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Portions of the registrant’s proxy statement relating to the 2020 annual meeting of stockholders are incorporated by reference in Part III. The proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2019.

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•	our ability to attract and retain players;

•	our reliance on third-party platforms;

•	our dependence on the optional purchases of virtual currency to supplement the availability of periodically offered free virtual currency;

•	our ability to continue to launch and enhance games that attract and retain a significant number of paying players;

•	our reliance on a small percentage of our players for nearly all of our revenue;

•	our ability to adapt to, and offer games that keep pace with, changing technology and evolving industry standards;

•	competition;

•

the impact of legal and regulatory restrictions on our business, including significant opposition in some jurisdictions to interactive social gaming, including social casino gaming, and how such opposition could lead these jurisdictions to adopt legislation or impose a regulatory framework to govern interactive social gaming or social casino gaming specifically, and how this could result in a prohibition on interactive social gaming or social casino gaming altogether, restrict our ability to advertise our games, or substantially increase our costs to comply with these regulations;

•

laws and government regulations, both foreign and domestic, including those relating to our parent, Scientific Games Corporation, and to data privacy and security, including with respect to the collection, storage, use, transmission, sharing and protection of personal information and other consumer data, and those laws and regulations that affect companies conducting business on the internet, including ours;

•	the continuing evolution of the scope of data privacy and security regulations, and our belief that the adoption of increasingly restrictive regulations in this area is likely within the U.S. and other jurisdictions;

•	our ability to use the intellectual property rights of our parent, Scientific Games Corporation, and other third parties, including the third-party intellectual property rights licensed to Scientific Games Corporation, under our intellectual property license agreement (“IP License Agreement”) with our parent;

•	protection of our proprietary information and intellectual property, inability to license third-party intellectual property and the intellectual property rights of others;

•	security and integrity of our games and systems;

•	security breaches, cyber-attacks or other privacy or data security incidents, challenges or disruptions;

•	reliance on or failures in information technology and other systems;

•	our ability to complete acquisitions and integrate businesses successfully;

•	our ability to pursue and execute new business initiatives;

•	fluctuations in our results due to seasonality and other factors;

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•	dependence on skilled employees with creative and technical backgrounds;

•	expectations of growth in total consumer spending on social casino gaming;

•	our dependence on certain key providers;

•	natural events that disrupt our operations or those of our providers or suppliers;

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risks relating to foreign operations, including the complexity of foreign laws, regulations and markets; the uncertainty of enforcement of remedies in foreign jurisdictions; the effect of currency exchange rate fluctuations; the impact of foreign labor laws and disputes; the ability to attract and retain key personnel in foreign jurisdictions; the economic, tax and regulatory policies of local governments; compliance with applicable anti-money laundering, anti-bribery and anti-corruption laws;

•	U.S. and international economic and industry conditions;

•	changes in tax laws or tax rulings, or the examination of our tax positions;

•	the discontinuation or replacement of LIBOR, which may adversely affect interest rates;

•	litigation and other liabilities relating to our business, including litigation and liabilities relating to consumer protection, gambling-related matters, employee matters, alleged service and system malfunctions, alleged intellectual property infringement and claims relating to our contracts, licenses and strategic investments;

•	restrictions and covenants in debt agreements, including those that could result in acceleration of the maturity of our indebtedness;

•	failure to maintain adequate internal control over financial reporting;

•	influence of certain stockholders, including decisions that may conflict with the interests of other stockholders;

•	our ability to achieve some or all of the anticipated benefits of being a standalone public company;

•	our dependence on distributions from SciPlay Parent Company, LLC (“SciPlay Parent LLC”) to pay our taxes and expenses, including substantial payments we will be required to make under the Tax Receivable Agreement (the “TRA”); and

•	stock price volatility.

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•	Invest in growth from existing games - We continue to invest in and grow our current games by adapting and developing our monetization and marketing engines to improve player engagement, increase paying player conversion and drive per-player monetization. As we continue to develop our games, we believe we will be able to further monetize our existing user base and attract new players.

•	Develop new social casino games -  We intend to continue to capitalize on our ability to build successful social casino games by introducing new titles that appeal to specific player segments and offer differentiated experiences.

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Continue international growth and expansion -  We intend to further expand our global presence by incorporating our vast library of recognizable and regionalized brands and content in our game design, customization and marketing for regional audiences. As the global mobile gaming market expands, we believe there is an opportunity to continue to improve our reach across the rest of the world by offering more targeted content than we currently offer and a better game play experience than is currently available to international players.

