Description of the Business and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2021

Organization, Consolidation and Presentation of Financial Statements [Abstract]

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, social and digital gaming industries. Our portfolio of revenue-generating activities primarily includes supplying gaming machines and game content, casino-management systems and table game products and services to licensed gaming entities; providing instant and draw-based lottery products, lottery systems and lottery content and services to lottery operators; providing social casino and other mobile games to retail customers; and providing a comprehensive suite of digital RMG and sports wagering solutions, distribution platforms, content, products and services. We also gain access to technologies and pursue global expansion through strategic acquisitions and equity investments.

On June 29, 2021, we announced our intent to divest our Lottery and Sports Betting businesses. On September 27, 2021, we announced that we had entered into a definitive agreement to sell our Sports Betting business to Endeavor Group Holdings, Inc. (“Endeavor”) in a cash and stock transaction. Under the terms of the agreement, we will receive $1 billion in cash, subject to customary working capital purchase price closing adjustments, and 7.6 million shares of Endeavor Class A common stock (valued at approximately $200 million as of the purchase agreement date). On October 27, 2021, we announced that we entered into a definitive agreement to sell our Lottery business to Brookfield Business Partners L.P. together with its institutional partners (collectively “Brookfield”) for total consideration of $6.05 billion consisting of $5.825 billion in cash and an earn-out of up to $225 million based on the achievement of certain EBITDA targets in 2022 and 2023. We expect to complete these transactions during the first half of 2022, subject to applicable regulatory approvals and customary closing conditions. Beginning in the third quarter of 2021, we have reflected these businesses as discontinued operations in our consolidated statements of operations and reflected the assets and liabilities of these businesses as held for sale in our consolidated balance sheets, for all periods presented. These businesses held for sale are included in our covenant compliance requirements until disposed of and all of their related cash flows are available to the Company without restriction. Refer to Note 2 for further information.

Retrospective reclassifications have been made to prior period financial statements and disclosures to present the Lottery and Sports Betting businesses as discontinued operations (see Note 2). Accordingly, we report our results of continuing operations in three business segments—Gaming, SciPlay and iGaming (former Digital business segment excluding Sports Betting)—representing our different products and services. Unless otherwise noted, amounts and disclosures included herein relate to our continuing operations.

On July 15, 2021, we submitted a proposal to SciPlay’s board of directors to acquire all the outstanding equity interests in SciPlay not already owned by us (approximately 19%) in alignment with the strategy developed as part of the strategic review. Under our proposal, all SciPlay shareholders (other than SGC and our subsidiaries) would receive 0.250 shares of our common stock for each share of SciPlay Class A common stock they own. The proposed transaction is subject to the approval of an independent special committee of the SciPlay board of directors, as well as the negotiation and execution of a mutually acceptable merger agreement.

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, its wholly owned subsidiaries, and those subsidiaries in which we have a controlling financial interest. Investments in other entities in which we do not have a controlling financial interest but we exert significant influence are accounted for in our consolidated financial statements using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.

In the opinion of SGC and its management, we have made all adjustments necessary to present fairly our consolidated financial position, results of operations, 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 2020 10-K. Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.

Impact of COVID-19

As more fully described in the “Description of the Business and Summary of Significant Accounting Policies - Impact of COVID-19” in Note 1 of our 2020 10-K, COVID-19 disruptions continue to impact our results of operations and particularly

certain aspects of our Gaming business segment operations. While most gaming establishments have reopened globally and have begun to operate at full capacity, there is a continued risk of future COVID-related developments impacting Gaming business segment results. We continue to see fluctuations in infection rates and regulations for various regions along with ongoing domestic and international travel restrictions or warnings, social distancing measures, reduced operating capacity and an overall economic and general uncertainty regarding the magnitude and length of time that these disruptions will continue. These circumstances may change in the future and such changes could be material. We continue to assess the situation jurisdiction by jurisdiction, actively managing our cash flows and continuing to evaluate additional measures that may reduce operating costs and conserve cash to preserve liquidity as we execute on our strategic initiatives.

As of September 30, 2021, our total available liquidity (excluding our SciPlay business segment, but including cash and cash equivalents totaling $62 million of the businesses held for sale as those are still available for our general use until a divestiture occurs) was $1,016 million, which included $503 million of undrawn availability under SGI’s revolving credit facility. In October 2021, we made a voluntary payment of $135 million on SGI’s revolving credit facility leaving the entire revolving credit facility undrawn and available.

Significant Accounting Policies

There have been no changes to our significant accounting policies described within the Notes of our 2020 10-K.

Computation of Basic and Diluted Net Income (Loss) Per Share Attributable to SGC

Basic and diluted net income (loss) per share for the three and nine months ended September 30, 2021 and 2020 were computed by dividing net loss from continuing operations and net income from discontinued operations by the weighted average number of shares outstanding.

