPOLY Slots, Bingo
Showdown and 88 Fortunes Slots, and recently added a solitaire social game targeted toward casual game players as a part of the Come2Play acquisition on
various platforms referenced herein. 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, including titles and 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.
Trends and Recent Updates
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
this year as a result of the stay at home measures across the U.S. has begun to recede, we are still seeing higher player engagement as compared to before
stay at home measures began. We are not able to predict and quantify the ultimate impact of further COVID-19 developments on our results of operations
in future periods.
On June 22, 2020, we completed the acquisition of the privately held mobile and social game company Come2Play (see Note 1), which expanded
and diversified our portfolio of social games. As a result of this acquisition we now offer a solitaire social game targeted towards casual game players on
the same platforms in which we currently offer our existing games. We currently plan to launch an additional casual game in 2022.
On September 14, 2020, our parent, Scientific Games Corporation, announced that a number of long-term institutional investors, including highly
credentialed gaming industry investor Caledonia Investments, reached an agreement to acquire a 34.9% stake in SGC from MacAndrews & Forbes
Incorporated ("MacAndrews & Forbes”) at a price of $28.00 per share. This transaction was completed on October 27, 2020, with no investor owning more
than 9.9% of Scientific Games shares. M. Mendel Pinson, Executive Vice President at MacAndrews and Forbes, and Frances F. Townsend, Executive Vice
President of Worldwide Government, Legal and Business Affairs of MacAndrews & Forbes, resigned from the Board of Directors of SciPlay effective
October 2, 2020.
Throughout 2019 and 2020, we deployed significant updates across a number of our portfolio games, and we continued testing in certain
international markets. We expect to deploy further updates to games in future years and to continue testing in international markets.
Our year over year total revenue growth of 25% was in-line with the overall industry trend. We believe that there is an opportunity for improved
operating results in 2021 and beyond, as we continue to execute on our strategic game updates, enhanced analytics, and an upcoming new game release.
41
KEY PERFORMANCE INDICATORS AND NON-GAAP MEASURES
We manage our business by tracking several key performance indicators, each of which is tracked by our internal analytics systems and more fully
described below and referred to in our discussion of operating results. Our key performance indicators are impacted by several factors that could cause
them to fluctuate on a quarterly basis, such as platform providers' policies, restrictions, seasonality, user connectivity and addition of new content to certain
portfolios of games. Future growth in players and engagement will depend on our ability to retain current players, attract new players, launch new games
and features and expand into new markets and distribution platforms.
Mobile Penetration
Mobile penetration is defined as the percentage of total revenue generated from mobile platforms. We believe this indicator provides useful
information in understanding revenue generated from mobile platforms such as smartphones and tablets.
Average Monthly Active Users (MAU)
MAU is defined as the number of individual users who played a game during a particular month. An individual who plays multiple games or from
multiple devices may, in certain circumstances, be counted more than once. However, we use third-party data to limit the occurrence of multiple counting.
Average MAU for a period is the average of MAUs for each month for the period presented. We believe this indicator provides useful information in
understanding the number of users reached across our portfolio of games on a monthly basis.
Average Daily Active Users (DAU)
DAU is defined as the number of individual users who played a game on a particular day. An individual who plays multiple games or from
multiple devices may, in certain circumstances, be counted more than once. However, we use third-party data to limit the occurrence of multiple counting.
Average DAU for a period is the average of the monthly average DAUs for the period presented. We believe this indicator provides useful information in
understanding the number of users reached across our portfolio of games on a daily basis.
Average Revenue Per Daily Active User (ARPDAU)
ARPDAU is calculated by dividing revenue for the period by the average DAU for the period and then dividing by the number of days in the
period. We believe this indicator provides useful information reflecting game monetization.
Average Monthly Paying Users (MPU)
MPU is defined as the number of individual users who made an in-game purchase during a particular month. An individual who made purchases
in multiple games or from multiple devices may, in certain circumstances, be counted more than once. However, we use third-party data to limit the
occurrence of multiple counting. Average MPU for a period is the average of MPUs for each month for the period presented. We believe this indicator
provides useful information in understanding the number of users reached across our portfolio of games making in-game purchases on a monthly basis.
Average Monthly Revenue Per Paying User (AMRPPU)
AMRPPU is calculated by dividing average monthly revenue by average MPUs for the applicable time period. We believe this indicator provides
useful information reflecting game monetization.
Payer Conversion Rate
Payer conversion rate is calculated by dividing average MPU for the period by the average MAU for the same period. We believe this indicator
provides useful information reflecting game monetization.
Non-GAAP Financial Measures
Adjusted EBITDA, or AEBITDA, as used herein, is a non-GAAP financial measure that is presented as
42
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.
COMPONENTS OF RESULTS OF OPERATIONS
Revenue
We generate substantially all of our revenue from the sale of coins, chips and cards, which players of our games can use to play slot games, table
games and bingo games. Revenue from the sale of coins, chips and cards is generated on mobile and web platforms. Other revenue primarily represents
advertising revenue, which is currently an insignificant portion of our total revenue. We expect our overall revenue to continue to grow as we continue to
increase our market share and execute our strategy. As player platform preferences change and continue to migrate to mobile, we expect revenue generated
on web platforms to continue to decline.
Operating Expenses
Operating expenses consist primarily of cost of revenue, sales and marketing expenses, general and administrative expenses, R&D, D&A,
contingent acquisition consideration, and restructuring and other expenses, each more fully described below. D&A expense is excluded from cost of
revenue and other operating expenses, and is separately presented on the consolidated statements of income.
Cost of Revenue
Cost of revenue consists primarily of fees paid to platform providers such as Facebook, Google, Apple, Amazon and Microsoft, which generally
represent approximately 30% of our revenue, and licensing fees, which includes intellectual property royalties paid to both affiliated and unaffiliated third
parties, and other direct expenses incurred to generate revenue. We expect the aggregate amount of cost of revenue to increase for the foreseeable future as
we grow our revenue and expand our business.
Sales and Marketing
Sales and marketing expenses consist primarily of advertising costs related to marketing and player acquisition and retention, salaries and benefits
for our sales and marketing employees and fees paid to consultants. We intend to continue to invest in sales and marketing to grow our player base both for
our existing games and future games we may deploy. As a result, we expect the aggregate amount of sales and marketing expenses to increase for the
foreseeable future as we grow our
43
revenues and business and deploy new games. As deployed games mature, we generally expect sales and marketing expenses as a percentage of revenue
attributable to such games to decrease.
General and Administrative
General and administrative expenses consist primarily of salaries, benefits, and stock-based compensation for our executives, finance, information
technology, human resources and other administrative employees, and includes administrative parent services (see Note 10). In addition, general and
administrative expenses include outside consulting, legal and accounting services, facilities and other supporting overhead costs not allocated to other
departments. We expect that our aggregate amount of general and administrative expenses will increase for the foreseeable future as we continue to grow
our business and incur additional expenses associated with being a publicly traded company.
Research & Development
Research & Development expenses consist primarily of costs associated with game development, such as associated salaries, benefits, and other
supporting overhead costs associated with game development. Continued investment in enhancing existing games and developing new games is important
to attaining our strategic objectives. As a result, we expect the aggregate amount of R&D expenses to increase for the foreseeable future as we grow our
business, focus on retention of our development team and grow our facilities.
Contingent Acquisition Consideration
Contingent acquisition consideration expense consists of incremental consideration to be paid to former owners of businesses we acquired, the
amount of which exceeds the acquisition date estimation. As described in Note 1, when an acquisition includes future consideration to be paid to previous
owners of those businesses we have acquired, we estimate the fair value of the future payments and record the acquisition-date fair value as a component of
the purchase price. We monitor such arrangements and evaluate them when conditions change. Any adjustments subsequent to the acquisition date estimate
are recorded as contingent acquisition consideration expense. Because such expense is based on our current expectations of the future results of the
acquired businesses, any adjustments are recorded if our expectations for the future change. Although we currently do not have any expectation that we will
incur future contingent acquisition consideration, any such expenses will be dependent on future merger and acquisition activities and terms of those
arrangements.
Restructuring and Other
Our restructuring and other expenses include charges or expenses attributable to: (i) employee severance; (ii) management restructuring and
related costs; (iii) restructuring and integration; (iv) cost savings initiatives; and (v) acquisition related and other unusual items. Restructuring and other
expenses will increase or decrease based on management actions and/or occurrence of charges described herein.
44
RESULTS OF OPERATIONS
Summary of Results of Operations
($ in millions, except percentages)
Revenue
Operating expenses
Operating income
Net income
Net income attributable to SciPlay
AEBITDA
Net income margin
AEBITDA margin
pp = percentage points.
nm = not meaningful.
Years ended December 31,
2019
2020
Variance
2020 vs. 2019
$
$
$
$
582.2
427.2
155.0
146.0
20.9
188.7
25.1 %
32.4 %
$
$
465.8
362.1
103.7
93.5
32.4
122.3
20.1 %
26.3 %
116.4
65.1
51.3
52.5
(11.5)
66.4
5.0 pp
6.1 pp
25 %
18 %
49 %
56 %
(35)%
54 %
nm
nm
The following table reconciles Net income attributable to SciPlay to AEBITDA and AEBITDA margin:
($ in millions, except percentages)
Net income attributable to SciPlay
(1)
Net income attributable to noncontrolling interest
Net income
Restructuring and other
Depreciation and amortization
Income tax expense
Stock-based compensation
Other expense, net
(2)
AEBITDA
Revenue
Net income margin (Net income/Revenue)
(2)
AEBITDA margin (AEBITDA/Revenue)
$
$
$
Years ended December 31,
2019
2020
$
$
$
20.9
125.1
146.0
2.0
9.7
8.4
22.0
0.6
188.7
582.2
25.1 %
32.4 %
—
32.4
61.1
93.5
2.7
7.0
8.7
8.9
1.5
122.3
465.8
20.1 %
26.3 %
10.2
Royalties for Scientific Games IP
(1) Under the terms of the revised IP License Agreement, as more fully described in Note 10, we acquired an exclusive (subject to certain limited exceptions),
perpetual, non-royalty-bearing license for intellectual property created or acquired by SG Gaming, Inc. or its affiliates, which resulted in no future royalties or fees for
our use of intellectual property owned by SG Gaming, Inc. or its affiliates in our currently available games.
(2) Refer to “Key Performance Indicators and Non-GAAP Measures” section above for the definitions of AEBITDA and AEBITDA margin presented in this table.
$
$
(1)
Revenue, Key Performance Indicators and Other Metrics
($ in millions)
Mobile
Web and other
Total revenue
Years ended December 31,
2020
2019
Variance
2020 vs. 2019
$
$
505.9 $
76.3
582.2 $
391.0 $
74.8
465.8 $
114.9
1.5
116.4
29 %
2 %
25 %
45
Revenue information by geography is summarized as follows:
($ in millions)
North America
International
(2)
Total revenue
Years ended December 31,
(1)
2020
2019
(1)
Variance
2020 vs. 2019
$
$
533.3 $
48.9
582.2 $
422.4 $
43.4
465.8 $
110.9
5.5
116.4
26 %
13 %
25 %
(1) For the years ended December 31, 2020 and 2019, 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, geographical location is now
determined based on player location as reported by the platform provider. Accordingly, we recast 2019 to align with current year
presentation.
(2) For the years ended December 31, 2020 and 2019, U.S. revenue was $496.0 million and $395.3 million, respectively.
The following reflects our Key Performance Indicators and Other Metrics:
(1)
(1)
(1)
(1)
(in millions, except ARPDAU, AMRPPU, and percentages)
Mobile Penetration
Average MAU
Average DAU
ARPDAU
Average MPUs
AMRPPU
Payer Conversion Rate
(1) KPI include results from current period players only.
pp = percentage points.
nm = not meaningful.
(1)
(1)
(1)
Years ended December 31,
Variance
2020
2019
87 %
7.4
2.7
0.60
0.5
92.75
7.1 %
$
$
83 %
8.0
2.7
0.48
0.5
82.19
6.0 %
$
$
$
$
2020 vs. 2019
4.0 pp
(0.6)
—
0.12
—
10.56
1.1 pp
nm
(7.5)%
— %
25.0 %
— %
12.8 %
nm
Mobile platform revenue increased primarily due to increased player engagement as a result of the stay at home measures across North America
and other regions and the ongoing popularity of Jackpot Party Casino, Gold Fish Casino, Quick Hit Slots, 88 Fortunes, and MONOPOLY Slots.