•

Expand into adjacent gaming markets -  We intend to continue to address additional segments within the broader mobile gaming market by expanding into adjacent areas and investing in new game markets. We believe our extensive experience in developing and operating social gaming titles strongly positions us to enter untapped areas within the casual market, such as puzzles, card, match three, poker and board games.

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•	Leverage platform to scale through select acquisitions - We expect to continue to pursue select strategic acquisitions to fuel our top line growth and build our portfolio. We believe we can maximize the value of an acquired asset through our scalable platform and our rigorous, data-driven acquisition, engagement and monetization model.

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•	our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after they are filed electronically with or furnished to the SEC;

•	Section 16 ownership reports filed by our executive officers, directors and 10% stockholders on Forms 3, 4 and 5 and amendments to those reports as soon as reasonably practicable after they are filed electronically with the SEC; and

•	our Code of Business Conduct, which applies to all of our officers, directors and employees (which is also our required code of ethics applicable to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer in keeping with the Sarbanes-Oxley Act of 2002).

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•	the platform providers discontinue or limit our access to their platforms;

•	governments or private parties, such as internet providers, impose bandwidth restrictions or increase charges or restrict or prohibit access to those platforms;

•	the platforms decline in popularity;

•	the platforms modify their current discovery mechanisms, communication channels available to developers, respective terms of service or other policies, including fees;

•	the platforms impose restrictions or make it more difficult for players to buy virtual currency; or

•	the platforms change how the personal information of players is made available to developers or develop their own competitive offerings.

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•	anticipate and effectively respond to changing game player interests and preferences;

•	anticipate or respond to changes in the competitive landscape;

•	develop, sustain and expand games that are fun, interesting and compelling to play and on which players want to spend money;

•	retain rights to the intellectual property rights of third parties, including Scientific Games;

•	build and maintain our brand and reputation;

•	effectively market new games and enhancements to our existing players and new players;

•	minimize launch delays and cost overruns on new games and game expansions;

•	minimize downtime and other technical difficulties; and

•	acquire high-quality assets, personnel and companies.

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•	cause us to incur greater costs and expenses in the protection of our intellectual property;

•	potentially negatively impact our intellectual property rights, for example, by causing one or more of our intellectual property rights to be ruled or rendered unenforceable or invalid; or

•	divert management’s attention and our resources.

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•	be expensive and time-consuming to defend or require us to pay significant amounts in damages;

•	result in invalidation of our proprietary rights or render our proprietary rights unenforceable;

•	cause us to cease making, licensing or using games that incorporate the intellectual property;

•	require us to redesign, reengineer or rebrand our games or limit our ability to bring new games to the market in the future;

•	require us to enter into costly or burdensome royalty, licensing or settlement agreements in order to obtain the right to use a product or process;

•	impact the commercial viability of the games that are the subject of the claim during the pendency of such claim; or

•	require us to stop selling the infringing games.

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•	the geographies where we operate;

•	holiday and vacation seasons;

•	climate and weather;

•	economic and political conditions; and

•	timing of the release of new games.

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•	any determination with respect to our business direction and policies, including the appointment and removal of officers and, in the event of a vacancy on our board of directors, additional or replacement directors;

•	any determinations with respect to mergers, business combinations or disposition of assets;

•	determination of our management policies;

•	determination of the composition of the committees on our board of directors;

•	our financing policy;

•	our compensation and benefit programs and other human resources policy decisions;

•	termination of, changes to or determinations under our agreements with Scientific Games;

•	changes to any other agreements that may adversely affect us;

•	the payment of dividends on our Class A common stock; and

•	determinations with respect to our tax returns.

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•	corporate opportunities;

•	the impact that operating decisions for our business may have on Scientific Games’ consolidated financial statements;

•	differences in tax positions between Scientific Games and us, especially in light of the TRA (see “Risks Related to Our Organizational Structure and the TRA”);

•	the impact that operating or capital decisions (including the incurrence of indebtedness) for our business may have on Scientific Games’ current or future indebtedness or the covenants under that indebtedness;

•	future, potential commercial arrangements between Scientific Games and us or between Scientific Games and third parties;

•	business combinations involving us;

•	our dividend policy;

•	management stock ownership; and

•	the intercompany agreements between Scientific Games and us.

