NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in USD, table amounts in millions, except per share amounts)
(1) Description of the Business and Summary of Significant Accounting Policies
Background and Nature of Operations
SciPlay Corporation was formed as a Nevada corporation on November 30, 2018 as a subsidiary of Light & Wonder, Inc. (“Light & Wonder”, “L&W” or “Parent”), for the purposes of completing a public offering and related transactions 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 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, 88 Fortunes® Slots, Solitaire Pets™ Adventure and Backgammon Live as well as other games in the hyper-casual space, such as Candy Challenge 3D™, Boss Life™ and Deep Clean Inc.™. Our games are available in various formats. We have one operating segment with one business activity, developing and monetizing games.
Basis of Presentation
The accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All intercompany balances and transactions have been eliminated in consolidation.
In the opinion of management, we have made all adjustments necessary to present fairly our consolidated statements of income, consolidated statements of comprehensive income, condensed consolidated balance sheets, consolidated statements of changes in stockholders’ equity and condensed consolidated statements of cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related Notes included in our 2022 Form 10-K. Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.
Variable Interest Entities (“VIE”) and Consolidation
Our sole material asset is our member’s interest in SciPlay Parent LLC. In accordance with the Operating Agreement of SciPlay Parent LLC (the “Operating Agreement”), we have all management powers over the business and affairs of SciPlay Parent LLC and to conduct, direct and exercise full control over the activities of SciPlay Parent LLC. Class A common stock does not hold majority voting rights but holds 100% of the economic interest in the Company, which results in SciPlay Parent LLC being considered a VIE. Due to our power to control the activities most directly affecting the results of SciPlay Parent LLC, we are considered the primary beneficiary of the VIE. Accordingly, we consolidate the financial results of SciPlay Parent LLC and its subsidiaries.
Significant Accounting Policies
There have been no changes to our significant accounting policies described within the Notes of our 2022 Form 10-K.
New Accounting Guidance
There have been no recent accounting pronouncements or changes in accounting pronouncements since those described within the Notes of our 2022 10-K that are expected to have a material impact on our consolidated financial statements.
Revenue Recognition
We generate revenue from the sale of coins, chips and cards, which players can use to play casino-style slot games, table games and bingo games (i.e., spin in the case of slot games, bet in the case of table games and use 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 we offer are internally branded franchises, original content and third-party branded games. We also generate revenue from providing advertising platforms with access to our game software platform, which facilitates the placement of advertising inventory.
Disaggregation of Revenue
We believe disaggregation of our revenue on the basis of platform type and geographical location of our players is appropriate because the nature of revenue 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 platform type: | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | | | 2023 | | 2022 |
Mobile in-app purchases | | | | | $ | 165.7 | | | $ | 139.7 | |
Web in-app purchases and other(1) | | | | | 20.7 | | | 18.3 | |
| | | | | | | |
Total revenue | | | | | $ | 186.4 | | | $ | 158.0 | |
(1) Other primarily represents advertising revenue, which was not material in the periods presented. |
The following table presents our revenue disaggregated based on the geographical location of our players: | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | | | 2023 | | 2022 |
North America(1) | | | | | $ | 172.9 | | | $ | 144.9 | |
International | | | | | 13.5 | | | 13.1 | |
Total revenue | | | | | $ | 186.4 | | | $ | 158.0 | |
(1) North America revenue includes revenue derived from the U.S., Canada and Mexico. | | | | |
Contract Assets, Contract Liabilities and Other Disclosures
We receive customer payments based on the payment terms established in our contracts. Payment for the purchase of coins, chips and cards is made at purchase, and such payments are non-refundable in accordance with our standard terms of service. Such payments are initially recorded as a contract liability, and revenue is subsequently recognized as we satisfy our performance obligations.