The increase in mobile penetration percentage primarily reflects a continued trend of players migrating from web to mobile platforms to play our
games.
Average MAU decreased and average DAU stayed flat due to the turnover in users while paying users stayed consistent. Consequently, ARPDAU
and AMRPPU increased due to stay at home measures across North America and other regions, introduction of new content and features, and ongoing
popularity of our games.
The increase in payer conversion rates were due to the growing popularity of our games and increased interaction with the games by our players as
a result of the introduction of new content and features into our games.
46
Operating Expenses
(1)
(1)
($ in millions)
Operating expenses:
Cost of revenue
Sales and marketing
General and administrative
Research and development
Depreciation and amortization
Contingent acquisition consideration
Restructuring and other
(1)
(1)
Total operating expenses
(1) Excludes depreciation and amortization.
nm = not meaningful.
pp = percentage points.
Cost of Revenue
Years ended December 31,
Variance
Percentage of Revenue
2020
2019
2020 vs. 2019
2020
2019
$
$
185.3 $
130.7
66.2
33.3
9.7
—
2.0
427.2 $
158.5 $
129.7
40.6
23.6
7.0
1.7
1.0
362.1 $
26.8
1.0
25.6
9.7
2.7
(1.7)
1.0
65.1
16.9 %
0.8 %
63.1 %
41.1 %
38.6 %
(100)%
100 %
18 %
31.8 %
22.4 %
11.4 %
5.7 %
1.7
nm
nm
34.0 %
27.8 %
8.7 %
5.1 %
1.5
nm
nm
2020 vs. 2019
Change
(2.2)pp
(5.4)pp
2.7 pp
0.6 pp
0.2 pp
Cost of revenue increased in line with revenues which was partially offset by the decrease of $10.2 million in Scientific Games IP royalties due to
the revised IP License Agreement in 2019.
Sales and Marketing
Sales and marketing expenses as a percentage of revenue decreased by 5.4 percentage points primarily related to our focus on more efficient user
acquisition to acquire higher quality players.
General and Administrative
General and administrative expenses increased primarily due to $20.3 million increase in salaries, benefits, and stock-based incentive
compensation related to increased headcount and increased incentive compensation from attainment of higher performance metrics, $4.1 million increase in
legal fees and $1.2 million increase in other professional services fees.
Research and Development
Research and development expenses increased primarily as a result of an increase of $8.3 million in salary and benefits costs primarily due to a
9% increase in research and development headcount coupled with higher professional services expenses.
Depreciation and Amortization
Depreciation and amortization expenses increased primarily as a result of amortization associated with Come2Play acquired intangible assets.
Net Income
Net income increased primarily due to continued growth in revenue as a result of stay at home measures and increased payer conversion rates (as
described above) coupled with a decrease in IP royalty expense as a result of our entry into the revised IP License Agreement partially offset by operating
expenses as described above.
Net income margin improved by 5.0 percentage points as a result of the above stated drivers.
47
Noncontrolling interest
Net income attributable to noncontrolling interest increased due to the increase in Net Income coupled with no noncontrolling interest prior to our
IPO completed on May 7, 2019.
AEBITDA
AEBITDA increased primarily due to continued growth in revenue (as described above) coupled with a decrease in IP royalty expense as a result
of our entry into the revised IP License Agreement, partially offset by operating costs driving the growth.
AEBITDA margin improved by 6.1 percentage points as a result of the above stated drivers.
For 2019 and 2018 consolidated results comparison, see Part II, Item 7 of our 2019 Annual Report on Form 10-K.
RECENTLY ISSUED ACCOUNTING GUIDANCE
For a description of recently issued accounting pronouncements, see Note 1.
CRITICAL ACCOUNTING ESTIMATES
Information regarding significant accounting policies is included in the Notes to the audited consolidated financial statements. As stated in Note 1,
the preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical
experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe that the estimates, assumptions, and judgments involved in the following accounting policies have the greatest potential impact on our
consolidated financial statements:
•
•
•
•
Revenue recognition;
Business combinations;
Contingent acquisition consideration;
Income taxes; and
• Variable interest entities (VIE).
Revenue Recognition
Our revenue recognition policy described fully in Note 1 requires us to make significant judgments and estimates. The guidance in ASC 606
requires that we apply judgments or estimates to determine the performance obligations, the standalone selling prices of our performance obligations to
customers and the timing of transfer of control of the respective performance obligations. The evaluation of each of these criteria in light of contract
specific facts and circumstances is inherently judgmental, but certain judgments could significantly affect the timing or amount of revenue recognized if we
were to reach a different conclusion than we have. The critical judgments we are required to make in our assessment of contracts with customers that could
significantly affect the timing or amount of revenue recognized are:
•
Satisfaction of our performance obligation — We estimate the amount of outstanding purchased coins, chips or cards at period end based on
customer behavior, because we are unable to distinguish between the consumption of purchased or free coins, chips or cards. Based on an analysis
of the customers' historical play behavior, the timing difference between when virtual currencies are purchased by a customer and when those
virtual currencies are consumed in game play is relatively short. Future usage patterns may differ from historical usage patterns, and therefore the
estimated average playing periods may change in the future, and such changes could be material.
48
•
Principal-agent considerations — We recognize revenues on a gross basis because we have control over the content and functionality of games
before players access our games on our platform providers platforms. We evaluated our current agreements with our platform providers and end-
user agreements and based on the preceding, we determined that we are the principal in such arrangements. Any future changes in these
arrangements or to our games and related method of distribution may result in a different conclusion, and such change would have a material
impact on our gross revenues.
Business Combinations
We account for business combinations in accordance with ASC 805. This standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business combination.
Determining the fair value of assets acquired and liabilities assumed requires management judgment and often involves the use of significant
estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among
other items. Any changes in the underlying assumptions can impact the estimates of fair value by material amounts, which can in turn materially impact our
results of operations. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions
and projections used to develop these fair values, we could record impairment charges. In addition, we have estimated the useful lives of certain acquired
assets, and these lives are used to calculate Depreciation & amortization expense. If our estimates of the useful lives change, Depreciation & amortization
expense could be accelerated or slowed.
Contingent Acquisition Consideration
The valuation of contingent acquisition consideration (which is required each reporting period) requires significant judgments, and any changes in
the underlying assumptions can impact the estimates of fair value by material amounts. During the second quarter of 2020, we acquired Come2Play for a
total purchase consideration of $17.8 million which includes $3.7 million in estimated contingent acquisition consideration.
We paid $4.0 million and $27.0 million of the SpiceRack contingent acquisition consideration during the years ended December 31, 2020 and
2019, respectively.
Income Taxes
We are subject to the income tax laws of the U.S. federal, state and foreign jurisdictions in which we operate. These tax laws are complex, and the
manner in which they apply to our facts is sometimes open to interpretation. In establishing the provision for income taxes, we must make judgments about
the application of these inherently complex tax laws. For periods prior to the IPO, the provision for income taxes is calculated as if SciPlay completed
separate tax returns apart from its Parent ("Separate-return Method"), which requires significant judgments. 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.
Our income tax positions and analysis are based on currently enacted tax law. Future changes in tax law could significantly impact the provision
for income taxes, the amount of taxes payable and the deferred tax asset and liability balances in future periods. Deferred tax assets generally represent the
excess of tax basis in our investment and tax benefits for tax deductions available in future tax returns. Certain estimates and assumptions are required to
determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment,
management analyzes and estimates the impact of future taxable income, available carry-backs and carry-forwards, reversing temporary differences and
available prudent and feasible tax planning strategies. Should a change in facts or circumstances lead to a change in judgment about the ultimate
realizability of a deferred tax asset, we record or adjust the related valuation allowance in the annual period that the change in facts and circumstances
occurs, along with a corresponding increase or decrease in the provision for income taxes. For discussion of our income taxes, see Note 9.
Variable Interest Entities (VIE)
As described in Note 1, upon the completion of the IPO, SciPlay's sole material asset is its member's interest in
49
SciPlay Parent LLC. Due to SciPlay's power to control combined with its significant economic interest in SciPlay Parent LLC, we concluded that SciPlay is
the primary beneficiary of the VIE, and therefore it will consolidate the financial results of SciPlay Parent LLC and its subsidiaries. Any future changes to
the economic interest and/or the SciPlay Parent LLC Agreement, among other factors, may result in a different conclusion, and such change would have a
material impact on SciPlay financial statements, as SciPlay Parent LLC and its subsidiaries would not be consolidated but rather accounted for under the
equity method of accounting.
LIQUIDITY, CAPITAL RESOURCES AND WORKING CAPITAL
SciPlay is a holding company, with no material assets other than its ownership of SciPlay Parent LLC interests, no operating activities on its own
and no independent means of generating revenue or cash flow. Operations are carried out by SciPlay Parent LLC and its subsidiaries, and we depend on
distributions from SciPlay Parent LLC to pay our taxes and expenses. SciPlay Parent LLC’s ability to make distributions to us is restricted by the terms of
the Revolver, and may be restricted by any future credit agreement we or our subsidiaries enter into, any future debt or preferred equity securities we or our
subsidiaries issue, other contractual restrictions or applicable Nevada law.
We have funded our operations primarily through cash flows from operating activities. Based on our current plans and market conditions, we
believe that cash flows generated from our operations and borrowing capacity under the Revolver will be sufficient to satisfy our anticipated cash
requirements for the foreseeable future. However, we intend to continue to make significant investments to support our business growth and may require
additional funds to respond to business challenges, including the need to develop new games and features or enhance our existing games, improve our
operating infrastructure or acquire complementary businesses, personnel and technologies. Accordingly, we may need to engage in equity or debt
financings to secure additional funds. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain
adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to
business challenges could be significantly impaired, and our business may be harmed.
Our total cash on hand was $268.9 million and $110.6 million at years ended December 31, 2020 and 2019, respectively.
Revolving Credit Facility
In connection with the IPO, we entered into the $150.0 million Revolver by and among SciPlay Holding, 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. 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 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%. As of December 31, 2020 the commitment fee was 0.375% per annum. The Revolver provides
for up to $15.0 million in letter of credit issuances, which requires customary issuance and administration fees, and a fronting fee of 0.125%.
The Revolver contains covenants that, among other things, restrict our ability to incur additional indebtedness; incur liens; sell, transfer or dispose
of property and assets; invest; make dividends or distributions or other restricted payments; and engage in affiliate transactions, with the exception of
certain payments under the TRA and payments in respect of certain tax distributions under the Operating Agreement. In addition, the Revolver requires us
to maintain a maximum total net leverage ratio not to exceed 2.50:1.00 and to maintain a minimum fixed charge coverage ratio of no less than 4.00:1.00.
Such covenants are tested quarterly at the end of each fiscal quarter. As of December 31, 2020, there were no borrowings outstanding, and we were in
compliance with the financial covenants under the Revolver.
The Revolver is secured by a (i) first priority pledge of the equity securities of SciPlay Holding, SciPlay Parent LLC’s restricted subsidiaries and
each subsidiary guarantor party thereto and (ii) first priority security interests in, and mortgages on, substantially all tangible and intangible personal
property and material fee-owned real property of SciPlay Parent LLC, SciPlay Holding and each subsidiary guarantor party thereto, in each case, subject to
customary exceptions.
50
Changes in Cash Flows
The following table presents a summary of our cash flows for the periods indicated:
($ in millions)
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Increase (decrease) in cash, cash equivalents and restricted cash
Years Ended December 31,
2019
2020
$
$
193.4 $
(19.7)
(16.0)
0.6
158.3 $
93.0
(8.8)
15.9
0.5
100.6
Net cash provided by operating activities increased primarily due to higher earnings, coupled with a positive impact of working capital changes
primarily driven by timing of payments on accrued liabilities and payables and a $21.2 million decrease in payments related to contingent acquisition
consideration.
Net cash used in investing activities increased primarily due to $12.6 million in net cash paid in relation to the acquisition of Come2Play.
Net cash used in financing activities increased primarily due to $2.5 million in payments made under the TRA and $12.4 million in distributions to
Parent and affiliates compared to net IPO proceeds received during 2019.
Credit Agreement and Other Debt
For additional information regarding our credit agreement and other debt and interest rate risk, see “Contractual Obligations” in this Item 7 below,
Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” and Note 1.
