SCIPLAY CORPORATION 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 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
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We are a leading developer and publisher of digital games on mobile and web platforms. We currently offer seven core games, including social casino gamesJackpot Party Casino ,Gold Fish Casino ,Hot Shot Casino and Quick Hit Slots, and casual games MONOPOLY Slots, Bingo Showdown and 88 Fortunes Slots. 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, and Amazon, with some of our games available on Microsoft and other web and mobile platforms. 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 asJAMES BOND , MONOPOLY,CIRQUE DU SOLEIL , FLINTSTONES, CHEERS and THE GODFATHER. We generate substantially all of our revenue from the sale of virtual coins, chips and bingo 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 virtual coins, cards or chips upon the initial launch of the game and additional free virtual coins, cards or chips at specific time intervals. Players may exhaust the virtual coins, cards or chips that they receive for free and may choose to purchase additional virtual coins, cards or chips in order to extend their time of game play. 41 --------------------------------------------------------------------------------
Trends and Recent Updates
Our year over year total revenue growth of 12% was higher than the overall industry trend. We believe that there is an opportunity for improved operating results in 2020 and beyond, as we continue to execute on our strategic game updates, international pilot testing and enhanced analytics. During the fourth quarter of 2019, we deployed significant updates across a number of our portfolio games, including Gold Fish and Monopoly, and are beginning to see improved results.
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.
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.
42
--------------------------------------------------------------------------------Non-GAAP Financial Measures
Adjusted EBITDA, or AEBITDA, as used herein, is a non-GAAP financial measure that is presented as supplemental disclosure and is reconciled to net income attributable toSciPlay as the most directly comparable GAAP measure as set forth in the below table. We define AEBITDA to include net income attributable toSciPlay before: (1) net income attributable to noncontrolling interest; (2) interest expense; (3) income tax (benefit) expense; (4) depreciation and amortization; (5) contingent acquisition consideration; (6) 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; and (e) cost-savings initiatives; (7) stock-based compensation; (8) loss (gain) on debt financing transactions; and (9) 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 virtual
coins, chips and bingo cards, which players of our games can use to play slot
games, table games and bingo games. Revenue from the sale of virtual coins,
chips and bingo 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
30% of 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
43
--------------------------------------------------------------------------------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 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.
R&D
R&D expenses consist primarily of costs associated with game development,
such as associated salaries, benefits, facilities 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 other than contingent acquisition consideration. 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
Years ended December 31 , Variance
($ in millions, except percentages) 2019 2018 2019 vs. 2018 Revenue$ 465.8 $ 416.2 $ 49.6 12 % Operating expenses 362.1 369.8 (7.7 ) (2 )% Operating income 103.7 46.4 57.3 123 % Net income 93.5 39.0 54.5 140 % Net income attributable to SciPlay 32.4 39.0 (6.6 ) (17 )% AEBITDA$ 122.3 $ 94.0 $ 28.3 30 % Net income margin 20.1 % 9.4 % 10.7 pp nm AEBITDA margin 26.3 % 22.6 % 3.7 pp nm pp = percentage points. nm = not meaningful. The following table reconciles Net income attributable toSciPlay to AEBITDA and AEBITDA margin: Years ended December 31, ($ in millions, except percentages) 2019
2018
Net income attributable to SciPlay(1)$ 32.4 $ 39.0 Net income attributable to noncontrolling interest 61.1
-
Net income 93.5
39.0
Contingent acquisition consideration 1.7 27.5 Restructuring and other 1.0 1.0 Depreciation and amortization 7.0 15.1 Income tax expense 8.7 10.4 Stock-based compensation 8.9 4.0 Other expense (income), net 1.5 (3.0 ) AEBITDA(2)$ 122.3 $ 94.0 Revenue$ 465.8 $ 416.2 Net income margin (Net income/Revenue) 20.1 % 9.4 % AEBITDA margin (AEBITDA/Revenue)(2) 26.3 % 22.6 % Royalties for Scientific Games IP(1)$ 10.2 $ 26.1 (1) Under the terms of the 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 bySG Gaming, Inc. or its affiliates, which resulted in no future royalties or fees for our use of intellectual property owned bySG 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.