The following table summarizes our opening and closing balances in contract assets, contract liabilities and accounts receivable: | | | | | | | | | | | | | | | | | |
| Accounts Receivable | | Contract Assets(1) | | Contract Liabilities(2) |
Beginning of period balance | $ | 51.0 | | | $ | 0.1 | | | $ | 3.0 | |
Balance as of March 31, 2023 | 64.2 | | | 0.1 | | | 2.5 | |
(1) Contract assets are included within Prepaid expenses and other current assets in our consolidated balance sheets. (2) Contract liabilities are included within Accrued liabilities in our consolidated balance sheets. |
During the three months ended March 31, 2023 and 2022, we recognized $0.6 million and $0.3 million, respectively, of revenue that was included in the opening contract liability balance. Substantially all of our unsatisfied performance obligations relate to contracts with an original expected length of one year or less.
Concentration of Credit Risk
Our revenue and accounts receivable are generated via certain platform providers, which subject us to a concentration of credit risk. The following tables summarize the percentage of revenues and accounts receivable generated via our platform providers in excess of 10% of our total revenues and total accounts receivable: | | | | | | | | | | | | | | | | | |
| | | | Revenue Concentration |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
Apple | | | | | 48.8% | | 47.9% |
Google | | | | | 34.3% | | 34.6% |
Facebook | | | | | 11.3% | | 12.1% |
| | | | | | | | | | | |
| Accounts Receivable Concentration as of |
| March 31, 2023 | | December 31, 2022 |
Apple | 61.5% | | 48.3% |
Google | 24.7% | | 30.5% |
Facebook | 8.0% | | 10.7% |
Alictus Acquisition
On March 1, 2022, we acquired 80% of all issued and outstanding share capital of privately-held Alictus Yazilim Anonim Şirketi (“Alictus”), a Turkey-based hyper-casual gaming studio. The remaining 20% was to be acquired ratably for potential additional consideration payable annually based upon the achievement of specified revenue and earnings targets by Alictus during each of the five years following the acquisition date. The specified financial targets for the first year were not met, resulting in extinguishment of $2.9 million in redeemable non-controlling interest liability, which was recorded within the other income (expense), net line item in our consolidated statement of income. The remaining payout ranges from a minimum of $0.0 million to a maximum payout of $200.0 million.
We incurred acquisition-related costs, which were recorded in Restructuring and other, of $1.2 million for the three months ended March 31, 2022. The results of operations from Alictus have been included in our consolidated statement of income since the date of acquisition and are not significant to our operations.
(2) Goodwill, Intangible Assets and Software, net
The table below reconciles the changes in the carrying value of goodwill for the period from December 31, 2022 to March 31, 2023.
| | | | | | | | |
| | Total |
Balance as of December 31, 2022 | | $ | 217.6 | |
| | |
Foreign currency adjustments | | (1.5) | |
Balance as of March 31, 2023 | | $ | 216.1 | |
| | |
|
| | |
The following table presents certain information regarding our intangible assets and software: | | | | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Balance |
Balance as of March 31, 2023 | | | | | |
Intellectual property | $ | 74.3 | | | $ | (44.1) | | | $ | 30.2 | |
Customer relationships | 29.7 | | | (24.6) | | | 5.1 | |
Software | 40.7 | | | (23.8) | | | 16.9 | |
Licenses | 33.3 | | | (11.0) | | | 22.3 | |
Brand names and other | 10.4 | | | (5.3) | | | 5.1 | |
Total intangible assets and software | $ | 188.4 | | | $ | (108.8) | | | $ | 79.6 | |
| | | | | |
Balance as of December 31, 2022 | | | | | |
Intellectual property | $ | 75.2 | | | $ | (43.2) | | | $ | 32.0 | |
Customer relationships | 29.9 | | | (24.1) | | | 5.8 | |
Software | 37.6 | | | (22.6) | | | 15.0 | |
Licenses | 25.9 | | | (9.4) | | | 16.5 | |
Brand names and other | 10.6 | | | (5.1) | | | 5.5 | |
Total intangible assets and software | $ | 179.2 | | | $ | (104.4) | | | $ | 74.8 | |
The following reflects amortization expense related to intangible assets and software included within Depreciation and amortization: | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | | | 2023 | | 2022 |
Amortization expense | | | | | $ | 5.5 | | | $ | 4.3 | |
(3) Leases
Our operating leases primarily consist of real estate office leases, and total expenses related to these leases were $0.7 million and $0.7 million for the three months ended March 31, 2023 and 2022, respectively. We do not have any material finance leases. Our total variable and short-term lease payments and operating lease expenses were immaterial for all periods presented.