Off Balance Sheet Obligations
As of December 31, 2020, we did not have any significant off-balance sheet arrangements.
Contractual Obligations
Our contractual obligations as of December 31, 2020 principally include obligations associated with our future minimum operating lease
obligations, obligations under the TRA and an obligation related to Come2Play contingent acquisition consideration as set forth in the table below:
Operating leases
Contingent acquisition consideration
Obligations under the TRA
License royalty minimum guaranteed payments
(1)
Total contractual obligations
(1)
Cash Payments Due In
Total
Less than 1
year
1 - 3 years
4 - 5 years
More than 5
years
$
$
10.5 $
5.0
72.5
2.9
90.9 $
2.4 $
1.0
4.0
2.6
10.0 $
7.4 $
4.0
12.4
0.3
24.1 $
0.7 $
—
8.7
—
9.4 $
—
—
47.4
—
47.4
The contingent acquisition consideration obligation represents non-discounted estimated liability.
The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant
terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the actions under the
contracts. The table does not include obligations under agreements that we can cancel without a significant penalty. We have agreements whereby we are
obligated to pay royalties based on future events that are uncertain and therefore they are not included in the table above.
51
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2020, we had no material exposure to market risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and other information required by this item are included in Part IV, Item 15 of this Annual Report on Form 10-K and are
presented beginning on page 55.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, as that term is defined in Rule
13a-15(e) under the Exchange Act, as of the end of the period covered by this annual report. Based on that evaluation, the CEO and CFO concluded that
our disclosure controls and procedures are effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting
The management of SciPlay is responsible for establishing and maintaining adequate internal control over financial reporting as such term is
defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of SciPlay; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2020. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework (2013). Based on our assessment we concluded that, as of December 31, 2020, our internal control over
financial reporting was effective based on those criteria.
An attestation of the Company’s internal control over financial reporting by our independent registered public accounting firm is not included as
we are an Emerging Growth Company and are exempt from the auditor attestation requirement of Section 404(b) of the Sarbanes-Oxley Act of 2002.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2020 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
52
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
We have adopted a Code of Business Conduct that applies to all of our officers, directors and employees (including our CEO, CFO and Chief
Accounting Officer) and have posted the Code of Business Conduct on our website at https://www.sciplay.com/wp-content/uploads/2019/05/SciPlay-Code-
of-Business-Conduct-April-2019.pdf. In the event that we have any amendments to or waivers from any provision of the Code of Business Conduct
applicable to our CEO, CFO or Chief Accounting Officer, we intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K by posting such
information on our website at https://www.sciplay.com/investors/corporate-governance.
Information relating to our executive officers is included in Part I, Item 1 of this Annual Report on Form 10-K. The other information called for by
this item is incorporated by reference to our definitive proxy statement relating to our 2021 annual meeting of stockholders, which will be filed with the
SEC. If such proxy statement is not filed on or before April 30, 2021, the information called for by this item will be filed as part of an amendment to this
Annual Report on Form 10-K on or before such date.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2021 annual meeting of
stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 30, 2021, the information called for by this item will
be filed as part of an amendment to this Annual Report on Form 10-K on or before such date.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2021 annual meeting of
stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 30, 2021, the information called for by this item will
be filed as part of an amendment to this Annual Report on Form 10-K on or before such date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2021 annual meeting of
stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 30, 2021, the information called for by this item will
be filed as part of an amendment to this Annual Report on Form 10-K on or before such date.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by this item is incorporated herein by reference to our definitive proxy statement relating to our 2021 annual meeting of
stockholders, which will be filed with the SEC. If such proxy statement is not filed on or before April 30, 2021, the information called for by this item will
be filed as part of an amendment to this Annual Report on Form 10-K on or before such date.
53
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
1. Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity/Accumulated Net Parent Investment for the years ended
December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
3. Exhibits
Form 10-K Page
55
56
57
58
59
60
61
81
82
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of SciPlay Corporation:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SciPlay Corporation and subsidiaries (the "Company") as of December 31, 2020 and
2019, the related consolidated statements of income, comprehensive income, changes in stockholders' equity/accumulated net parent investment and cash
flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively
referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
March 1, 2021
We have served as the Company's auditor since 2016.
55
SCIPLAY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
Years Ended December 31,
2019
2018
2020
$
582.2 $
465.8 $
(1)
(1)
(1)
(1)
Revenue
Operating expenses:
Cost of revenue
Sales and marketing
General and administrative
Research and development
Depreciation and amortization
Contingent acquisition consideration
Restructuring and other
Operating income
Other (expense) income:
Other (expense) income, net
Total other (expense) income, net
Net income before income taxes
Income tax expense
Net income
Less: Net income attributable to the noncontrolling interest
Net income attributable to SciPlay
(2)
Basic and diluted net income attributable to SciPlay per share :
Basic
Diluted
$
$
$
Weighted average number of shares of Class A common stock used in per
share calculation:
Basic shares
Diluted shares
185.3
130.7
66.2
33.3
9.7
—
2.0
155.0
(0.6)
(0.6)
154.4
8.4
146.0
125.1
20.9 $
0.92 $
0.86 $
22.8
24.4
158.5
129.7
40.6
23.6
7.0
1.7
1.0
103.7
(1.5)
(1.5)
102.2
8.7
93.5
61.1
32.4 $
0.53
0.53
22.7
22.7
416.2
160.4
105.7
34.5
25.6
15.1
27.5
1.0
46.4
3.0
3.0
49.4
10.4
39.0
—
39.0
(1) Excludes depreciation and amortization.
(2) For the years ended December 31, 2019 and 2018, basic and diluted earnings per share and weighted average shares of Class A common stock is applicable only for
the period starting May 7, 2019, the period following SciPlay Corporation’s IPO described in Note 1 — Description of the Business and Summary of Significant
Accounting Policies. See Note 8 — Earnings Per Share for further details regarding the computation of earnings per share.
See accompanying notes to consolidated financial statements.
56
SCIPLAY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Net income
Other comprehensive income:
Foreign currency translation gain (loss), net of tax
Total comprehensive income
Less: comprehensive income attributable to the noncontrolling interest
Comprehensive income attributable to SciPlay
$
$
Years Ended December 31,
2019
2018
2020
146.0 $
93.5 $
3.1
149.1
127.6
21.5 $
3.4
96.9
62.4
34.5 $
39.0
(3.8)
35.2
—
35.2
See accompanying notes to consolidated financial statements.
57
SCIPLAY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
As of December 31,
2020
2019
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net (allowance for doubtful accounts of $—)
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Goodwill
Intangible assets and software, net
Deferred income taxes
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Due to affiliate
Total current liabilities
Operating lease liabilities
Liabilities under the TRA
Other long‑term liabilities
Total liabilities
Commitments and contingencies (see Note 11)
Stockholders’ equity:
Class A common stock, par value $0.001 per share, 625.0 shares authorized, 22.8 and 22.7 shares
issued and outstanding as of December 31, 2020 and 2019, 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 December 31, 2020 and 2019, respectively.
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total SciPlay stockholders’ equity
Noncontrolling interest
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
See accompanying notes to consolidated financial statements.
58
268.9 $
36.6
5.9
311.4
4.4
8.5
129.8
30.3
82.5
1.9
568.8 $
23.2 $
22.9
5.5
51.6
7.5
68.5
5.7
133.3
—
0.1
46.1
32.9
0.9
80.0
355.5
435.5
568.8 $
110.6
32.1
4.3
147.0
4.6
6.0
120.7
17.0
87.1
2.2
384.6
12.8
13.7
2.7
29.2
5.2
72.7
—
107.1
—
0.1
41.7
12.0
0.3
54.1
223.4
277.5
384.6
SCIPLAY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/ACCUMULATED NET PARENT INVESTMENT
(in millions)
Class A common
stock
Class B common
stock
Shares
Amount
Additional
paid-in
capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Noncontrolling
interest
Total
Accumulated
net parent
investment
December 31, 2017
Net income
Dividend distributions
Transactions with Parent and
affiliates, net
Currency translation
adjustment
December 31, 2018
Activity prior to IPO and
organization transactions:
Net income
Transactions with Parent and
affiliates, net
Currency translation
adjustment and other
May 7, 2019
Issuance of Class A common
stock in the IPO, net of
underwriting discount and
offering costs
Issuance of Class B common
stock
Allocation of SGC equity to
noncontrolling interests
Distributions to Parent and
affiliates, net
Net effect of tax-related
organization transactions and
other
Activity subsequent to IPO
and organization
transactions:
Net income
Stock-based compensation
Currency translation and
other
December 31, 2019
Net income
Stock-based compensation
Net issuance (redemption) of
common stock in connection
with RSUs
Distributions to Parent and
affiliates, net
Currency translation
December 31, 2020
$
$
$
$
$
161.4
39.0
(77.9)
18.3
—
140.8
20.4
9.2
—
170.4
—
—
(170.4)
—
—
—
—
—
—
—
—
—
—
—
—
Shares
Amount
—
—
—
— $
—
—
—
—
— $
—
—
—
— $
22.7
—
—
—
—
—
—
—
22.7 $
—
—
0.1
—
—
22.8 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
— $
—
—
— $
—
—
— $
—
—
—
—
—
—
—
— $
—
— $
—
— $
—
— $
—
—
—
—
—
— $
—
— $
—
—
— $
—
—
—
— $
—
103.5
—
—
—
—
—
—
0.1
—
—
—
—
—
59.9
—
30.7
(56.1)
5.6
—
1.5
—
103.5 $
—
—
—
0.1 $
—
—
0.1
41.7 $
—
4.5
—
—
—
—
—
12.0
—
—
12.0 $
20.9
—
—
—
(0.1)
—
—
—
103.5 $
—
—
0.1 $
—
—
46.1 $
—
—
32.9 $
1.6 $
—
—
—
(3.8)
(2.2) $
—
—
1.9
(0.3) $
—
—
0.2
—
—
—
—
0.4
0.3 $
—
—
—
—
0.6
0.9 $
— $ 163.0
39.0
—
(77.9)
—
—
18.3
(3.8)
—
— $ 138.6
—
—
20.4
9.2
—
1.9
— $ 170.1
272.9
332.8
—
139.5
0.1
—
(255.6)
(311.7)
—
5.6
61.1
4.7
73.1
6.2
0.8
1.3
223.4 $ 277.5
146.0
125.1
22.0
17.5
(0.2)
(0.3)
(12.8)
2.5
(12.8)
3.1
355.5 $ 435.5
See accompanying notes to consolidated financial statements.
59
SCIPLAY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended December 31,
2019
2018
2020
Cash flow from operating activities:
Net income
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
Contingent acquisition consideration fair value adjustment
Deferred income taxes
Stock-based compensation
Operating expenses paid by Parent and affiliates
Payments of contingent acquisition consideration
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable
Prepaid expenses, other current assets and other assets
Accrued liabilities, accounts payable and other liabilities
Due to affiliate and other, net
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Business acquisitions, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Net proceeds from issuance of Class A common stock
Net proceeds from issuance of Class B common stock
Distributions to Scientific Games and affiliates, net
Payments of deferred offering costs
Payments of contingent acquisition consideration
Payments under tax receivable agreement
Payments on license obligations
Net redemptions of common stock under stock-based compensation plans
Payments of debt issuance costs
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Supplemental cash flow information:
Cash paid for income taxes
Payment for Scientific Games’ intellectual property license included in Distributions to Scientific
Games and affiliates, net
Non-cash investing and financing activities:
Non-cash deferred offering costs
$
146.0 $
93.5 $
9.7
—
4.3
22.0
—
(4.0)
(3.9)
(0.8)
17.2
2.9
193.4
(7.1)
(12.6)
(19.7)
—
—
(12.4)
—
(0.5)
(2.5)
(0.3)
(0.3)
—
(16.0)
0.6
158.3
110.6
268.9 $
7.0
1.7
(0.5)
8.9
7.2
(25.2)
(0.4)
1.7
(3.9)
3.0
93.0
(8.8)
—
(8.8)
341.7
0.1
(311.7)
(9.3)
(1.8)
—
(2.0)
—
(1.1)
15.9
0.5
100.6
10.0
110.6 $
2.0 $
1.5 $
—
—
255.0
—
$
$
39.0
15.1
27.5
(6.0)
4.0
14.4
—
2.2
2.1
(14.8)
(6.6)
76.9
(3.5)
—
(3.5)
—
—
(77.9)
(0.6)
—
—
(1.0)
—
—
(79.5)
(0.7)
(6.8)
16.8
10.0
1.8
—
1.9
See accompanying notes to consolidated financial statements.
