Description of the Business and Summary of Significant Accounting Policies

Description of the Business

We are a leading developer of technology‑based products and services and associated content for the worldwide gaming, lottery and interactive gaming industries. Our portfolio includes gaming machines and game content, casino management systems, table game products and services, instant and draw‑based lottery games, lottery systems, lottery content and services, interactive gaming and social casino solutions, as well as other products and services. We report our operations in three business segments—Gaming, Lottery and Interactive.

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The accompanying condensed consolidated financial statements include the accounts of SGC and its wholly owned subsidiaries. Investments in other entities in which we do not have a controlling financial interest but we exert significant influence are accounted for in our condensed consolidated financial statements using the equity method of accounting. 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 financial position, results of operations and comprehensive loss and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2016 10-K. Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.

Significant Accounting Policies

There have been no changes to our significant accounting policies described within the Notes of our 2016 10-K.

Acquisitions

On January 18, 2017, we closed the acquisition of all of the issued and outstanding common shares of DEQ Systems Corp. ("DEQ"), which was announced in the third quarter of 2016. DEQ was integrated into our gaming business segment and expands the depth and breadth of our table product portfolio.

On April 7, 2017, we completed the acquisition of all of the issued and outstanding capital stock of privately held mobile and social game company Spicerack Media, Inc. ("Spicerack"), which expands our existing portfolio of social casino games and our customer base. Spicerack was integrated into our interactive business segment.

On April 25, 2017, we completed the acquisition of all of the issued and outstanding membership interests of privately held lottery sales force and retail performance technology and consulting services company Lapis Software Associates, LLC (“Lapis”), which expands our suite of value-added retail lottery products. Lapis was integrated into our lottery business segment.

On July 7, 2017, we completed the acquisition of all of the issued and outstanding capital shares of privately held U.K.-based mobile and interactive casino content developer Red7Mobile Ltd. ("Red7"), which expands our existing portfolio of mobile and interactive game titles. Red7 was integrated into our interactive business segment.

We accounted for these acquisitions using the acquisition method of accounting whereby the total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on respective estimated fair values. The following table summarizes an aggregate disclosure related to business acquisitions completed through September 30, 2017 and is based on the preliminary allocations of the purchase price expected to be finalized by the fourth quarter of 2017, pending completion of the valuation analyses for acquired intangible assets:



	Total Consideration		Cash paid, net of cash acquired		Contingent Consideration ¹		Allocation of purchase price to Intangible assets, net ²		Weighted average useful life of acquired intangible assets	Excess purchase price allocated to Goodwill
Aggregate total	$	66.0	$	57.7	$	7.5	$	56.4	8.3	$	14.6

¹Contingent consideration as determined by fair value and included in the consideration transferred.

²Intangible assets primarily consist of technology-based and customer relationship intangible assets. The fair value of these intangible assets was determined using a combination of a royalty savings method and the excess earnings method using Level 3 in the hierarchy as established by ASC 820. The discount rates and royalty rates used in the valuation analysis ranged between 9% and 20% and 1% and 16%, respectively.

The contingent consideration value is primarily based on reaching certain earnings-based metrics, with a maximum payout of up to $38.5 million. The goodwill recognized relates to the Spicerack acquisition, and the factors contributing to the recognition of goodwill are based on expected synergies resulting from this acquisition, including the expansion of the customer base. None of the resultant goodwill is expected to be deductible for income tax purposes.

The amount of revenue and earnings associated with the above acquisitions and since the acquisition date included in the consolidated financial statements were less than 1.0% for all of the periods presented, thus not significant to our consolidated financial statements.