Supplemental balance sheet and cash flow information related to operating leases is as follows: | | | | | | | | | | | |
| As of |
| March 31, 2023 | | December 31, 2022 |
Operating lease right-of-use assets | $ | 4.2 | | | $ | 4.8 | |
| | | |
Accrued liabilities | 2.3 | | | 2.3 | |
Operating lease liabilities | 2.4 | | | 3.1 | |
Total operating lease liabilities | $ | 4.7 | | | $ | 5.4 | |
| | | |
Weighted average remaining lease term, years | 2.0 | | 2.3 |
Weighted average discount rate | 4.9 | % | | 4.9 | % |
| | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows for operating leases for the three months ended March 31, 2023 and 2022, respectively | $ | 0.6 | | | $ | 0.6 | |
| | | |
| | | |
| | | |
Lease liability maturities: | | | | | |
| Operating Leases |
Remainder of 2023 | $ | 1.9 | |
2024 | 2.4 | |
2025 | 0.7 | |
| |
| |
| |
Less: imputed interest | (0.3) | |
Total | $ | 4.7 | |
As of March 31, 2023, we did not have material additional operating leases that have not yet commenced.
(4) Income Taxes
We hold an economic interest of 17.5% in SciPlay Parent LLC. The 82.5% economic interest that we do not own represents a noncontrolling interest for financial reporting purposes. SciPlay Parent LLC is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As such, SciPlay Parent LLC is not subject to income tax in most jurisdictions, and SciPlay Parent LLC’s members, of which we are one, are liable for income taxes based on their allocable share of SciPlay Parent LLC’s taxable income. The effective income tax rates for the three months ended March 31, 2023 and 2022 were 8.5% and 6.4%, respectively. The effective income tax rates were determined using an estimated annual effective tax rate after considering any discrete items for such periods. Our effective tax rate differs from the U.S. statutory rate of 21.0% primarily because we generally do not record income taxes for the noncontrolling interest portion of U.S. pre-tax income.
TRA
During the three months ended March 31, 2023 and 2022, there were no payments made to Light & Wonder pursuant to the TRA. As of both March 31, 2023 and December 31, 2022, the total TRA liability was $64.3 million, of which $4.1 million was included in Accrued liabilities for each of the periods.
(5) Related Party Transactions
The following is the summary of expenses paid to Light & Wonder and settled in cash: | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | |
| | | March 31, | | |
| | | | | 2023 | | 2022 | | Financial Statement Line Item |
Royalties to Light & Wonder for third-party IP | | | | | $ | 0.2 | | | $ | 0.3 | | | Cost of revenue |
Parent services | | | | | 1.6 | | | 1.4 | | | General and administrative |
| | | | | | | | | |
Distributions to Parent and affiliates, net(1) | | | | | 0.1 | | | 0.2 | | | Noncontrolling interest |
| | | | | | | | | |
(1) Under the terms of the Operating Agreement, SciPlay Corporation relies on distributions from SciPlay Parent LLC to pay its obligations under the TRA and any other tax obligations. All distributions must be on a pari-passu basis, thus initiating a pro-rata distribution to Parent and affiliates. |
The following is the summary of balances due to affiliates: | | | | | | | | | | | | | | | |
| | | | | March 31, 2023 | | December 31, 2022 |
Royalties to Light & Wonder for third-party IP | | | | | $ | 0.8 | | | $ | 0.2 | |
Parent services | | | | | 0.9 | | | 0.4 | |
Reimbursable expenses to (from) Light & Wonder and its subsidiaries | | | | | 2.3 | | | 3.2 | |
| | | | | $ | 4.0 | | | $ | 3.8 | |
Parent Equity Awards
See Note 6 for disclosures related to Parent’s equity awards.