Basic and diluted net (loss) income attributable to SGC per share were the same for the three months ended September 30, 2020 and nine months ended September 30, 2021 and 2020, respectively, as all common stock equivalents during those periods would be anti-dilutive. We excluded 2 million of stock options from the diluted weighted-average common shares outstanding for the nine months ended September 30, 2021, and 1 million and 2 million of stock options from the diluted weighted-average common shares outstanding for the three and nine months ended September 30, 2020, respectively. We excluded 3 million of RSUs from the calculation of diluted weighted-average common shares outstanding for the nine months ended September 30, 2021 and the three and nine months ended September 30, 2020, respectively.

Acquisitions

Acquisitions Related to Continuing Operations

In July of 2021, SciPlay acquired privately-held Koukoi Games Oy (“Koukoi”), a developer and operator of casual mobile games. Koukoi has been included in our SciPlay business segment.

In August of 2021, we acquired privately-held Lightning Box Games (“Lightning Box”), an iGaming content studio. Lightning Box has been included in our iGaming business segment.

In October of 2021, we signed a definitive agreement to acquire Automated Cashless Systems, Inc.’s (“ACS”) table game solution PlayOn™ (“PlayOn™”), a cashless product line that provides players with a debit solution at live table games. PlayOn™ was re-named to “Access To On Demand Money” (“AToM™”) and will be included in our Gaming business segment.

In November of 2021, we acquired Authentic Gaming, a premium provider of live casino solutions, which will be included in our iGaming business segment.

Acquisitions Related to Discontinued Operations

In August of 2020, we obtained a one-year option agreement to acquire SportCast Pty, Limited (the “SportCast Option”), a privately held sports-betting content and player engagement technology and platform supplier. We accounted for the SportCast Option by electing a measurement alternative to measure this equity investment at cost, less impairment given lack of readily determinable fair value in accordance with ASC Topic 321. In May of 2021, we exercised the SportCast Option and completed an acquisition of SportCast (the “SportCast Acquisition”), which expanded the Sports Betting business’ portfolio of sports-betting technology, services and content.

In September of 2021, we acquired Sideplay Entertainment (“Sideplay”), a digital “e-instant” content studio. Sideplay has been included in the Lottery business.

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, 2021 and is based on the preliminary allocations of the purchase price expected to be finalized by the fourth quarter of 2021, 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(3)
Acquisitions related to continuing operations	$	60	$	40	$	15	$	21	6.5	Years	$	39
Acquisitions related to discontinued operations(4)	106		18		25		35		6	Years	77
Aggregate total	$	166	$	58	$	40	$	56			$	116
(1) Contingent acquisition consideration values are primarily based on reaching certain earnings-based metrics, with a cumulative maximum payout of up to $64 million as of September 30, 2021 and were determined by fair value and included in the consideration transferred. The fair value was primarily determined using an income approach method and level 3 inputs in the hierarchy as established by ASC 820. The maximum contingent acquisition consideration liability related to continuing operations was $30 million as of September 30, 2021. The maximum contingent acquisition consideration liability related to discontinued operations was $34 million as of September 30, 2021.
(2) Intangible assets primarily consist of technology-based and customer relationship intangible assets. The fair value of these intangible assets was determined using an income approach method and level 3 inputs in the hierarchy as established by ASC 820. The discount rates and royalty rates used in the valuation analyses ranged between 15% and 29% and 1% and 52%, respectively.
(3) The factors contributing to the recognition of acquisition goodwill are based on customer offering diversification, expected synergies, assembled workforce and other strategic benefits. None of the resultant goodwill is expected to be deductible for income tax purposes.
(4) The SportCast acquisition’s total consideration transferred included $63 million in fair value of the SportCast Option, which resulted in a $63 million gain recorded in the Net income from discontinued operations, net of tax, line item in our consolidated statements of operations for the nine-months ended September 30, 2021 due to the increase in fair value of the SportCast Option. The fair value of the Sportscast Option has been preliminarily determined using an income approach method and level 3 inputs in the hierarchy as established by ASC 820. The discount rate used in the valuation analyses was 15%.

The revenue and earnings associated with all of the above acquisitions are not significant to our consolidated financial statements.

New Accounting Guidance - Recently Adopted

The FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors – Certain Leases with Variable Lease Payments, on July 19, 2021. The new guidance requires the lessor to classify a lease with variable lease payments that do not depend on an index or a rate as an operating lease at lease commencement if classifying the lease as a sales-type lease or direct financing lease would result in the recognition of a selling loss. We adopted this standard during the third quarter of 2021 on a prospective basis. 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. Based on our preliminary assessment completed to date, we do not expect the adoption of this guidance to have a significant impact on our consolidated financial statements.

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