Pending Acquisition of NYX Gaming Group Limited

As previously disclosed in Item 1.01 of our Current Report on Form 8-K filed with the SEC on September 21, 2017, during the third quarter of 2017, we entered into a definitive agreement (the “Arrangement Agreement”) to acquire all of the outstanding ordinary shares of NYX Gaming Group Limited, a Guernsey company ("NYX"), for CAD $2.40 per share, equivalent to an aggregate enterprise value of approximately CAD $775.0 million, or approximately $631.0 million, including the refinancing of the existing indebtedness of NYX (the "NYX Acquisition"). NYX, a leading digital gaming software supplier for interactive, social and mobile gaming worldwide, is headquartered in Las Vegas, Nevada and is listed on the Toronto Stock Exchange - Venture Exchange (“TSX-V”) under the ticker symbol “NYX.” The transaction, which was approved by each company’s board of directors, is expected to close in the first quarter of 2018, subject to the satisfaction of certain conditions, including NYX shareholder approval, approval by the Royal Court of Guernsey and receipt of gaming approvals in certain jurisdictions. The Arrangement Agreement contains customary deal protection provisions in favor of us, including a termination fee payable by NYX in certain circumstances. If the conditions to closing the NYX Acquisition have been satisfied and we are unable to close, we would be required to pay to NYX a termination fee of CAD$30 million. We expect to finance the NYX Acquisition with a combination of cash on hand, borrowings under our existing revolving credit facility and the October 2017 Financing Transaction (see Note 10). See “Uncertainties related to our proposed acquisition of NYX may negatively affect our financial condition and results of operations and could negatively impact our stock price” contained in “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q which discusses our ability to complete this transaction and other uncertainties related to this proposed acquisition.

Upon consummation of the NYX Acquisition, we anticipate reporting our operations in four business segments, representing our different products and services -- Gaming, Lottery, Social, and Digital Gaming & Sports.

Revenue

The following table summarizes our revenues by type within each of our business segments:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Gaming
Gaming operations	$	176.0	$	182.4	$	526.8	$	552.8
Gaming machine sales	163.1		159.8		482.6		448.7
Gaming systems	62.0		57.6		190.6		176.8
Table products	53.5		48.4		151.8		133.5
Total	$	454.6	$	448.2	$	1,351.8	$	1,311.8

Lottery
Instant products	$	142.7	$	140.3	$	435.7	$	431.3
Lottery systems	60.2		46.3		158.6		146.9
Total	$	202.9	$	186.6	$	594.3	$	578.2

Interactive
Social Gaming - B2C	$	95.1	$	70.3	$	266.4	$	199.5
Other	16.3		14.9		48.1		41.7
Total	$	111.4	$	85.2	$	314.5	$	241.2

Deferred Revenue

The following table summarizes the deferred revenue activity for the reporting period:



	Nine Months Ended September 30,
	2017			2016
Deferred revenue balance, beginning of period	$	67.4		$	57.8
New deferrals	173.3			194.6
Amounts recognized in revenue	(178.4		)	(192.8		)
Deferred revenue balance, end of period	$	62.3		$	59.6

Computation of Basic and Diluted Net Loss Per Share

Basic and diluted net loss per share were the same for all periods presented as all common stock equivalents would be anti-dilutive. We excluded 2.6 million and 3.2 million of stock options from the diluted weighted-average common shares outstanding for the three and nine months ended September 30, 2017 and 2016, respectively. We excluded 4.2 million and 5.6 million of RSUs from the calculation of diluted weighted-average common shares outstanding for the three and nine months ended September 30, 2017 and 2016, respectively.

New Accounting Guidance - Recently Adopted

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amended guidance is intended to simplify several aspects of accounting for share-based payment award transactions, including income tax consequences, accounting for forfeitures, classification of awards as either equity or liabilities and classification in the statement of cash flows. ASU 2016-09 has separate transition guidance for each element of the new standard. We adopted the guidance at the beginning of the first quarter of 2017. The adoption of this guidance did not result in a net cumulative-effect adjustment to accumulated loss, as the previously unrecognized excess tax benefit of $10.1 million was fully offset by an increase in the valuation allowance as of December 31, 2016. The excess tax benefit recognized in our provision for income taxes for the three and nine months ended September 30, 2017 was immaterial. In addition, we elected to continue to account for forfeitures by estimating the expected forfeitures over the course of a vesting period.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We adopted the guidance retrospectively at the beginning of first quarter 2017. The adoption of this guidance resulted in increases to the cash, cash equivalents and restricted cash beginning-of-period and end-of period line item totaling $38.1 million and $41.6 million, respectively, which now includes restricted cash, and a $3.5 million decrease in net cash used in investing activities for the nine months ended September 30, 2016.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. We adopted this guidance prospectively at the beginning of the first quarter of 2017, which will simplify our future goodwill impairment testing, if testing necessitates an impairment charge.

New Accounting Guidance - Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 combined with all subsequent amendments (collectively ASC 606) provides guidance outlining a single comprehensive revenue model in accounting for revenue from contracts with customers. ASC 606 supersedes existing revenue recognition guidance, including industry-specific guidance, and replaces it with a five-step revenue model with a core principle that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. We will adopt this guidance at the beginning of the first quarter of 2018, using a modified retrospective application approach.