•	tax, employee benefits, indemnification and other matters arising from the IPO;

•	the nature, quality and pricing of services Scientific Games agrees to provide to us;

•	sales or other disposals by the SG Members of all or a portion of their ownership interests in SciPlay Parent LLC or us; and

•	business combinations involving us.

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•	engaging in the same or similar business activities or lines of business as we do;

•	doing business with any of our clients, consumers, vendors or lessors;

•	employing or otherwise engaging any of our officers or employees; or

•	making investments in any property in which we may make investments.

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•	the requirement that a majority of its board of directors consist of independent directors;

•	the requirement that its director nominations be made, or recommended to the full board of directors, by its independent directors or by a nominations committee that is comprised entirely of independent directors and that it adopt a written charter or board resolution addressing the nominations process; and

•	the requirement that it have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

•	allowing investors to evaluate the distinct merits, performance and future prospects of our business, independent of Scientific Games’ other businesses;

•	improving our strategic and operational flexibility and increasing management focus as we continue to implement our strategic plan and allowing us to respond more effectively to different player needs and the competitive environment for our business;

•	allowing us to adopt a capital structure better suited to our financial profile and business needs, without competing for capital with Scientific Games’ other businesses;

•	creating an independent equity structure that will facilitate our ability to effect future acquisitions utilizing our capital stock; and

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•	facilitating incentive compensation arrangements for employees more directly tied to the performance of our business, and enhancing employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives of our business.

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•

certain of our historical financial results reflect charges for certain support functions that are provided on a centralized basis within Scientific Games, such as expenses for business technology, facilities, legal, finance, human resources, business development, public affairs and procurement under a prior intercompany services agreement, and we entered into a new Intercompany Services Agreement in connection with the IPO;

•	certain of our historical financial results reflect charges for the use of certain proprietary and third-party intellectual property licensed or sublicensed from Scientific Games under a prior intercompany intellectual property license agreement, and we have entered into a new IP License Agreement in connection with the IPO;

•	our cost of debt and our capital structure are and may be different from that reflected in our historical financial statements;

•	we have incurred additional ongoing costs as a result of the IPO, including costs related to public company reporting, investor relations and compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”); and

•	the IPO may have a material effect on our relationship with our players and our other business relationships, including supplier relationships.

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•	the last day of the fiscal year in which we have more than $1.07 billion in annual revenue;

•	the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates;

•	the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or

•	the last day of the fiscal year ending after the fifth anniversary of the completion of the IPO.

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•	rules regarding how our stockholders may present proposals or nominate directors for election at stockholder meetings;

•	empowering only the board of directors to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;

•	the absence of cumulative voting rights in the election of directors;

•	limiting the ability of stockholders to act by written consent or to call special meetings after Scientific Games ceases to beneficially own, directly or indirectly, more than 50% of our combined voting power; and

•	the right of our board of directors to issue preferred stock without stockholder approval.

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Background and Nature of Operations

SciPlay Corporation was formed as a Nevada corporation on November 30, 2018 as a subsidiary of Scientific Games Corporation (“Scientific Games”, “SGC”, and “the Parent”) for the purpose of completing a public offering and related transactions (collectively referred to herein as the “IPO”) in order to carry on the business of SciPlay Parent LLC and its subsidiaries (collectively referred to as “SciPlay”, the “Company”, “we”, “us”, and “our”). As the managing member of SciPlay Parent LLC, SciPlay operates and controls all of the business affairs of SciPlay Parent LLC and its subsidiaries.

We develop, market and operate a portfolio of social games played on various mobile and web platforms, including Jackpot Party Casino, Quick Hit Slots, Gold Fish Casino, Hot Shot Casino, Bingo Showdown, MONOPOLY Slots, and 88 Fortunes Slots, among others. Our games are available in various formats. We have one operating segment with one business activity, developing and monetizing social games.

    The following are our material subsidiaries:

•	SciPlay Parent Company, LLC (Nevada)

•	SciPlay Holding Company, LLC (Nevada) (“SciPlay Holding”)

•	Phantom EFX, LLC (Nevada)

•	Dragonplay Ltd (Israel)

•	SpiceRack Media, LLC (Nevada)

Initial Public Offering

On May 7, 2019, we completed the offering of 22,720,000 shares of Class A common stock at a public offering price of $16.00 per share, after giving effect to the underwriters’ partial exercise of their over-allotment option on June 4, 2019. We received $341.7 million in proceeds, net of underwriting discount, but before offering expenses of $9.3 million.