Revenue, Key Performance Indicators and Other Metrics
Years ended December 31, Variance
($ in millions) 2019 2018 2019 vs. 2018
Mobile $ 391.0 $ 323.3 $ 67.7 21 %
Web 74.8 92.8 (18.0 ) (19 )%
Other - 0.1 (0.1 ) (100 )%
Total revenue $ 465.8 $ 416.2 $ 49.6 12 %
45--------------------------------------------------------------------------------
Revenue information by geography is summarized as follows:
Years ended December 31, Variance
($ in millions) 2019 2018 2019 vs. 2018
U.S. $ 434.2 $ 380.3 $ 53.9 14 %
International 31.6 35.9 (4.3 ) (12 )%
Total revenue $ 465.8 $ 416.2 $ 49.6 12 %
The following reflects our Key Performance Indicators and Other Metrics:
(in millions, except ARPDAU, Average monthly Years ended
Variance
revenue per payer, and percentages) 2019 2018 2019 vs. 2018
Mobile Penetration(1) 83 % 78 % 5 pp nm
Average MAU(1) 8.0 8.3 (0.3 ) (3.6 )%
Average DAU(1) 2.7 2.6 0.1 3.8 %
ARPDAU(1) $ 0.48 $ 0.43 $ 0.05 11.6 %
Average MPUs(1) 0.5 0.5 - - %
Average monthly revenue per payer(1) $ 82.19 $ 75.93 $ 6.26 8.2 %
Payer conversion rate(1) 6.0 % 5.5 % 0.5 pp nm
(1) KPI include results from current period players only, excluding out of period adjustments disclosed in
Note 12.
pp = percentage points.
nm = not meaningful.
Mobile platform revenue increased primarily due to the ongoing popularity of
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 relatively flat due to the turnover
in users while paying users stayed consistent. Consequently, ARPDAU and average
monthly revenue per payer increased due to decreased average MAU and flat
average DAU base.
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
Years ended December 31, Variance Percentage of Revenue
2019 vs. 2018
($ in millions) 2019 2018 2019 vs. 2018 2019 2018 Change
Operating expenses:
Cost of revenue(1) $ 158.5 $ 160.4 $ (1.9 ) (1 )% 34.0 % 38.5 % (4.5 )pp
Sales and marketing(1) 129.7 105.7 24.0 23 % 27.8 % 25.4 % 2.4 pp
General and
administrative(1) 40.6 34.5 6.1 18 % 8.7 % 8.3 % 0.4 pp
Research and
development(1) 23.6 25.6 (2.0 ) (8 )% 5.1 % 6.2 % (1.1 )pp
Depreciation and
amortization 7.0 15.1 (8.1 ) (54 )% nm
Contingent acquisition
consideration 1.7 27.5 (25.8 ) (94 )% nm
Restructuring and other 1.0 1.0 - - % nm
Total operating expenses $ 362.1 $ 369.8 $ (7.7 ) (2 )%
(1) Excludes depreciation and amortization.
nm = not meaningful.
pp = percentage points.
Cost of Revenue
Cost of revenue decreased primarily as a result of a decrease of $16.0 million
in Scientific Games IP royalties due to our entry into the IP License Agreement
and a decrease of $0.8 million in third-party IP royalties. This decrease was
partially offset by an increase of $15.1 million in platform fees, which was
correlated with revenue growth.
Sales and Marketing
Sales and marketing expenses increased primarily due to an increase in player acquisition costs, largely associated withJackpot Party Casino , Quick Hit Slots,Gold Fish Casino , Bingo Showdown, MONOPOLY Slots, and 88 Fortunes. Sales and marketing expenses as a percentage of revenue increased by 2.4 percentage points for the year endedDecember 31, 2019 as a result of a management decision to increase spend to drive user engagement in our games.
General and Administrative
General and administrative expenses increased due to higher stock-based
compensation reflecting SciPlay RSUs granted under the Long-Term Incentive Plan
("LTIP"). Stock-based compensation expense increased by $4.9 million . General
and administrative expenses as a percentage of revenue increased by 0.4
percentage points.
Contingent Acquisition Consideration
Contingent acquisition consideration decreased as a result of lower
remeasurement charges, which relates to the Bingo Showdown app's
post-acquisition performance measurement period closing. Remaining unpaid
contingent acquisition consideration is expected to be fully paid by
Net Income Net income increased primarily due to continued growth in revenue (as described above) coupled with a decrease in IP royalty expense as a result of our entry into the IP License Agreement, lower depreciation and amortization and lower contingent acquisition consideration.
Net income margin improved by 10.7 percentage points as a result of the above stated drivers.
47
--------------------------------------------------------------------------------AEBITDA
AEBITDA increased due to continued growth in revenue and a decrease in IP royalty expense as a result of our entry into the IP License Agreement, which was partially offset by higher sales and marketing expenses (as described above).
AEBITDA margin improved by 3.7 percentage points as a result of the above stated drivers.
Other Factors Affecting Net Income Attributable to
Years ended December 31,
($ in millions) 2019 2018 2019 vs. 2018
Other (expense) $ (1.5 ) $ 3.0 The change is primarily attributable to
income, net the changes in foreign currency rates
between the U.S. Dollar and the Israeli
Shekel.