60
SCIPLAY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 and a solitaire social game targeted toward
casual game players, among others. Our games are available in various formats. We have one operating segment with one business activity, developing and
monetizing social games.
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, 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 IPO 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;
• We used the net proceeds from the IPO and underwriters’ exercise of the over-allotment option after deducting the underwriting discount, as
follows:
61
To acquire 20,725,319 LLC Interests from SG Holding I
To acquire 1,994,681 newly issued LLC Interests from SciPlay Parent LLC
Net proceeds after deducting underwriting discount
(A) SG Holding I subsequently used these proceeds as follows:
Acquire IP License from Parent (“Upfront License Payment”)
Distributed as a dividend to Scientific Games
(1)
(B) SciPlay Parent LLC subsequently used the proceeds as follows:
Fees and expenses incurred in connection with the IPO
General corporate purposes, including a portion of contingent acquisition consideration
Note
(A)
(B)
Amount
311.7
30.0
341.7
255.0
56.7
311.7
9.3
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 owned 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 allows 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 also 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 SciPlay Parent LLC being considered a VIE. Due to our power to control the activities most directly affecting the
results of
62
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”). 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.
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.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less. We place our
temporary cash investments with high credit quality financial institutions. At times, such investments in U.S. accounts may be in excess of the Federal
Deposit Insurance Corporation insurance limit. We had $5.6 million and $8.0 million held in foreign currency and foreign bank accounts as of
December 31, 2020 and December 31, 2019, respectively.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any estimated uncollectible amounts. We
review accounts receivable regularly and make estimates for the allowance for doubtful accounts when there is doubt as to our ability to collect individual
balances. In evaluating our ability to collect outstanding receivable balances, we consider many factors, including the age of the balance, the platform
provider's payment history and current creditworthiness, and current economic trends. Bad debts are written off after all collection efforts have ceased. We
do not require collateral from our platform providers.
We had no allowance for doubtful accounts as of December 31, 2020 and December 31, 2019 and had no significant write-offs or recoveries
during the years ended December 31, 2020, 2019 and 2018.
Long-Lived Assets and Finite-Lived Intangible Assets
We assess the recoverability of our other long-term assets (including intangibles) with finite lives whenever events arise or circumstances change
that indicate the carrying value of the asset may not be recoverable. Recoverability of long-lived assets (or asset groups) to be held and used is measured by
a comparison of the carrying amount of the asset (or asset group) to the expected net future undiscounted cash flows to be generated by that asset (or asset
group).
The amount of impairment of other long-lived assets and intangible assets with finite lives is measured by the amount by which the carrying
amount of the asset exceeds the fair market value of the asset.
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.
63
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:
Mobile
Web and other
Total revenue
Years Ended December 31,
2019
2018
2020
$
$
505.9 $
76.3
582.2 $
391.0 $
74.8
465.8 $
323.3
92.9
416.2
The following table presents our revenue disaggregated based on the geographical location of our players:
Years Ended December 31,
2019
(1)
2018
(1)
2020
(1)
North America
International
(2)
Total revenue
$
$
533.3 $
48.9
582.2 $
422.4 $
43.4
465.8 $
380.3
35.9
416.2
(1) For the years ended December 31, 2020 and 2019, 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 2019,
geographical location is now determined based on player location as reported by the platform provider. Accordingly, we recast 2019 to align
with current year presentation. 2018 revenue continues to be disaggregated between the U.S. and International as we did not have the ability
to recast revenue.
(2) For the years ended December 31, 2020, 2019, and 2018, U.S. revenue was $496.0 million, $395.3 million, and $380.3 million,
respectively.
General
Our social and mobile games operate on a free-to-play model, whereby game players may collect coins, chips or cards free of charge through the
passage of time or through targeted marketing promotions. If a game player wishes to obtain coins, chips or cards above and beyond the level of free coins,
chips or cards available to that player, the player may purchase additional coins, chips or cards. Once a purchase is completed, the coins, chips or cards are
deposited into the player's account and are not separately identifiable from previously purchased coins, chips or cards or coins, chips and cards obtained by
the game player for free. Once obtained, coins, chips or cards (either free or purchased) cannot be redeemed for cash nor exchanged for anything other than
game play within our apps. When coins, chips or cards are played in the games, the game player could "win" and would be awarded additional coins, chips
or cards, or could "lose" and lose the future use of those coins, chips or cards. We have concluded that coins, chips and cards represent consumable goods,
because the game player does not receive any additional benefit from the games and is not entitled to any additional rights once the coins, chips or cards are
substantially consumed.
Control transfers and we recognize revenues from player purchases of coins, chips and cards as the coins, chips or cards are consumed for game play. We
determined through a review of play behavior that game players generally do not purchase additional coins, chips and cards until their existing coins, chips
and cards balances have been substantially consumed. As we are able to track the duration between purchases of coins, chips and cards for individual game
players for specific games, we are able to reliably estimate the period of time over which coins, chips and cards are consumed. Accordingly, for most
games, we recognize revenue using an item-based revenue model.
We estimate the amount of outstanding purchased coins, chips and cards at period end based on customer behavior, because we are unable to
distinguish between the consumption of purchased or free coins, chips and cards. Based on an analysis of the customers' historical play behavior, the timing
difference between when coins, chips or cards are purchased by a customer and when those coins, chips or cards are consumed in game play is relatively
short.
64
For games where we are unable to track the duration between purchases of coins, chips or cards for individual game players, we are able to
reliably estimate the average player life. Accordingly, we recognize revenue using a user-based revenue model. Future usage patterns may differ from
historical usage patterns and therefore the estimated average playing periods may change in the future.
We continuously gather and analyze detailed customer play behavior and assess this data in relation to our judgments used for revenue
recognition.
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:
Balance as of January 1, 2020
Balance as of December 31, 2020
(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.
$
32.1 $
36.6
0.2 $
0.2
0.6
0.6
Accounts
Receivable
Contract Assets
(1)
Contract
Liabilities
(2)
During the years ended December 31, 2020 and 2019, we recognized $0.6 million and $0.7 million, respectively, of revenue that was included in
the respective period beginning contract liability balance. Substantially all of our unsatisfied performance obligations relate to contracts with an original
expected length of one year or less.
Principal-Agent Considerations
Our games are played on various third-party platforms for which the platform providers collect proceeds from our customers and pay us an
amount after deducting a platform fee. Because we have control over the content and functionality of games before they are accessed by the end user, we
have determined we are the principal and, as a result, revenues are recorded on a gross basis. Payment processing fees paid to platform providers (such as
Facebook, Apple, Amazon, Google and Microsoft) are recorded within cost of revenue.
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
Years Ended December 31,
2019
2020
46.3 %
37.1 %
13.1 %
44.8 %
35.9 %
16.7 %
2018
41.7 %
32.3 %
22.1 %
Accounts
Receivable
Concentration
As of December 31,
2019
2020
49.2 %
35.4 %
11.5 %
42.7 %
33.1 %
20.9 %
Apple
Google
Facebook
Cost of Revenue
Amounts recorded as cost of revenue relate to direct expenses incurred in order to generate social gaming revenue.
65
Such costs are recorded as incurred, and primarily consist of fees withheld by our platform providers from the player proceeds received by the platform
providers on our behalf and licensing fees.
Depreciation and amortization expense is excluded from cost of revenue and other operating expenses and is separately presented on the
consolidated statements of income.
Advertising Cost
The cost of advertising is expensed as incurred and totaled $123.0 million, $123.6 million and $100.2 million for the years ended December 31,
2020, 2019 and 2018, respectively. Advertising costs primarily consist of marketing and player acquisition and retention costs and are included in Sales and
marketing expenses.
Research and Development (R&D)
R&D costs relate primarily to employee costs associated with game development and enhancement costs that do not meet internal-use software
capitalization criteria. Such costs are expensed as incurred.
Contingent Acquisition Consideration
Our 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 the Contingent acquisition 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 $4.0 million and $27.0 million during the years ended December 31, 2020 and 2019, respectively.
During the second quarter of 2020, we acquired Come2Play for a total purchase consideration of $17.8 million which includes $3.7 million in
estimated contingent acquisition consideration.
The following table summarizes our contingent acquisition consideration liabilities:
Contingent acquisition consideration included in accrued liabilities
Contingent acquisition consideration included in other long-term liabilities
Restructuring and Other
As of December 31,
2019
2020
$
1.0 $
2.4
4.0
—
Restructuring and other includes charges or expenses attributable to: (i) employee severance; (ii) management restructuring and related costs;
(iii) restructuring and integration; (iv) cost savings initiatives; and (v) acquisition related and other unusual items.
Restructuring and other expense for the years ended December 31, 2020, 2019 and 2018 primarily related to items (i), (iii) and (v) set forth above.
Foreign Currency Translation
We have operations in Israel where the local currency is the functional currency. Assets and liabilities of foreign operations are translated at
period-end rates of exchange, and results of operations are translated at the average rates of exchange for the period. Gains or losses resulting from
translating the foreign currency financial statements were accumulated as a separate component of Accumulated other comprehensive income (loss) in
Stockholders’ Equity/Accumulated Net Parent Investment. Gains or losses resulting from foreign currency transactions are included in Other income
(expense), net.
66
Acquisition of Come2Play
We account for business combinations in accordance with ASC 805. This standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard prescribe, among other things, the
determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of
transaction and acquisition related restructuring costs, which are expensed as incurred, from acquisition accounting.
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, which expands our existing portfolio of social games. Come2Play offers a solitaire social game targeted towards casual game players
on 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 $6.9 million in excess purchase price allocated to goodwill. We
finalized purchase price allocation during the fourth quarter of 2020, which resulted in a $0.5 million adjustment to goodwill and deferred tax liability. 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.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of
our assets and liabilities, when necessary, using an established three-level hierarchy in accordance with ASC 820.
The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We
believe the fair value of our financial instruments, which are principally cash and cash equivalents, accounts receivable, prepaid expenses and other current
assets, accounts payable and accrued liabilities, approximates their recorded values due to the short-term nature of these instruments.
In connection with our 2020 acquisition of Come2Play, we have recorded contingent consideration liability, which value is based on reaching
certain earnings-based metrics. The contingent consideration liability was recorded at fair value on the acquisition date as part of the consideration
transferred and is remeasured each reporting period. The inputs used to measure the fair value of contingent consideration liability are categorized as
Level 3 in the fair value hierarchy. Refer to Contingent Acquisition Consideration section above for additional disclosures.
As of December 31, 2020 and 2019 we did not have other assets and liabilities recorded at fair value on a recurring or nonrecurring basis other
than those described above.
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 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
67
the Revolver, which fee varies based on the total net leverage ratio and is subject to a floor of 0.375%. As of December 31, 2020 the commitment fee was
0.375% per annum. 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. As of December 31, 2020, there were no borrowings outstanding, and we were in
compliance with the financial covenants under the Revolver.
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.
We capitalized $1.1 million in debt issuance costs associated with the Revolver as of December 31, 2019, which are presented in Other assets and
amortized over the term of the arrangement and reflected in Other income (expense). As of December 31, 2020, we have incurred $0.6 million in unused
revolver commitment fees during the year ended December 31, 2020, which are reflected in Other income (expense).
New Accounting Guidance‑ Recently 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. We adopted this standard effective January 1, 2020. The adoption of this guidance did not have a material effect on our consolidated financial
statements.
The FASB issued ASU No. 2018-13, Fair Value Measurement, and several subsequent amendments (collectively, Topic 820) in 2018. The
standard amends the required quantitative and qualitative disclosure requirements for recurring and nonrecurring fair value measurements. We adopted this
standard effective January 1, 2020. The adoption of this standard did not have a material impact on our financial statement disclosures.
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 on a prospective basis for all
relevant changes. The adoption of this guidance did not have a material effect on our consolidated financial statements.
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 are currently assessing the impact of these
standards on our consolidated financial statements.
68
We do not expect that any other recently issued accounting guidance will have a significant effect on our consolidated financial statements.