In connection with the closing of the IPO and partial exercise of over-allotment option, we consummated the following organizational transactions:

•	We amended and restated the SciPlay Parent LLC Operating Agreement (the “Operating Agreement”) to, among other things:

(i) provide for a single class of SciPlay Parent LLC common units (the “LLC Interests”);

(ii) exchange all of SG Social Holding Company I, LLC’s (“SG Holding I”) and SG Social Holding Company, LLC’s (each a wholly owned subsidiary of Scientific Games and collectively, the “SG Members”) existing member’s interests in SciPlay Parent LLC for LLC Interests;

(iii) provide for the right of the SG Members to have their LLC Interests redeemed or exchanged for shares of our Class A common stock or, at our option, cash; and

(iv) appoint SciPlay as the sole manager of SciPlay Parent LLC. 

•	We amended and restated our articles of incorporation to, among other things, provide for Class A common stock and Class B common stock;

    

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•	We used the net proceeds from the IPO and underwriters’ exercise of the over-allotment option after deducting the underwriting discount, as follows:

    

	Amount				Note
To acquire 20,725,319 LLC Interests from SG Holding I	$	311.7			(A)
To acquire 1,994,681 newly issued LLC Interests from SciPlay Parent LLC	30.0				(B)
Net proceeds after deducting underwriting discount	$	341.7
(A) SG Holding I subsequently used these proceeds as follows:
Acquire IP License from Parent (“Upfront License Payment”)(1)	$	255.0
Distributed as a dividend to Scientific Games	56.7
	$	311.7
(B) SciPlay Parent LLC subsequently used the proceeds as follows:
Fees and expenses incurred in connection with the IPO	$	9.3
General corporate purposes, including a portion of contingent acquisition consideration	20.7
	$	30.0
(1) Per the Assignment Agreement, dated May 7, 2019, SG Holding I assigned its rights, duties, obligations and interest under the IP License Agreement to SciPlay.

•	We issued shares of Class B common stock to the SG Members, on a one-to-one basis with the number of LLC Interests owned by the SG Members following the IPO;

•	As a result of the transactions described above, the SG Members own 82.0% of the outstanding shares and LLC Interests and 97.9% of the combined voting power; and

•	We and the SG Members entered into the TRA, and we and the SG Members entered into the registration rights agreement, dated May 7, 2019 (“Registration Rights Agreement”).

Our corporate structure following the IPO is commonly referred to as an “Up-C” structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure allows the SG Members to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “passthrough” entity, for U.S. income tax purposes following the IPO. One of these benefits is that future taxable income of SciPlay Parent LLC that is allocated to the SG Members will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the SciPlay Parent LLC entity level. Additionally, because the SG Members may exchange or redeem their LLC Interests for newly issued shares of our Class A common stock on a one-for-one basis or, at our option, for cash, the Up-C structure also provides the SG Members with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. 

We also receive the same benefits as the SG Members on account of our ownership of LLC Interests in an entity treated as a partnership, or “passthrough” entity, for U.S. income tax purposes. As the SG Members redeem or exchange their LLC Interests, we will obtain a step-up in tax basis in our share of SciPlay Parent LLC assets. This step-up in tax basis will provide us with certain tax benefits, such as future depreciation and amortization deductions that can reduce the taxable income allocable to us. The TRA provides for the payment by us to the SG Members of 85% of the amount of tax benefits, if any, that we actually realize (or in some cases are deemed to realize) as a result of (i) increases in the tax basis of assets of SciPlay Parent LLC (a) in connection with the IPO, (b) resulting from any redemptions or exchanges of LLC Interests pursuant to the Operating Agreement or (c) resulting from certain distributions (or deemed distributions) by SciPlay Parent LLC and (ii) certain other tax benefits related to our making of payments under the TRA.

Variable Interest Entities (“VIE”) and Consolidation

              Subsequent to the IPO, our sole material asset is our member’s interest in SciPlay Parent LLC. In accordance with the Operating Agreement of SciPlay Parent LLC, we have all management powers over the business and affairs of SciPlay Parent LLC and to conduct, direct and exercise full control over the activities of SciPlay Parent LLC. Class A common stock issued in the IPO do not hold majority voting rights but hold 100% of the economic interest in the Company, which results in SciPlay Parent LLC being considered a VIE. Due to our power to control the activities most directly affecting the results of

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SciPlay Parent LLC, we are considered the primary beneficiary of the VIE. Accordingly, beginning with the IPO, we consolidate the financial results of SciPlay Parent LLC and its subsidiaries.