IP Royalties
As more fully described in Note 10 of our 2022 Form 10-K, we entered into the IP License Agreement under which we obtained an exclusive (subject to certain limited exceptions), perpetual, non-royalty-bearing license from LNW Gaming, Inc. (a subsidiary of the Parent, formerly known as Bally Gaming, Inc.) (“LNW Gaming”) for intellectual property created or acquired by LNW Gaming or its affiliates on or before the third anniversary of the date of the IP License Agreement. Under the terms of the IP License Agreement, some rights would have changed from exclusive to non-exclusive for newly created intellectual property and other rights would not have extended to newly created intellectual property as of May 6, 2022. On May 6, 2022, we entered into an amendment which extended our rights under the IP License Agreement through July 7, 2022. We are in the process of negotiating new terms with the Parent.
(6) Stockholders’ Equity and Noncontrolling Interest
Noncontrolling Interest
We are a holding company, and our sole material assets are SciPlay Parent LLC Interests (“LLC Interest”) that we purchased from SciPlay Parent LLC and LNW Holding Company I, LLC, an indirect wholly owned subsidiary of Parent, formerly known as SG Holding Company I, LLC (“the L&W Member”), representing an aggregate 17.5% economic interest in SciPlay Parent LLC. The remaining 82.5% economic interest in SciPlay Parent LLC is owned indirectly by Light & Wonder, through the ownership of LLC Interests by the L&W Member.
Stock-Based Compensation
The following table summarizes stock-based compensation expense that is included in General and administrative expenses: | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | | | 2023 | | 2022 |
| | | | | | | |
| | | | | | | |
SciPlay awards(1) | | | | | $ | 5.9 | | | $ | 2.5 | |
Parent awards | | | | | 0.6 | | | 0.1 | |
Total | | | | | $ | 6.5 | | | $ | 2.6 | |
| | | | | | | |
(1)Includes $2.3 million and $0.6 million of stock-based compensation classified as liability awards as of March 31, 2023 and 2022, respectively. |
As of March 31, 2023, we had $27.2 million in unrecognized stock-based compensation expense that is expected to be recognized over a weighted-average expected vesting period of 1.3 years, of which $10.3 million relates to performance-based restricted stock units.
Share Repurchase Program
On May 9, 2022, our Board of Directors approved a share repurchase program under which the Company is authorized to repurchase, from time to time through May 9, 2024, up to an aggregate amount of $60.0 million of our outstanding Class A common stock. Repurchases may be made at the discretion of the Board of Directors through one or more open market transactions, privately negotiated transactions, including block trades, accelerated share repurchases, issuer tender offers or other derivative contracts or instruments, “10b5-1” plan, or other financial arrangements or other arrangements. Repurchases are funded from cash flows generated by SciPlay Parent LLC and its operating subsidiaries. Immediately prior to the execution of such repurchases, a redemption is effected of a corresponding number of SciPlay Parent LLC partnership units held by the Company at an aggregate redemption price equal to the aggregate purchase price (plus any expenses related thereto) of the shares of Class A common stock being repurchased by the Company. During the three months ended March 31, 2023, we repurchased 0.5 million shares of Class A common stock under the program at an aggregate cost of $8.2 million. On May 3, 2023, our Board of Directors approved a new share repurchase program under which the Company is authorized to repurchase, from time to time through May 3, 2024, up to an aggregate amount of $60.0 million of our outstanding Class A common stock.
(7) Earnings per Share
The table below sets forth a calculation of basic earnings per share ("EPS") based on Net income attributable to SciPlay divided by the basic weighted average number of Class A common stock outstanding during the period. Diluted EPS of Class A common stock is computed by dividing Net income attributable to SciPlay by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to all potentially dilutive securities, using the treasury stock method. No material number of restricted stock units was excluded from the calculation of diluted weighted-average common shares outstanding for the three-month periods ended March 31, 2023 and 2022.
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 presented.