(2) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
Prepaid expenses and other
Income tax receivable
Contract assets
As of December 31,
2020
2019
$
$
4.1 $
1.6
0.2
5.9 $
3.0
1.1
0.2
4.3
During the year ended December 31, 2019, we incurred $9.3 million in costs directly related to pursuing the IPO. These costs were charged
against the gross offering proceeds.
(3) Property and equipment, net
Property and equipment, net are stated at cost, and when placed in service, are depreciated using the straight-line method over the estimated useful
lives of the assets as follows:
Item
Computer equipment
Furniture and fixtures
Leasehold improvements
Estimated Life in Years
3 - 5
5 - 10
Shorter of the estimated useful life or remaining lease term
Property and equipment, net consisted of the following:
Computer equipment
Furniture and fixtures
Leasehold improvements
Less: accumulated depreciation and amortization
Total property and equipment, net
As of December 31,
2020
2019
5.0 $
2.1
2.9
(5.6)
4.4 $
4.3
2.1
2.7
(4.5)
4.6
$
$
The following reflects depreciation and amortization expense related to property and equipment included within depreciation and amortization:
Depreciation and amortization expense
$
1.7 $
0.9 $
0.6
Years Ended December 31,
2019
2018
2020
(4) Goodwill, Intangible Assets and Software, net
Goodwill
$120.7 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”), and
our acquisition of SpiceRack. The carrying value of goodwill increased by $6.9 million, as a result of the Come2Play acquisition in 2020.
69
We account for goodwill in accordance with ASC 350, Intangibles—Goodwill and Other ("ASC 350"). We test goodwill for impairment annually
as of October 1 of each fiscal year, or whenever events or circumstances make it more likely than not that impairment may have occurred since completion
of the last annual test. Impairment testing for goodwill is performed at the reporting unit level. We have identified a single reporting unit based on our
management structure. The fair value of goodwill for this reporting unit is in excess of its carrying value.
The table below reconciles the changes in the carrying value of goodwill for the period from December 31, 2018 to December 31, 2020.
Balance as of December 31, 2018
Foreign currency adjustments
Balance as of December 31, 2019
Acquired Goodwill
Foreign currency adjustments
Balance as of December 31, 2020
Intangible Assets and Software, net
Total
120.7
—
120.7
6.9
2.2
129.8
$
$
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 the acquisitions. Intangible assets increased during the year ended December 31, 2020 as a result of the
Come2Play acquisition. Identified intangible assets are amortized over three to ten years using the straight-line method, which materially approximates the
pattern of the assets' use. Factors considered when assigning useful lives include legal, regulatory and contractual provisions, game or technology
obsolescence, demand, competition and other economic factors.
The following table presents certain information regarding our intangible assets:
Balance as of December 31, 2020
Amortizable intangible assets:
Intellectual property
Customer relationships
Software
Licenses
Brand names
Balance as of December 31, 2019
Amortizable intangible assets:
Intellectual property
Customer relationships
Software
Licenses
Brand names
Gross
Carrying
Amount
Accumulated
Amortization
Net
Balance
$
$
$
$
42.2 $
30.5
21.9
7.7
6.1
108.4 $
35.4 $
23.2
16.8
5.1
3.9
84.4 $
(37.2) $
(19.8)
(13.8)
(3.5)
(3.8)
(78.1) $
(33.4) $
(18.0)
(10.3)
(2.4)
(3.3)
(67.4) $
5.0
10.7
8.1
4.2
2.3
30.3
2.0
5.2
6.5
2.7
0.6
17.0
70
The following reflects amortization expense related to intangible assets included within depreciation and amortization:
Years Ended December 31,
2019
2018
2020
Amortization expense
(1) Amortization expense for the year ended December 31, 2018 includes $4.2 million in accelerated amortization of certain Dragonplay intellectual property
recorded as a result of a change in estimate of the remaining useful lives.
6.1 $
8.0 $
$
(1)
Estimated amortization expense for the years ending December 31, 2021 through 2025 and thereafter is as follows:
Year
Expense
2021
2022
2023
2024
2025
Thereafter
(5) Accrued liabilities
Accrued liabilities consisted of the following:
Compensation and benefits
Contingent acquisition consideration
Income and other taxes
Liabilities under the TRA
Operating lease liabilities
Other
(6) Leases
$
$
As of December 31,
2020
2019
$
$
10.8 $
1.0
3.1
4.0
2.0
2.0
22.9 $
14.5
9.8
8.4
5.7
2.6
1.8
2.0
30.3
3.6
4.0
0.4
2.6
1.9
1.2
13.7
Our operating leases primarily consist of real estate leases such as offices. Our leases have remaining terms of 4 years 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.
71
Supplemental balance sheet and cash flow information related to operating leases is as follows:
Operating lease right-of-use assets
Accrued liabilities
Operating lease liabilities
Total operating lease liabilities
(1)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Weighted average remaining lease term, years
Weighted average discount rate
$
$
$
December 31, 2020
8.5
2.0
7.5
9.5
2.4
4.26
5.0 %
$
$
$
December 31, 2019
6.0
1.9
5.2
7.1
2.1
4.16
5.0 %
(1) Right-of-use assets obtained in exchange for lease obligations for the year ended December 31, 2020 were immaterial.
Lease liability maturities:
2021
2022
2023
2024
2025
Thereafter
Less: Imputed Interest
Total
Operating Leases
$
$
2.4
2.5
2.5
2.4
0.7
—
(1.0)
9.5
As of December 31, 2020, we did not have material additional operating leases that have not yet commenced.
(7) Stockholders’ Equity and Noncontrolling Interest
Stockholders’ Equity
Following the closing of the IPO and the partial exercise of the over-allotment option by the underwriters on June 4, 2019, there were 22,720,000
shares of our Class A common stock issued and outstanding and 103,547,021 shares of our Class B common stock issued and outstanding. Holders of our
Class A common stock and Class B common stock vote together as a single class on all matters presented to stockholders for their vote or approval, except
where separate class voting is required by Nevada law. Each share of Class A common stock entitles its holder to one vote on all matters presented to our
stockholders generally. Each share of Class B common stock entitles its holder to ten votes on all matters presented to our stockholders generally, for so
long as the number of shares of our common stock beneficially owned by the SG Members and their affiliates represents at least 10% of our outstanding
shares of common stock and, thereafter, one vote per share. Immediately following the IPO, all of our outstanding shares of Class B common stock were
held by the SG Members on a one-to-one basis with the LLC Interests each SG Member then owned. Following the IPO and the partial exercise of over-
allotment option by the underwriters on June 4, 2019, the holders of our issued Class A common stock collectively held 100% of the economic interests in
us and 2.1% of the voting power in us, and Scientific Games, through its indirect ownership of all of the outstanding Class B common stock, held the
remaining 97.9% of the voting power in us. As of December 31, 2020, Scientific Games owned all of the outstanding Class B common stock. Accordingly,
Scientific Games continues to control shares representing 97.8% of the voting power in us and continues to have a controlling financial interest in and
consolidate us.
72
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 18.1% economic interest in SciPlay Parent LLC. The remaining 81.9% economic interest in SciPlay Parent LLC is owned
indirectly by SGC, through the ownership of LLC Interests by the indirect wholly owned subsidiaries of Scientific Games, the SG Members.
The organizational transactions (including the IP License Agreement), consummated in connection with the closing of the IPO and partial exercise
of over-allotment option, as described in Note 1, were executed concurrently with a single economic objective; therefore, the net effect of these transactions
along with accumulated net parent investment balance as of the IPO date was allocated on a pro rata basis between additional paid-in capital and
noncontrolling interest.
Stock-Based Compensation
Our Long-Term Incentive Plan (“LTIP”) authorizes the issuance of up to 6.5 million shares of our Class A common stock to be granted in
connection with awards of incentive and nonqualified stock options, restricted stock and stock units, stock appreciation rights and performance-based
awards. At our 2020 annual meeting of stockholders, our stockholders approved the adoption of the 2020 Employee Stock Purchase Plan (the “ESPP”),
which authorizes the issuance of up to 250,000 shares of our Class A common stock. The first offering period under the ESPP commenced on January 1,
2021.
The Parent maintains an equity incentive awards plan under which the Parent may issue, among other awards, time‑based and performance‑based
stock options and restricted stock units to our employees. Although awards under such plan result in the issuance of shares of the Parent, the amounts are a
component of the total compensation for our employees and are included in our stock‑based compensation expense, which is accounted for as a component
of Stockholders’ equity.
The following table summarizes stock‑based compensation expense that is included in general and administrative expenses:
Related to SciPlay equity awards
Related to the Parent’s equity awards
Total
Restricted Stock Units (RSUs)
Years Ended December 31,
2019
2020
2018
$
$
21.4 $
0.6
22.0 $
5.7 $
3.2
8.9 $
—
4.0
4.0
A summary of changes in unvested RSUs under our equity-based compensation plans during 2020 is presented below:
Unvested RSU as of December 31, 2019
Granted
Vested
Cancelled
Unvested RSU as of December 31, 2020
Number of Shares
Weighted Average Grant
Date Fair Value
252,071 $
493,977 $
(124,920) $
(32,667) $
588,461 $
12.21
12.66
13.54
12.52
12.24
The weighted-average grant date fair value of RSUs granted during 2020 and 2019 was $12.66 and $12.21, respectively. The fair value of each
RSU grant is based on the market value of our common stock at the time of grant. As of December 31, 2020, we had $6.0 million of unrecognized stock-
based compensation expense relating to unvested RSUs that will be amortized on a straight-line basis over a weighted-average remaining term of
approximately 1.5 years. The fair value at vesting date of RSU’s vested during the year ended December 31, 2020 was $1.7 million.
73
Performance-Based Restricted Stock Units (PRSUs)
Starting with the second quarter of 2019, SciPlay employees including our senior executives and a non-employee director are granted PRSUs with
respect to our Class A common stock. The performance criteria for vesting of such PRSUs granted is based on revenue and Adjusted EBITDA metrics set
through the end of fiscal year 2022. Recipients of these awards generally must be actively employed by and providing services to the Company on the last
day of the performance period in order to receive an award payout. In certain cases, upon death, disability or a qualifying termination, all or a pro-rata
portion of the PRSUs will remain eligible to vest at the end of the performance period.
The fair value of the PRSUs granted was based on the closing price of our Class A common stock on the date of each grant. Stock-based
compensation expense associated with these awards is recognized over the service period based on our projection as to the probable outcome of the above
specified performance conditions. We reassess the probability of meeting the above specified performance conditions at each reporting period and adjust
stock-based compensation expense to reflect current expected results, as necessary.
The following is a summary of changes in unvested PRSUs during 2020:
Unvested PRSU as of December 31, 2019
Granted
Vested
Cancelled
Unvested PRSU as of December 31, 2020
Number of Shares
Weighted Average Grant
Date Fair Value
3,806,802 $
109,417 $
(33,082) $
(349,571) $
3,533,566 $
15.76
14.94
15.13
15.84
15.77
The weighted-average grant date fair value of PRSUs granted during 2020 and 2019 was $14.94 and $15.76, respectively. All of the PRSUs
granted during 2020 remained unvested as of December 31, 2020. As of December 31, 2020, we had $1.9 million of unrecognized stock-based
compensation expense relating to unvested PRSUs that will be amortized on a straight-line basis over a weighted-average remaining term of approximately
0.4 years. The fair value at vesting date of PRSU’s vested during the year ended December 31, 2020 was $0.5 million.
(8) 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. 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.
For the years ended December 31, 2019 and December 31, 2018, we previously presented basic and diluted EPS as if the IPO had occurred at the
beginning of the earliest period presented. Subsequently we have revised the presentation to only include net income attributable to SciPlay generated from
May 7, 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 an
economic interest in us and therefore a separate presentation of EPS of Class B common stock under the two-class method has not been provided.
74
Numerator:
Net income
Less: net income attributable to SG Social Holding Company II, LLC prior to IPO
Less: net income attributable to the noncontrolling interest
Net income attributable to SciPlay
Denominator:
Weighted average shares of Class A common stock for basic EPS
Effect of dilutive securities:
Stock-based compensation grants
Weighted average shares of Class A common stock for diluted EPS
Basic and diluted net income attributable to SciPlay per share:
Basic
Diluted
(9) Income Taxes
Years Ended December 31,
2019
2018
2020
$
$
$
$
146.0 $
—
125.1
20.9 $
22.8
1.6
24.4
0.92 $
0.86 $
93.5 $
20.4
61.1
12.0 $
39.0
39.0
—
—
22.7
—
22.7
0.53
0.53
Income taxes are determined using the liability method of accounting for income taxes, under which deferred tax assets ("DTAs") and deferred tax
liabilities ("DTLs") are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets
and liabilities. Deferred income tax balances are reported using currently enacted tax rates and are adjusted for changes in such rates in the period of
change.