Basis of Presentation

              The accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”). SG Social Holding Company II, LLC is SciPlay’s predecessor for financial reporting purposes, and accordingly, for all periods presented prior to May 7, 2019, the financial statements represent the financial statements of the predecessor. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

              The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and the accompanying notes. Actual results may differ materially from our estimates.

Cash and Cash Equivalents

Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less. We place our temporary cash investments with high credit quality financial institutions. At times, such investments in U.S. accounts may be in excess of the Federal Deposit Insurance Corporation insurance limit. We had $8.0 million and $5.4 million held in foreign currency and foreign bank accounts as of December 31, 2019 and December 31, 2018, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

              Accounts receivable are recorded and carried at the original invoiced amount less an allowance for any estimated uncollectible amounts. We review accounts receivable regularly and make estimates for the allowance for doubtful accounts when there is doubt as to our ability to collect individual balances. In evaluating our ability to collect outstanding receivable balances, we consider many factors, including the age of the balance, the platform provider's payment history and current creditworthiness, and current economic trends. Bad debts are written off after all collection efforts have ceased. We do not require collateral from our platform providers.

              We had no allowance for doubtful accounts as of December 31, 2019 and $1.1 million in allowance for doubtful accounts as of December 31, 2018 and had no significant write-offs or recoveries during the years ended December 31, 2019, 2018 and 2017.

Long-Lived Assets and Finite-Lived Intangible Assets

              We assess the recoverability of our other long-term assets (including intangibles) with finite lives whenever events arise or circumstances change that indicate the carrying value of the asset may not be recoverable. Recoverability of long-lived assets (or asset groups) to be held and used is measured by a comparison of the carrying amount of the asset (or asset group) to the expected net future undiscounted cash flows to be generated by that asset (or asset group).

              The amount of impairment of other long-lived assets and intangible assets with finite lives is measured by the amount by which the carrying amount of the asset exceeds the fair market value of the asset.

Revenue Recognition

We generate revenue from the sale of virtual coins, chips and bingo cards (collectively referred to as “virtual currency”), which players can use to play casino‑style slot games, table games and bingo games (i.e., spin in the case of slot games, bet in the case of table games and use of bingo cards in the case of bingo games). We distribute our games through various global social web and mobile platforms such as Facebook, Apple, Google and Amazon, with some of our games available on Microsoft and other web and mobile platforms. The games are primarily WMS, Bally, Barcrest^TM, and SHFL^TM branded games. In addition, we also offer third‑party branded games and original content.

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Disaggregation of Revenue

We believe disaggregation of our revenue on the basis of platform and geographical locations of our players is appropriate because the nature and the number of players generating revenue could vary on such basis, which represent different economic risk profiles.

The following table presents our revenue disaggregated by type of platform:

	Years Ended December 31,
	2019				2018				2017
Mobile	$	391.0			$	323.3			$	259.6
Web	74.8				92.8				99.6
Other	—				0.1				2.2
Total revenue	$	465.8			$	416.2			$	361.4

The following table presents our revenue disaggregated based on the geographical location of our players:

	Years Ended December 31,
	2019				2018				2017
U.S.(1)	$	434.2			$	380.3			$	327.4
International	31.6				35.9				34.0
Total revenue	$	465.8			$	416.2			$	361.4
(1) Geographic location is presented as being derived from the U.S. when data is not available.

General

                  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. In accordance with the modified retrospective transition method, our results of operations beginning with the first quarter of 2018 are presented in accordance with ASC 606, while prior periods continue to be reported in accordance with the historical revenue recognition guidance under ASC 605. The adoption of ASC 606 had no impact on our financial statements other than incremental disclosures provided herein.

Our social and mobile games operate on a free-to-play model, whereby game players may collect virtual currency free of charge through the passage of time or through targeted marketing promotions. If a game player wishes to obtain virtual currency above and beyond the level of free virtual currency available to that player, the player may purchase additional virtual currency. Once a purchase is completed, the virtual currency is deposited into the player's account and is not separately identifiable from previously purchased virtual currency or virtual currency obtained by the game player for free.