We continue to assess the anticipated impact of adopting this guidance in revenue recognition for our business segments. The following table summarizes the anticipated impact to the financial statements based on our assessment completed to date:



Business Segment	Revenue Type	Anticipated Impact
Gaming	Gaming operations Gaming machine sales Gaming systems Table products and other	Ÿ We anticipate the following impact on the net amount of revenue for WAP jackpot payments, which will no longer be treated as an expense but rather as a reduction to revenue: WAP jackpot expense of $5.5 million and $17.9 million for the three and nine months ended September 30, 2017, respectively, and $6.1 million and $22.9 million for the three and nine months ended September 30, 2016, respectively, would have been recognized as a reduction to revenue. Ÿ We do not anticipate a material impact on timing or amount of revenue, other than the WAP impact disclosed above. Ÿ We do not anticipate a material impact on timing or amount of revenue. Ÿ We anticipate impact on timing of revenue recognition primarily related to certain hardware products and professional services, for which timing of revenue recognition might accelerate. While we do not anticipate this will result in a material impact on our consolidated financial statements, we are in the process of quantifying this change. Ÿ We do not anticipate a material impact on timing or amount of revenue. We do not anticipate a material impact on timing or amount of revenue on our U.K. gaming operations, which includes gaming operations, machine sales and to a lesser extent gaming system revenue streams.
Lottery	Instant products under POS Lottery - other	Ÿ We anticipate there may be a material impact on the timing and amount of revenue for our instant products revenues generated under POS arrangements. Timing of recognition- currently, we recognize revenue under POS arrangements when such amounts become fixed or determinable, which is when retail sales occur. Under ASC 606, we have concluded that control transfers to the lottery authorities when the lotteries have taken delivery of shipments of instant products. This will accelerate revenue when compared to the current timing of recognition. Adoption impact- upon adoption of ASC 606, the amount that we expect to receive from our lottery customers for inventory that remains unsold through retail sales will be recognized as an adjustment (both the revenue and cost of such instant products) to retained earnings. As of December 31, 2016, approximately $55 million of revenue related to instant products was not recognized because those tickets had not been sold by lottery retailers; accordingly, under ASC 606 this amount would be recognized directly to retained earnings as opposed to being recognized as future revenue upon the occurrence of retail sales. Because the ultimate effect of this adoption is highly dependent on shipment of instant products under POS arrangements in the fourth quarter, we can not quantify the adoption impact at December 31, 2017. Future impact- because of the timing change described above, revenues and associated operating income may be materially impacted depending on timing of shipments of instant products. We also expect that future revenues under POS arrangements could be much more volatile than we have experienced under current accounting. However, because the timing of future shipments is not known, we can not estimate the impact on future revenues and associated operating income. Ÿ We anticipate other immaterial impacts on timing and amount of revenue related to our other instant product and lottery systems arrangements which we anticipate would result in a shift in the timing of revenue recognition from 2017 to 2018 by less than $12 million in the aggregate.
Interactive	All	Ÿ We do not anticipate a material impact on timing or amount of revenue.

Additionally, as disclosed in our 2016 10-K, ASC 606 will significantly increase revenue disclosure requirements; however many of these newly required disclosures, including disaggregation of revenue and discussion of deferred revenue are included in revenue presented in this Note 1. We currently do not anticipate significant changes to our business processes and systems to support the adoption of the new guidance and are currently assessing an impact on our internal controls. We will continue to monitor and assess the impact of any changes to the standard and interpretations as they become available.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amended guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of this guidance is expected to result in a significant portion of our operating leases, where we are the lessee, to be recognized on our Consolidated Balance Sheet. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier adoption permitted. We are currently evaluating the impact and timing of adopting this guidance.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326). The new guidance replaces the incurred loss impairment methodology in current 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. The new guidance will be effective for us beginning January 1, 2020, with early adoption permitted beginning January 1, 2018. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We are currently evaluating the impact and timing of adopting this guidance, including potentially early adopting this guidance.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new guidance clarifies the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact of adopting this guidance.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new guidance makes improvements to simplify the application of hedge accounting guidance while also creating more transparency for results presented on the face of the financial statements and footnotes. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of adopting this guidance.

We do not expect that any other recently issued accounting guidance will have a significant effect on our financial statements.