We hold an economic interest of 18.1% in SciPlay Parent LLC. The 81.9% 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 U.S. 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 components of Net income before income taxes are as follows:
United States
Foreign
Net income before income taxes
Years Ended December 31,
2019
2018
2020
$
$
155.0 $
(0.6)
154.4 $
101.1 $
1.1
102.2 $
50.8
(1.4)
49.4
75
The components of income tax expense are as follows:
Current
U.S. Federal
U.S. State
Foreign
Total
Deferred
U.S. Federal
U.S. State
Foreign
Total
Total income tax expense
Years Ended December 31,
2019
2018
2020
$
$
$
1.7 $
1.3
1.0
4.0 $
3.6
0.9
(0.1)
4.4
5.4 $
1.5
0.9
7.8 $
0.6
0.5
(0.2)
0.9
8.4 $
8.7 $
11.0
3.8
1.6
16.4
(2.6)
(0.9)
(2.5)
(6.0)
10.4
The reconciliation of the U.S. federal statutory tax rate to the actual tax rate is as follows:
Statutory U.S. federal income tax rate
U.S. state income taxes, net of federal benefit
Noncontrolling interest
Other
Effective income tax rate
Years Ended December 31,
2019
2018
2020
21.0 %
1.3 %
(17.3)%
0.4 %
5.4 %
21.0 %
1.7 %
(12.2)%
(2.0)%
8.5 %
21.0 %
3.1 %
— %
(3.0)%
21.1 %
Our effective tax rate for the years ended December 31, 2020 and 2019 differ from the statutory rate of 21.0% primarily because we 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.
76
The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the following:
Deferred tax assets:
Investment in LLC
TRA Liability
Other
Valuation allowance
Realizable deferred tax assets
Deferred tax liabilities:
Difference in financial reporting and tax basis for:
Identifiable Intangible Assets
Total deferred tax liabilities
Net deferred tax assets on balance sheet
As of December 31,
2020
2019
$
$
74.3 $
17.5
0.7
(9.6)
82.9
(2.9)
(2.9)
80.0 $
75.0
18.2
1.6
(7.7)
87.1
—
—
87.1
As a result of the IPO, we recorded a deferred tax asset for the difference between the financial reporting value and the tax basis of our investment
in SciPlay Parent LLC. We also recorded a deferred tax asset for the tax basis increases that will be generated from future payments under the Tax
Receivable Agreement. The TRA liability represents 85% of the tax savings we expect to receive from the amortization deductions associated with the
step-up in basis of depreciable assets under Internal Revenue Code Section 754. This DTA will be realized as cash payments are made to the TRA
participants.
As of December 31, 2020, we did not have any material NOL or credit carryforwards.
The following table summarizes our valuation allowances:
Federal
State
Foreign
As of December 31,
2020
2019
$
$
(8.4) $
(1.2)
—
(9.6) $
(5.7)
(0.9)
(1.1)
(7.7)
At each reporting period, we analyze the likelihood of our deferred taxes assets to be realized. If, based upon all available evidence, both positive
and negative, it is more likely than not that such deferred tax assets will not be realized, a valuation allowance is recorded. As a result of this analysis, we
determined that a portion of the DTA related to our investment in SciPlay Parent LLC is not expected to be realized; therefore, we recorded a valuation
allowance on this portion of the outside basis difference in our investment.
We apply a recognition threshold and measurement attribute related to uncertain tax positions taken or expected to be taken on our tax returns. We
recognize a tax benefit for financial reporting of an uncertain income tax position when it has a greater than 50% likelihood of being sustained upon
examination by the taxing authorities. We measure the tax benefit of an uncertain tax position based on the largest benefit that has a greater than 50%
likelihood of being ultimately realized including evaluation of settlements. For the years ended December 31, 2020 and 2019, we had no unrecognized tax
benefits.
We file income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions. There are no material U.S. federal, state,
local or non-U.S. examinations by tax authorities currently ongoing.
77
(10) Related Party Transactions
The following is the summary of expenses paid to Scientific Games and settled in cash:
Years Ended December 31,
2019
2020
2018
Financial Statement Line Item
(1)
Royalties for Scientific Games IP
— $
7.0
Royalties to Scientific Games for third-party IP
5.9
Parent services
2.5
TRA payments
Distributions to Parent and affiliates, net
12.8
(1) In accordance with the IP License Agreement, we did not incur any additional royalty expense related to Scientific Games IP after the effective date of the IP License Agreement.
(2) 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.
26.1 Cost of revenue
7.7 Cost of revenue
5.7 General and administrative
— Accrued liabilities
— Noncontrolling interest
10.2 $
6.9
5.0
—
—
$
(2)
(2)
The following is the summary of balances due to affiliates:
Royalties to Scientific Games for third-party IP
Parent services
Reimbursable expenses to (from) Scientific Games and its subsidiaries
IP Royalties
As of December 31,
2019
2020
$
$
2.5 $
0.8
2.2
5.5 $
0.5
0.8
1.4
2.7
In connection with the IPO, we entered into the IP License Agreement from which we obtained an exclusive (subject to certain limited
exceptions), perpetual, non-royalty-bearing license from SG Gaming, Inc. (formerly known as Bally Gaming, Inc.) (“SG Gaming”) for intellectual property
created or acquired by SG Gaming or its affiliates on or before the third anniversary of the date of the IP License Agreement in any of our currently
available or future social games that are developed for mobile platforms, social media platforms, internet platforms or other interactive platforms and
distributed solely via digital delivery, and a non-exclusive, perpetual, non-royalty-bearing license for intellectual property created or acquired by SG
Gaming or its affiliates after such third anniversary, for use in our currently available games. So long as the IP License Agreement remains in effect, we do
not expect to pay any future royalties or fees for our use of intellectual property owned by SG Gaming or its affiliates in our currently available games. The
purchase price of the license was $255.0 million, which was determined based on the appropriate valuation methodology performed by a third-party
valuation specialist. This transaction was treated as a deemed distribution to the Parent as it constitutes a transaction between entities under common
control.
The Parent frequently licenses intellectual property (“IP”) from third parties, which we use in developing our games pursuant to the IP License
Agreement. Royalties allocated for use of third‑party IP are charged to us and are typically based upon net social gaming revenues and the royalty rates
defined and stipulated in the third‑party agreements.
Parent Services
On September 5, 2016, we entered into a Services Agreement with the Parent pursuant to which the Parent and its subsidiaries provide us various
corporate services. In connection with the IPO described above, we entered into a new Services Agreement under which the Parent and its subsidiaries will
continue to provide us the below services on substantially the same terms.
Parent services represent charges of corporate level general and administrative expenses that pay for services related to, but not limited to, finance,
corporate development, human resources, legal, information technology, and rental fees for shared assets. These expenses have been charged to us on the
basis of direct usage and costs when identifiable, with the remainder charged on the basis of revenues, operating expenses, headcount or other relevant
measures, which we believe to be the most meaningful methodologies.
78
TRA
As described in Note 1 and in connection with the IPO, we entered into the TRA with the SG Members. The annual tax benefits are computed by
comparing the income taxes due including such tax benefits and the income taxes due without such benefits. Our estimated liability under the TRA as of
December 31, 2020 was $72.5 million, of which $4.0 million was included in Accrued liabilities.
The amount of aggregate payments due under the TRA may vary based on a number of factors, including the amount and timing of the taxable
income SciPlay Parent LLC generates each year and applicable tax rates, with payments generally due within a specified period of time following the filing
of our tax return for the taxable year with respect to which the payment obligation arises. The TRA will remain in effect until all such tax benefits have
been utilized or expired unless we exercise our right to terminate the TRA. The TRA will also terminate if we breach our obligations under the TRA or
upon certain change of control events specified in the agreement. If the TRA is terminated in accordance with its terms, our payment obligations would be
accelerated based upon certain assumptions, including the assumption that we would have sufficient future taxable income to utilize such tax benefits.
During the year ended December 31, 2020, payments totaling $2.5 million were made to Scientific Games pursuant to the TRA. As of December
31, 2020 and 2019 the total TRA liability was $72.5 million and $75.3 million, respectively, of which $4.0 million and $2.6 million, respectively, was
included in Accrued liabilities.
Parent Equity Awards
See Note 7 for disclosures related to Parent’s equity awards.
(11) Commitments and Contingencies
Benefit plans
We have a 401(k) plan for U.S.-based employees and equivalent foreign plans for our international employees. Those employees who participate
in our 401(k) plan are eligible to receive matching contributions from us for the first 6% of participant contributions (as defined in the plan document).
Contribution expense for the years ended December 31, 2020, 2019 and 2018 amounted to $1.8 million, $1.5 million and $1.2 million, respectively.
Litigation
From time to time, we are subject to various claims, complaints and legal actions in the normal course of business. In addition, we may receive
notifications alleging infringement of patent or other IP rights.
Washington State Matter
On April 17, 2018, a plaintiff filed a putative class action complaint, Fife v. Scientific Games Corp., against our Parent, 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 our 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, our Parent filed a motion to dismiss the plaintiff’s
complaint with prejudice, which the trial court denied on December 18, 2018. Our Parent 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 our Parent, asserting the same claims, and seeking the same relief, as the complaint filed by Sheryl Fife. On September 8, 2020, our
Parent 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. We are currently unable to determine the
likelihood of an outcome or estimate a range of reasonably possible loss. 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.
79
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 IPO (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 the SciPlay IPO 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.
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 the SciPlay IPO. The plaintiff seeks to represent a class of all persons who
purchased Class A common stock of SciPlay in or traceable to the SciPlay IPO 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. 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.
80
Tax related valuation allowance
Year Ended December 31, 2018
Year Ended December 31, 2019
Year Ended December 31, 2020
SCHEDULE II
SCIPLAY CORPORATION
Valuation and Qualifying Accounts
Years Ended December 31, 2020, 2019 and 2018
(in millions)
Balance at beginning
of period
Additions/(deductions)
Balance at end of
period
—
—
7.7
— $
7.7 $
1.9 $
—
7.7
9.6
$
$
$
81
Exhibit
Number
Description
3.1
3.2
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Amended and Restated Articles of Incorporation of SciPlay Corporation (incorporated by reference to Exhibit 3.1 to SciPlay
Corporation’s Current Report on Form 8-K filed on May 8, 2019).
Amended and Restated Bylaws of SciPlay Corporation (incorporated by reference to Exhibit 3.2 to SciPlay Corporation’s Current Report
on Form 8-K filed on May 8, 2019).