              Once obtained, virtual currency (either free or purchased) cannot be redeemed for cash nor exchanged for anything other than game play within our apps. When virtual currency is played in the games, the game player could "win" and would be awarded additional virtual currency, or could "lose" and lose the future use of that virtual currency. We have concluded that virtual currency represents consumable goods, because the game player does not receive any additional benefit from the games and is not entitled to any additional rights once the virtual currency is substantially consumed.

              Control transfers and we recognize revenues from player purchases of virtual currency as the virtual currency is consumed for game play. We determined through a review of play behavior that game players generally do not purchase additional virtual currency until their existing virtual currency balances have been substantially consumed. As we are able to track the duration between purchases of virtual currency for individual game players for specific games, we are able to reliably estimate the period of time over which virtual currency is consumed. Accordingly, for most games, we recognize revenue using an item-based revenue model.

              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.

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              For games where we are unable to track the duration between purchases of virtual currency for individual game players, we are able to reliably estimate the average player life. Accordingly, we recognize revenue using a user-based revenue model. Future usage patterns may differ from historical usage patterns and therefore the estimated average playing periods may change in the future.

              We continuously gather and analyze detailed customer play behavior and assess this data in relation to our judgments used for revenue recognition.

Revenue Recognition prior to adoption of ASC 606 for the Year Ended December 31, 2018

For the year ended December 31, 2017, we recognized revenue in accordance with ASC 605 when persuasive evidence of an arrangement existed, the service had been provided to the user, the price paid by the user was fixed or determinable and collectability was reasonably assured. As described above in “General”, subsequent to adoption on January 1, 2018, we recognize revenue in accordance with ASC 606 when control of the promised services is transferred to our customers, in an amount that reflects the consideration we expected to be entitled to in exchange for those services.

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 virtual currency 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 contract asset is primarily comprised of platform fees for which revenue has not been recognized. 

    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)
Balance as of January 1, 2019	$	31.5			$	0.2			$	0.7
Balance as of December 31, 2019	32.1				0.2				0.6
(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 years ended December 31, 2019 and 2018, we recognized $0.7 million and $1.5 million, respectively, of revenue that was included in the respective period beginning contract liability balance. Substantially all of our unsatisfied performance obligations relate to contracts with an original expected length of one year or less.

Principal-Agent Considerations

              Our games are played on various third-party platforms for which the platform providers collect proceeds from our customers and pay us an amount after deducting a platform fee. Because we have control over the content and functionality of games before they are accessed by the end user, we have determined we are the principal and, as a result, revenues are recorded on a gross basis. Payment processing fees paid to platform providers (such as Facebook, Apple, Amazon, Google and Microsoft) are recorded within cost of revenue.

Concentration of Credit Risk

Our revenue and accounts receivable are generated via certain platform providers, which subject us to a concentration of credit risk. The following tables summarize the percentage of revenues and accounts receivable generated via our platform providers in excess of 10% of our total revenues and total accounts receivable:

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	Revenue Concentration									Accounts Receivable Concentration
	Years Ended December 31,									As of December 31,
	2019			2018			2017			2019			2018
Apple	44.8	%		41.7	%		41.1	%		42.7	%		38.6	%
Google	35.9	%		32.3	%		27.7	%		33.1	%		31.3	%
Facebook	16.7	%		22.1	%		27.2	%		20.9	%		23.7	%

Cost of Revenue

              Amounts recorded as cost of revenue relate to direct expenses incurred in order to generate social gaming revenue. Such costs are recorded as incurred, and primarily consist of fees withheld by our platform providers from the player proceeds received by the platform providers on our behalf and licensing fees.

              Depreciation and amortization expense is excluded from cost of revenue and other operating expenses and is separately presented on the consolidated statements of income.

Advertising Cost

              The cost of advertising is expensed as incurred and totaled $123.6 million, $100.2 million and $81.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. Advertising costs primarily consist of marketing and player acquisition and retention costs and are included in Sales and marketing expenses.

Research and Development (R&D)

              R&D costs relate primarily to employee costs associated with game development and enhancement costs that do not meet internal-use software capitalization criteria. Such costs are expensed as incurred.