Income tax 8.7 10.4 Our effective
income tax rates were 8.5%
expense and 21.1%, respectively, for the years
ended December 31, 2019 and 2018. The
change in effective tax rates is
primarily driven by the noncontrolling
interest portion of pretax income, for
which we do not record an income tax
provision.
Net income 61.1 - The year ended December 31, 2019 reflects
attributable to noncontrolling interest.
noncontrolling
interest
For 2018 and 2017 consolidated results comparison, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section included
in the Prospectus.
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).
48--------------------------------------------------------------------------------
Revenue Recognition
As described in Note 1, on January 1, 2018 , we adopted ASC 606 using the
modified retrospective method, which was applied to customer contracts that were
not completed as of January 1, 2018 . 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 virtual currency at period end based on customer behavior,
because we are unable to distinguish between the consumption of purchased or
free virtual currency. 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.
• 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 D&A expense. If our estimates of
the useful lives change, D&A 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. As a result of changes in significant unobservable inputs primarily
consisting of projected earnings-based measures and probability of achievement
(categorized as Level 3 in the fair value hierarchy as established by ASC 820),
we increased the fair value of SpiceRack contingent consideration by $1.7
million in 2019 and by $27.5 million in 2018, which changes were included in
Contingent acquisition consideration expense. The discount rate used in
estimating contingent acquisition consideration was approximately 10% (see Note
1). 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 $27.0 million during the year ended December 31, 2019
with the remaining balance to be fully paid by February 28, 2020 .
49
--------------------------------------------------------------------------------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 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
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' 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 . Refer to Note 1 for a more detailed
description of the IPO.
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, the proceeds from the IPO 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.
50
--------------------------------------------------------------------------------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, 2019 the
commitment fee was 0.375% per annum.The Revolver provides for up to $15.0
million in letter of credit issuances, which requires customary issuance and
administration fees, and a fronting fee of 0.125%.
The Revolver contains covenants that, among other things, restrict our
ability to incur additional indebtedness; incur liens; sell, transfer or dispose
of property and assets; invest; make dividends or distributions or other
restricted payments; and engage in affiliate transactions, with the exception of
certain payments under the TRA and payments in respect of certain tax
distributions under the Operating Agreement. In addition, the Revolver requires
us to maintain a maximum total net leverage ratio not to exceed 2.50:1.00 and to
maintain a minimum fixed charge coverage ratio of no less than 4.00:1.00. Such
covenants are tested quarterly at the end of each fiscal quarter. We were in
compliance with the financial covenants under the Revolver as of December 31,
2019 .
The Revolver is secured by a (i) first priority pledge of the equity securities
of SciPlay Holding , SciPlay Parent LLC's restricted subsidiaries and each
subsidiary guarantor party thereto and (ii) first priority security interests
in, and mortgages on, substantially all tangible and intangible personal
property and material fee-owned real property of SciPlay Parent LLC , SciPlay
Holding and each subsidiary guarantor party thereto, in each case, subject to
customary exceptions.
Changes in Cash Flows
The following table presents a summary of our cash flows for the periods
indicated:
Years Ended December 31,
($ in millions) 2019 2018
Net cash provided by operating activities $ 93.0 $ 76.9
Net cash used in investing activities (8.8 ) (3.5 )
Net cash provided by (used in) financing activities 15.9 (79.5 ) Effect of exchange rate changes on cash, cash equivalents and restricted cash
0.5 (0.7 )
Increase (decrease) in cash, cash equivalents and
restricted cash $ 100.6 Net cash provided by operating activities increased primarily due to higher earnings, which was partially offset by payment of contingent acquisition consideration. Net cash used in investing activities increased primarily due to higher leasehold improvement expenditures related to ourAustin facility and higher development costs of our capitalized software. Net cash provided by financing activities increased primarily due to net proceeds from the IPO during the second quarter of 2019. The increase was substantially offset by distributions to Scientific Games (including payments under the previous IP licensing arrangement) and payments of offering and financing costs. 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. 51 --------------------------------------------------------------------------------
Off Balance Sheet Obligations
As of
Contractual Obligations
Our contractual obligations as of
Cash Payments Due In
Less than 1 More than 5
Total year 1 - 3 years 4 - 5 years years
Operating leases $ 7.9 $ 2.1 $ 3.5 $ 2.3 $ -
Contingent acquisition consideration
and other obligations 4.0 4.0 - - -
Obligations under the TRA 75.3 2.6 12.3 8.4 52.0
Total contractual obligations $ 87.2 $ 8.7 $
15.8
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.
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 $27.0 million in 2019, with the remaining balance to be
fully paid by February 28, 2020 .
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