Description of the Company’s Securities.*
Scientific Games Corporation 2003 Incentive Compensation Plan (Amended and Restated as of June 12, 2019) (incorporated by reference
to Exhibit 10.1 to SciPlay Corporation’s Quarterly Report on Form 10-Q filed on November 8, 2019).(†)
SciPlay Corporation Long-Term Incentive Plan (incorporated by reference to Exhibit 4.3 to SciPlay Corporation’s Registration Statement
on Form S-8 filed on May 3, 2019).(†)
Employment Agreement, dated as of May 4, 2018, by and between Scientific Games Corporation and Barry Cottle (incorporated by
reference to Exhibit 10.10 to SciPlay Corporation’s Amendment No. 1 to Registration Statement on Form S-1 filed on April 12, 2019).(†)
Amendment to Employment Agreement, dated as of May 7, 2019, by and between Scientific Games Corporation and Barry L. Cottle
(incorporated by reference to Exhibit 10.11 to SciPlay Corporation’s Current Report on Form 8-K filed on May 8, 2019).(†)
Amendment to Employment Agreement, dated as of March 24, 2020 (effective as of April 5, 2020), by and between Scientific Games
Corporation and Barry Cottle (incorporated by reference to Exhibit 10.1 to SciPlay Corporation’s Quarterly Report on Form 10-Q filed on
May 11, 2020).(†)
Amendment to Employment Agreement, dated as of June 30, 2020 (effective as of July 1, 2020), by and between Scientific Games
Corporation and Barry Cottle (incorporated by reference to Exhibit 10.2 to SciPlay Corporation’s Quarterly Report on Form 10-Q filed on
July 23, 2020).(†)
Amended and Restated Employment Agreement, dated as of February 27, 2017, by and between Scientific Games Corporation and
Michael Winterscheidt (incorporated by reference to Exhibit 10.15 to SciPlay Corporation’s Amendment No. 1 to Registration Statement
on Form S-1 filed on April 12, 2019).(†)
Amendment to Employment Agreement, dated as of February 21, 2019 (effective as of February 25, 2019), by and between Scientific
Games Corporation and Michael Winterscheidt (incorporated by reference to Exhibit 10.16 to SciPlay Corporation’s Amendment No. 1 to
Registration Statement on Form S-1 filed on April 12, 2019).(†)
Amendment to Employment Agreement, dated as of March 27, 2020 (effective as of April 5, 2020), by and between Scientific Games
Corporation and Michael Winterscheidt (incorporated by reference to Exhibit 10.2 to SciPlay Corporation’s Quarterly Report on Form 10-
Q filed on May 11, 2020).(†)
Amendment to Employment Agreement, dated as of May 18, 2020, by and between Scientific Games Corporation and Michael
Winterscheidt (incorporated by reference to Exhibit 10.4 to SciPlay Corporation’s Quarterly Report on Form 10-Q filed on July 23, 2020).
(†)
Amendment to Employment Agreement, dated as of June 30, 2020 (effective as of July 1, 2020), by and between Scientific Games
Corporation and Michael Winterscheidt (incorporated by reference to Exhibit 10.5 to SciPlay Corporation’s Quarterly Report on Form 10-
Q filed on July 23, 2020).(†)
Amended and Restated Operating Agreement of SciPlay Parent Company, LLC, dated May 2, 2019, by and among SciPlay Parent
Company, LLC, the Company and its Members (incorporated by reference to Exhibit 10.1 to SciPlay Corporation’s Current Report on
Form 8-K filed on May 8, 2019).
Tax Receivable Agreement, dated May 7, 2019, by and among SciPlay Corporation, SciPlay Parent Company, LLC and each of the
Members from time to time party thereto (incorporated by reference to Exhibit 10.2 to SciPlay Corporation’s Current Report on Form 8-K
filed on May 8, 2019).
Registration Rights Agreement, dated May 7, 2019, by and among SciPlay Corporation, SG Social Holding Company I, LLC, SG Social
Holding Company, LLC and such other persons from time to time party thereto (incorporated by reference to Exhibit 10.3 to SciPlay
Corporation’s Current Report on Form 8-K filed on May 8, 2019).
License Agreement, dated May 7, 2019, by and between Bally Gaming, Inc. and SG Social Holding Company I, LLC (incorporated by
reference to Exhibit 10.4 to SciPlay Corporation’s Current Report on Form 8-K filed on May 8, 2019).
Assignment Agreement, dated May 7, 2019, by and between SG Social Holding Company I, LLC and SciPlay Holding Company, LLC
(incorporated by reference to Exhibit 10.5 to SciPlay Corporation’s Current Report on Form 8-K filed on May 8, 2019).
Services Agreement, dated May 7, 2019, by and among Scientific Games Corporation, Scientific Games International, Inc., Bally
Gaming, Inc. and SciPlay Holding Company, LLC (incorporated by reference to Exhibit 10.6 to SciPlay Corporation’s Current Report on
Form 8-K filed on May 8, 2019).
82
10.18
10.19
10.20
10.21
10.22
10.23
21.1
23.1
31.1
31.2
32.1
32.2
99.1
99.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
Credit Agreement, dated May 7, 2019, among SciPlay Holding Company, LLC, as the borrower, SciPlay Parent Company, LLC, the
several lenders from time to time parties thereto, Bank of America, N.A., as administrative agent, collateral agent and issuing lender, and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, JPMorgan Chase Bank, N.A., Deutsche Bank Securities Inc., Goldman Sachs Bank
USA, Morgan Stanley Senior Funding, Inc., Macquarie Capital (USA) Inc. and RBC Capital Markets, as joint lead arrangers and joint
bookrunners (incorporated by reference to Exhibit 10.7 to SciPlay Corporation’s Current Report on Form 8-K filed on May 8, 2019).
Employment Agreement, dated as of May 7, 2019, by and between SciPlay Parent Company, LLC and Joshua J. Wilson (incorporated by
reference to Exhibit 10.8 to SciPlay Corporation’s Current Report on Form 8-K filed on May 8, 2019).(†)
Offer Letter, dated as of May 7, 2019, from SciPlay Parent Company, LLC to Michael Cody (incorporated by reference to Exhibit 10.9 to
SciPlay Corporation’s Current Report on Form 8-K filed on May 8, 2019).(†)
Social Award Agreement, dated as of May 7, 2019, by and between SciPlay Corporation and Barry L. Cottle (incorporated by reference to
Exhibit 10.10 to SciPlay Corporation’s Current Report on Form 8-K filed on May 8, 2019).(†)
Social Award Agreement, dated as of May 7, 2019, by and between SciPlay Corporation and M. Mendel Pinson (incorporated by
reference to Exhibit 10.12 to SciPlay Corporation’s Quarterly Report on Form 10-Q filed on August 1, 2019).(†)
SciPlay Corporation 2020 Employee Stock Purchase Plan, dated April 21, 2020 (incorporated by reference to Exhibit 10.1 to SciPlay
Corporation’s Current Report on Form 8-K filed on June 12, 2020).(†)
Subsidiaries of the Registrant.*
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.*
Certification of the Chief Executive Officer of SciPlay Corporation pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
Certification of the Chief Financial Officer of SciPlay Corporation pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
Certification of the Chief Executive Officer of SciPlay Corporation pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
Certification of the Chief Financial Officer of SciPlay Corporation pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
Terms and Conditions of Equity Awards to Key Employees under the SciPlay Corporation Long-Term Incentive Plan (incorporated by
reference to Exhibit 99.1 to SciPlay Corporation’s Quarterly Report on Form 10-Q filed on November 8, 2019).(†)
Terms and Conditions of Equity Awards to Non-Employee Directors under the SciPlay Corporation Long-Term Incentive Plan
(incorporated by reference to Exhibit 99.2 to SciPlay Corporation’s Quarterly Report on Form 10-Q filed on November 8, 2019).(†)
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are
embedded within the Inline XBRL document
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Label Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags
are embedded within the Inline XBRL document.
*Filed herewith.
** Furnished herewith.
(†) Management contracts and compensation plans and arrangements.
83
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 1, 2021
SCIPLAY CORPORATION
(Registrant)
By:
Name:
Title:
By:
Name:
Title:
/s/ Michael D. Cody
Michael D. Cody
Chief Financial Officer
/s/ Michael F. Winterscheidt
Michael F. Winterscheidt
Chief Accounting Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 1, 2021.
Signature
/s/ Joshua J. Wilson
Joshua J. Wilson
/s/ Michael D. Cody
Michael D. Cody
/s/ Michael F. Winterscheidt
Michael F. Winterscheidt
/s/ Barry L. Cottle
Barry L. Cottle
/s/ Gerald D. Cohen
Gerald D. Cohen
/s/ Michael Marchetti
Michael Marchetti
/s/ Jay Penske
Jay Penske
/s/ William C. Thompson, Jr.
William C. Thompson, Jr.
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Chief Accounting Officer and Secretary
(Principal Accounting Officer)
Executive Chairman of the Board of Directors and Director
Director
Director
Director
Director
84
Exhibit 4.1
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934
SciPlay Corporation has one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”): our Class A common stock.
The following summarizes the material terms of the Class A common stock of SciPlay Corporation (the “Company”) as set
forth in the Company’s Amended and Restated Articles of Incorporation (the “Charter”) and the Company’s Amended and
Restated Bylaws (the “Bylaws”), as well as in the Amended and Restated Operating Agreement of SciPlay Parent Company, LLC
(“SciPlay Parent LLC”), dated May 2, 2019, by and among SciPlay Parent LLC, the Company and its Members (the “SciPlay
Parent LLC Agreement”), the Registration Rights Agreement, dated May 7, 2019, by and among the Company, SG Social
Holding Company I, LLC, SG Social Holding Company, LLC and such other persons from time to time party thereto (the
“Registration Rights Agreement”) and Chapters 86 and 92A of the Nevada Revised Statutes (the “NRS”). While we believe that
the following description covers the material terms of such securities, the following summary may not contain all of the
information that may be important to you and is subject to and qualified in its entirety by reference to applicable Nevada law,
including the NRS and to the Charter, the Bylaws, the SciPlay Parent LLC Agreement and the Registration Rights Agreement,
each of which is filed as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part. As used herein, unless
otherwise expressly stated or the context otherwise requires, the terms “Company”, “we”, “our” and “us” refer to SciPlay
Corporation and not to any of its subsidiaries.
General
We are incorporated under the laws of the State of Nevada. The rights of our stockholders are governed by the NRS, the
Charter and the Bylaws.
Authorized Stock
Under the Charter, our authorized capital stock consists of 625,000,000 shares of Class A common stock, par value $.001
per share (“Class A common stock”), 130,000,000 shares of Class B common stock, par value $.001 per share (“Class B common
stock”), and 10,000,000 shares of preferred stock, par value $.001 per share.
Common Stock
Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented
to stockholders for their vote or approval, except in the following circumstances where separate class voting is required by
Nevada law: (i) a proposed amendment to the Charter that would adversely alter any preference or other right of our Class A
common stock or Class B common stock, (ii) a board resolution providing for a proposed decrease in the number of issued and
outstanding shares of our Class A common stock or Class B common stock, as the case may be, which proposed decrease would
adversely alter any preference or other right of the other class of our common stock or (iii) a board resolution providing for a
proposed increase or decrease in the number of authorized shares and a corresponding increase or decrease of issued and
outstanding shares of our Class A common stock or Class B common stock, as the case may be, which proposed increase or
decrease in the number of authorized shares would adversely alter any preference or other right of the other class of our common
stock. An election of directors by our stockholders is determined by a plurality of the votes cast by the stockholders entitled to
vote on the election, and each director may be removed by an affirmative vote of the holders of at least two-thirds of the voting
power of the issued and outstanding shares of capital stock entitled to vote thereon. Other matters will be decided by a majority
of the votes cast at a meeting at which a quorum is present. See below under “-Anti-Takeover Effects and Our Articles of
Incorporation and Bylaws.”
Class A Common Stock
Voting Rights. Holders of Class A common stock are entitled to one vote for each share of Class A common stock held on
all matters submitted to a vote of stockholders. Holders of Class A common stock do not have cumulative voting rights.
Dividend Rights. Holders of Class A common stock are be entitled to receive proportionately any dividends as may be
declared by our board of directors, subject to any preferential dividend rights of any series of preferred stock that we may
designate and issue in the future.
Liquidation Rights. In the event of our liquidation or dissolution, the holders of Class A common stock are entitled to
receive proportionately our net assets available for distribution to stockholders after the payment of all debts and other liabilities
and subject to the prior rights of any outstanding preferred stock.
Other Matters. Holders of Class A common stock have no preemptive, subscription, redemption or conversion rights. The
rights, preferences and privileges of holders of Class A common stock will be subject to and may be adversely affected by the
rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
Class B Common Stock
Issuance of Class B common stock with Common Units. Shares of Class B common stock will only be issued in the future
to the extent necessary to maintain a one-to-one ratio between the number of Common Units (as defined in the SciPlay Parent
LLC Agreement) held by SG Social Holding Company, LLC and SG Social Holding Company I, LLC (together, the “Original
Members”) and the number of shares of Class B common stock issued to the Original Members. Shares of Class B common stock
will be transferable only together with an equal number of Common Units.
Voting Rights. Holders of Class B common stock will be entitled to ten votes for each share of Class B common stock
held on all matters submitted to a vote of stockholders, for so long as the number of shares of our common stock beneficially
owned by the Original Members and their affiliates represents at least 10% of the issued and outstanding shares of common
stock, provided that, from and after the first date on which the Original Members and their affiliates cease to beneficially own at
least 10% of our issued and outstanding shares of common stock, each share of Class B common stock shall entitle the record
holder thereof to one vote on all matters to be voted on by the stockholders. Holders of Class B common stock will not have
cumulative voting rights.