Contingent Acquisition Consideration

Our contingent consideration liability is recorded at fair value on the acquisition date as part of the consideration transferred and is remeasured each reporting period. The changes in fair value of contingent acquisition consideration as a result of remeasurement are included in Contingent acquisition consideration expenses. The inputs used to measure the fair value of the Contingent acquisition consideration liability primarily consist of projected earnings‑based measures and probability of achievement (categorized as Level 3 in the fair value hierarchy as established by ASC 820). During the second quarter of 2019, we agreed with the SpiceRack selling shareholders to pay them $31.0 million in total contingent acquisition consideration. We paid $27.0 million during the year ended December 31, 2019 with the remaining balance to be fully paid by February 28, 2020. The following table summarizes our contingent acquisition consideration liabilities:

	As of December 31,
	2019				2018
Contingent acquisition consideration included in accrued liabilities	$	4.0			$	18.8
Contingent acquisition consideration included in other long-term liabilities	—				10.5

Restructuring and Other

              Restructuring and other includes charges or expenses attributable to: (i) employee severance; (ii) management restructuring and related costs; (iii) restructuring and integration; (iv) cost savings initiatives; and (v) acquisition related and other unusual items other than contingent acquisition consideration.

              Restructuring and other expense for the years ended December 31, 2019, 2018 and 2017 primarily related to items (i), (iii) and (v) set forth above.

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Foreign Currency Translation

              We have operations in Israel where the local currency is the functional currency. Assets and liabilities of foreign operations are translated at period-end rates of exchange, and results of operations are translated at the average rates of exchange for the period. Gains or losses resulting from translating the foreign currency financial statements were accumulated as a separate component of Accumulated other comprehensive income (loss) in Stockholders’ Equity/Accumulated Net Parent Investment. Gains or losses resulting from foreign currency transactions are included in Other income (expense), net.

Acquisition of SpiceRack

              We account for business combinations in accordance with ASC 805. This standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard prescribe, among other things, the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration) and the exclusion of transaction and acquisition related restructuring costs, which are expensed as incurred, from acquisition accounting.

              On April 7, 2017, we completed the acquisition of the issued and outstanding capital stock of privately held mobile and social game company SpiceRack, which expanded our existing portfolio of social casino games and our customer base. The total cash paid, net of cash acquired was $26.0 million, which was funded using available cash and cash equivalents. In addition, during the second quarter of 2019, we agreed with the SpiceRack selling shareholders to pay them $31.0 million in total contingent acquisition consideration. Refer to the “Contingent Acquisition Consideration” section of this Note for additional details.

The following table summarizes the final allocation of the purchase price:

	Total
Assets:
Accounts receivable	$	1.2
Goodwill	12.8
Intangible assets	13.9
Liabilities:
Accounts payable	(0.1		)
Total purchase price(1)	$	27.8
(1) Includes $1.8 million of contingent acquisition consideration estimated at fair value on acquisition date.

The factors contributing to the recognition of goodwill are based on expected synergies resulting from this acquisition, including the expansion of the customer base. The resultant goodwill is expected to be deductible for income tax purposes.

The contingent acquisition consideration value was based on reaching certain growth in earnings before interest, taxes, depreciation and amortization (EBITDA) over the three-year period post close, with a maximum payout of up to $31.0 million and approximately 80% of the maximum contingent consideration payout based on the growth in the second year EBITDA. As described in the “Contingent Acquisition Consideration” section above, during the second quarter of 2019 the contingent acquisition consideration amount was subsequently remeasured to $31.0 million in accordance with the agreement with the SpiceRack selling shareholders.

The fair value of intangible assets was determined using a combination of the royalty savings method and the excess earnings method considered Level 3 hierarchy as established by ASC 820. The discount rate used in the valuation analysis was 20%, and royalty rates ranged between 1% and 16%. The following table details the intangible assets identified:

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	Fair value				Life (Years)
Customer relationships	$	8.6			7
Intellectual property	4.5				5
Brand names	0.8				10

SpiceRack revenue and net income since the acquisition date and through December 31, 2017 included in the consolidated statement of income were $13.8 million and $1.9 million, respectively. The following unaudited pro forma financial information for the year ended December 31, 2017 gives effect to the SpiceRack acquisition as if it had been completed on January 1, 2016:

	Year Ended December 31, 2017
Revenue	$	365.3
Net income	23.2

The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of what the operating results actually would have been if the SpiceRack acquisition had taken place on January 1, 2016, nor is it indicative of future operating results. The pro forma amounts include the historical operating results of SciPlay’s predecessor and SpiceRack prior to the acquisition, with adjustments factually supportable and directly attributable to the SpiceRack acquisition, primarily related to the effect of fair value adjustments and related depreciation and amortization.