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, |
| | | | | 2023 | | 2022 |
Numerator: | | | | | | | |
Net income | | | | | $ | 41.8 | | | $ | 32.0 | |
Less: net income attributable to the noncontrolling interest | | | | | 36.3 | | | 27.6 | |
Net income attributable to SciPlay | | | | | $ | 5.5 | | | $ | 4.4 | |
Denominator: | | | | | | | |
Weighted average shares of Class A common stock for basic EPS | | | | | 22.0 | | | 24.6 | |
Effect of dilutive securities: | | | | | | | |
Stock-based compensation grants | | | | | 1.0 | | | 0.2 | |
Weighted average shares of Class A common stock for diluted EPS | | | | | 23.0 | | | 24.8 | |
Basic and diluted net income attributable to SciPlay per share: | | | | | | | |
Basic | | | | | $ | 0.25 | | | $ | 0.18 | |
Diluted | | | | | $ | 0.24 | | | $ | 0.18 | |
(8) Litigation
From time to time, we are subject to various claims, complaints and legal actions, including notifications of alleged infringement of patent or other intellectual property rights, in the normal course of business.
Boorn Matter
On September 15, 2022, plaintiff Hannelore Boorn filed a putative class action against Light & Wonder, Inc., SciPlay Corporation, and Appchi Media Ltd. in the Fayette Circuit Court of the Commonwealth of Kentucky. In her complaint, plaintiff seeks to represent a putative class of all persons in Kentucky who, within the past five years, purchased and allegedly lost $5.00 or more worth of chips, in a 24-hour period, playing SciPlay's online social casino games. The complaint asserts claims for alleged violations of Kentucky’s “recovery of gambling losses” statute and for unjust enrichment, and seeks unspecified money damages, the award of reasonable attorneys' fees and costs, pre- and post-judgment interest, and injunctive and/or other declaratory relief. On October 18, 2022, defendants removed the action to the United States District Court for the Eastern District of Kentucky. On October 26, 2022, the plaintiff filed a notice voluntarily dismissing the lawsuit without prejudice. On October 27, 2022, the district court entered an order dismissing the lawsuit. On November 17, 2022, the plaintiff filed an arbitration demand against defendants before the American Arbitration Association, pursuant to which she seeks declaratory judgments that (1) SciPlay’s online social casino games constitute gambling under Kentucky law, and (2) SciPlay’s terms of service are void under Kentucky law. On January 12, 2023, the respondents filed their answering statement to plaintiff’s arbitration demand. 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 arbitration demand are without merit, and intend to vigorously defend against them.
Allah Beautiful Matter
On December 19, 2022, claimant Prince Imanifest Allah Beautiful filed an arbitration demand against respondent SciPlay Corporation before the American Arbitration Association. The complaint asserts claims for alleged violations of New Jersey’s anti-gambling statutes and seeks unspecified money damages, including recovery of monies allegedly lost by New Jersey players of SciPlay’s online social casino games other than the claimant. On March 7, 2023, the respondent filed its answering statement to claimant’s arbitration demand. 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 arbitration demand are without merit, and intend to vigorously defend against them.
Sprinkle Matter
On December 12, 2022, claimant Matthew Sprinkle filed an arbitration demand against respondent SciPlay Corporation before the American Arbitration Association. The complaint asserts claims for alleged violations of Ohio’s anti-
gambling statutes and seeks unspecified money damages, including recovery of monies allegedly lost by Ohio players of SciPlay’s online social casino games other than the claimant. On March 7, 2023, the respondent filed its answering statement to claimant’s arbitration demand. 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 arbitration demand are without merit, and intend to vigorously defend against them.
Sornberger Matter
On March 8, 2023, plaintiff Andrea Sornberger filed a complaint against SciPlay Corporation and SciPlay Games LLC in the Circuit Court of the Franklin County, Alabama. The complaint asserts claims for alleged violations of Alabama anti-gambling statutes and seeks unspecified money damages, including recovery of monies allegedly lost by Alabama’s players of SciPlay’s online social casino games other than the plaintiff, the award of interests and costs, and injunctive and other relief. On April 12, 2023, defendants removed the action to the United States District Court for the Northern District of Alabama. 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.