Exchange for Class A Common Stock. Pursuant to the SciPlay Parent LLC Agreement, the Original Members may require
SciPlay Parent LLC to redeem all or a portion of the Common Units held by the SG Members for newly issued shares of Class A
common stock on a one-for-one basis or, at our option, instead make a cash payment determined by reference to the arithmetic
average of the volume weighted average market prices of one share of our Class A common stock over a specified period prior to
the date of redemption for each Common Unit redeemed. We will be required to contribute cash and/or shares of Class A
common stock to SciPlay Parent LLC to satisfy such redemption or exchange, and SciPlay Parent LLC will issue to us newly
issued LLC Interests equal to the number of Common Units redeemed from the Original Members. In lieu of such a redemption,
we will have the right, at our option, to effect a direct exchange of cash and/or shares of our Class A common stock for the
Original Members’s Common Units. Shares of our Class B common stock will be cancelled for no other consideration on a one-
for-one basis whenever the Original Members’s Common Units are so redeemed or exchanged.
Preferred Stock
Under the terms of the Charter, our board of directors is authorized to cause the designation and issuance of up to
10,000,000 shares of preferred stock, in one or more series, without stockholder approval. No shares of preferred stock are
presently outstanding. Our board of directors will have the discretion to determine the designations, relative rights, limitations
preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences, if any, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to
eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our
outstanding voting stock. We have no present plans to issue any shares of preferred stock.
Registration Rights
The Registration Rights Agreement provides each of the Original Members certain registration rights to require us to
register under the Securities Act of 1933 (the “Securities Act”) shares of Class A common stock issuable to it upon redemption or
exchange of its Common Units.
Anti-Takeover Effects and Our Articles of Incorporation and Bylaws
Some provisions of Nevada law, the Charter and the Bylaws could make the following transactions more difficult: an
acquisition of us by means of a tender offer; a change of control of us by means of a proxy contest or otherwise; or the removal of
our incumbent officers and directors. It is possible that these provisions could make it more difficult to accomplish or could deter
transactions that stockholders may otherwise consider to be in their best interests or in our best interests, including transactions
which provide for payment of a premium over the market price for our shares.
These provisions, summarized below, are intended to discourage coercive takeover practices and inadequate takeover
bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of
directors. We believe that the benefits of the increased protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.
Undesignated Preferred Stock
The ability of our board of directors, without action by the stockholders, to designate and authorize the issuance of up to
10,000,000 shares of undesignated preferred stock with voting or other rights or preferences as designated by our board of
directors could have the effect of making changes in control or management of our company more difficult and expensive to
accomplish.
Stockholder Meetings
The Charter and the Bylaws provide that stockholders owning shares representing a majority of the combined voting
power of our issued and outstanding common stock have the right to call a special meeting of stockholders until the first date that
the Original Members and their affiliates (other than us and our controlled affiliates) cease to beneficially own shares of our
common stock representing greater than 50% of the combined voting power of our common stock. The Charter and the Bylaws
provide that thereafter, subject to applicable law, special meetings of the stockholders may be called only by the secretary of the
Company at the written request of the majority of our board of directors, by the chairman of our board of directors or by the
president of the Company.
Requirements for Advance Notification of Stockholder Nominations and Proposals
The Bylaws establish advance notice procedures with respect to stockholder proposals to be brought before a stockholder
meeting and the nomination of candidates for election as directors, other than proposals and nominations made by or at the
direction of the board of directors or a committee of the board of directors.
Elimination of Stockholder Action by Written Consent
The Charter and the Bylaws do not permit stockholders to act by written consent without a meeting after the first date that
the Original Members and their affiliates (other than us and our controlled affiliates) cease to beneficially own shares of our
common stock representing greater than 50% of the combined voting power of our common stock.
Removal of Directors
The NRS, the Charter and the Bylaws provide that no member of our board of directors may be removed from office by
our stockholders except, in addition to any other vote required by law, upon the approval of the holders of at least two-thirds of
the voting power of the outstanding shares of stock entitled to vote in the election of directors.
Stockholders Not Entitled to Cumulative Voting
The Charter does not permit stockholders to cumulate their votes in the election of directors. Accordingly, a plurality of
the votes cast by stockholders entitled to vote in the election of directors will be sufficient to elect all of the directors standing for
election.
Exclusive Forum
The Charter and the Bylaws provide that, to the fullest extent permitted by law, and unless we consent in writing to the
selection of an alternative forum, the Eighth Judicial District Court of Clark County, Nevada, will be the sole and exclusive
forum for any actions, suits or proceedings, whether civil, administrative or investigative (i) brought in our name or right or on
our behalf, (ii) asserting a claim for breach of any fiduciary duty owed by any of our directors, officers, employees or agents to us
or our stockholders, (iii) arising or asserting a claim arising pursuant to any provision of NRS Chapters 78 or 92A or any
provision of the Charter or Bylaws, (iv) to interpret, apply, enforce or determine the validity of the Charter or Bylaws or (v)
asserting a claim governed by the internal affairs doctrine; provided that the exclusive forum provisions will not apply to suits
brought to enforce any liability or duty created by the Securities Act or the Exchange Act, or to any claim for which the federal
courts have exclusive jurisdiction. The Charter and Bylaws further provide that, in the event that the Eighth Judicial District
Court of Clark County, Nevada does not have jurisdiction over any such action, suit or proceeding, then any other state district
court located in the State of Nevada will be the sole and exclusive forum therefor and in the event that no state district court in
the State of Nevada has jurisdiction over any such action, suit or proceeding, then a federal court located within the State of
Nevada will be the sole and exclusive forum therefor. Although we believe these provisions benefit us by providing increased
consistency in the application of Nevada law in the types of lawsuits to which they apply, the provisions may have the effect of
discouraging lawsuits against our directors and officers.
Anti-Takeover Effects of Nevada Law
The State of Nevada, where we are incorporated, has enacted statutes, summarized below, that could prohibit or delay
mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us even though
such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price. We
have opted out of these statutes.
Compliance with Gaming Laws
The Charter provides that, in order for Scientific Games Corporation (“SGC”) or any other affiliate of the Company to
secure and maintain in good standing its gaming licenses, any record or beneficial holder of securities of the Company (i) who is
determined or shall have been determined by any gaming authority not to be suitable or qualified to be associated or have a
relationship with SGC or any other affiliate of the Company or (ii) whose ownership or control of securities of the Company may
result, in the judgment of our board of directors, in the failure of SGC or any other affiliate of the Company to obtain, maintain,
retain, renew or qualify for a gaming license, or cause or otherwise result in the imposition of any materially burdensome or
unacceptable terms or conditions on any gaming license held by SGC or any other affiliate of the Company, shall sell or
otherwise dispose of their securities or other interests in the Company, or the Company may redeem such securities, pursuant to a
notice given by the Company.
Business Combinations and Acquisition of Control Shares
Nevada’s “combinations with interested stockholders” statutes (NRS 78.411 through 78.444, inclusive) prohibit specified
types of business “combinations” between certain Nevada corporations and any person deemed to be an “interested stockholder”
for two years after such person first becomes an “interested stockholder” unless the corporation’s board of directors approves the
combination (or the transaction by which such person first becomes an “interested stockholder”) in advance, or unless the
combination is approved by the board of directors and at least sixty percent of the corporation’s outstanding voting power not
beneficially owned by the interested stockholder, its affiliates and associates. Further, in the absence of prior approval, certain
restrictions may apply even after such two-year period. However, these statutes do not apply to any combination of a corporation
and an interested stockholder after the expiration of four years after the person first became an interested stockholder. For
purposes of these statutes, an “interested stockholder” is any person who is (1) the beneficial owner, directly or indirectly, of ten
percent or more of the voting power of the outstanding voting shares of the corporation, or (2) an affiliate or associate of the
corporation and at any time within the two previous years was the beneficial owner, directly or indirectly, of ten percent or more
of the voting power of the
then-outstanding shares of the corporation. The definition of the term “combination” is sufficiently broad to cover most
significant transactions between a corporation and an “interested stockholder.” As noted above, the Charter provides that the
Company will not be subject to these statutes.
Nevada’s “acquisition of controlling interest” statutes (NRS 78.378 through 78.3793, inclusive) contain provisions
governing the acquisition of a controlling interest in certain Nevada corporations. These “control share” laws provide generally
that any person that acquires a “controlling interest” in certain Nevada corporations may be denied voting rights, unless a
majority of the disinterested stockholders of the corporation elects to restore such voting rights. The Bylaws provide that these
statutes will not apply to the Company or any acquisition of our capital stock. Absent such provision in our articles of
incorporation or bylaws, these laws would apply to us if we were to have 200 or more stockholders of record (at least 100 of
whom have addresses in Nevada appearing on our stock ledger) at all times during the immediately preceding 90 days and do
business in the State of Nevada directly or through an affiliated corporation, unless our articles of incorporation or bylaws in
effect on the tenth day after the acquisition of a controlling interest by an “acquiring person” provide otherwise. These laws
provide that a person acquires a “controlling interest” whenever such person acquires shares of a subject corporation that, but for
the application of these provisions of the NRS, would enable that person to exercise (1) one-fifth or more, but less than one-third,
(2) one-third or more, but less than a majority or (3) a majority or more, of all of the voting power of the corporation in the
election of directors. Once an acquirer crosses one of these thresholds, shares which it acquired in the transaction taking it over
the threshold and within the 90 days immediately preceding the date when the acquiring person acquired or offered to acquire a
controlling interest become “control shares” to which the voting restrictions described above apply.
In addition, NRS 78.139 provides that directors may resist a change or potential change in control of a Nevada
corporation if the board of directors determines that the change or potential change is opposed to or not in the best interest of the
corporation upon consideration of any relevant facts, circumstances, contingencies or constituencies pursuant to NRS 78.138(4).
Dissenter’s Rights
The provisions of Nevada’s dissenter’s rights statutes (NRS 92A.300 through 92A.500, inclusive) specify certain
corporate actions giving rise to the right of a stockholder to demand payment of “fair value” (as defined in NRS 92A.320) of such
stockholder’s shares, subject to a number of limitations and procedural requirements.
Stockholders’ Derivative Actions
Our stockholders may be entitled to bring an action in our name to procure a judgment in our favor, also known as a
derivative action, subject to the requirements of applicable law.
Deemed Notice and Consent
The Charter and the Bylaws provide that any person purchasing or otherwise acquiring any interest in shares of our
capital stock will be deemed, to the fullest extent permitted by law, to have notice of and consented to all of the provisions of our
articles of incorporation, our bylaws (including, without limitation, the provisions described above under “-Exclusive Forum”)
and any amendment to our articles of incorporation or bylaws enacted in accordance therewith and applicable law.
Exhibit 21.1
SCIPLAY CORPORATION SUBSIDIARIES
(All subsidiaries are 100% owned unless otherwise stated)
December 31, 2020
Come2Play Ltd (Israel)
Dragonplay Ltd (Israel)
Phantom EFX, LLC (Nevada)
SciPlay Holding Company, LLC (Nevada)
SciPlay Parent Company, LLC (Nevada) (18% ownership; SciPlay is sole manager)
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-231225 and 333-249936 on Form S-8 of our
report dated March 1, 2021, relating to the financial statements of SciPlay Corporation appearing in this Annual Report on Form
10-K for the year ended December 31, 2020.
/s/ Deloitte & Touche LLP
Las Vegas, Nevada
March 1, 2021
Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Joshua J. Wilson, certify that:
1. I have reviewed this Annual Report on Form 10-K of SciPlay Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 1, 2021
/s/ Joshua J. Wilson
Joshua J. Wilson
Chief Executive Officer
Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2
I, Michael D. Cody, certify that:
1. I have reviewed this Annual Report on Form 10-K of SciPlay Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 1, 2021
/s/ Michael D. Cody
Michael D. Cody
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of SciPlay Corporation (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Joshua J. Wilson, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
/s/ Joshua J. Wilson
Joshua J. Wilson
Chief Executive Officer
March 1, 2021
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of SciPlay Corporation (the “Company”) on Form 10-K for the period ended December 31, 2020 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Michael D. Cody, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and
furnished to the Securities and Exchange Commission or its staff upon request.
/s/ Michael D. Cody
Michael D. Cody
Chief Financial Officer
March 1, 2021