Fair Value Measurements

              Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We estimate the fair value of our assets and liabilities, when necessary, using an established three-level hierarchy in accordance with ASC 820.

              The fair value of our financial assets and liabilities is determined by reference to market data and other valuation techniques as appropriate. We believe the fair value of our financial instruments, which are principally cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximates their recorded values due to the short-term nature of these instruments.

              In connection with our 2017 acquisition of SpiceRack, we have recorded contingent consideration liability, which value is based on reaching certain earnings-based metrics. The contingent consideration liability was recorded at fair value on the acquisition date as part of the consideration transferred and is remeasured each reporting period. The inputs used to measure the fair value of contingent consideration liability are categorized as Level 3 in the fair value hierarchy. Refer to Contingent Acquisition Consideration section above for additional disclosures.

              As of December 31, 2019 and 2018 we did not have other assets and liabilities recorded at fair value on a recurring or nonrecurring basis other than those described above.

Revolving Credit Facility

In connection with the IPO, SciPlay Holding, a wholly owned subsidiary of SciPlay Parent LLC, as the borrower, SciPlay Parent LLC, as a guarantor, the subsidiary guarantors party thereto, the lenders party thereto and Bank of America, N.A., as administrative agent and collateral agent, entered into a $150.0 million revolving credit agreement (the “Revolver”) that matures in May 2024. The interest rate is either Adjusted LIBOR (as defined in the Revolver) plus 2.250% (with one 0.250% leverage-based step-down to the margin and one 0.250% leverage-based step-up to the margin) or ABR (as defined in the Revolver) plus 1.250% (with one 0.250% leverage-based step-down to the margin and one 0.250% leverage-based step-up to the margin) at our option. We are required to pay to the lenders a commitment fee of 0.500% per annum on the average daily unused portion of the revolving commitments through maturity, which will be the five-year anniversary of the closing date of 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%.

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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.

    

The Revolver is secured by a (i) first priority pledge of the equity securities of SciPlay Holding, SciPlay Parent LLC’s restricted subsidiaries and each subsidiary guarantor party thereto and (ii) first priority security interests in, and mortgages on, substantially all tangible and intangible personal property and material fee-owned real property of SciPlay Parent LLC, SciPlay Holding and each subsidiary guarantor party thereto, in each case, subject to customary exceptions.

We capitalized $1.1 million in debt issuance costs associated with the Revolver, which are presented in Other assets and amortized over the term of the arrangement and reflected in Other income (expense). As of December 31, 2019, we had no balance outstanding on our Revolver, and we have incurred $0.5 million in unused revolver commitment fees, which are reflected in Other income (expense).

New Accounting Guidance‑ Adopted

The FASB issued ASU No. 2016-02, Leases (Topic 842) in 2016. ASU 2016-02 combined with all subsequent amendments (collectively, “ASC 842”) requires balance sheet recognition for all leases with a lease term greater than one year to be recorded as a lease liability (on a discounted basis) with a corresponding right-of-use asset. This guidance also expands the required quantitative and qualitative disclosures for lease arrangements and gives rise to other changes impacting certain aspects of lessee and lessor accounting. We adopted ASC 842 as of January 1, 2019 using the optional transition method provided by ASU 2018-11 and applied the lessee package of practical expedients. See Note 6 for our lease accounting policy and the adoption impact of ASC 842 on our consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard allows companies to make an election to reclassify from Accumulated Other

Comprehensive Income (AOCI) to retained earnings the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. This ASU is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The amendments in this updated guidance should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. corporate federal income tax rate in the Tax Act is recognized. We adopted this standard effective January 1, 2019. We elected not to reclassify the income tax effects of the Tax Cuts and Jobs Act from AOCI to retained earnings. 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. 2016-13, Financial Instruments - Credit Losses (Topic 326) in 2016. The new guidance replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For trade and other receivables, loans and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. The new guidance is effective for us beginning January 1, 2020. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the effective date. We do not expect a material impact on our consolidated financial statements from the adoption of this guidance.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The new guidance amends the disclosure requirements for recurring and nonrecurring fair value measurements by removing, modifying, and adding certain disclosures on fair value measurements in ASC 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The new guidance is effective for us beginning January 1, 2020. We do not expect a material impact on our consolidated financial statements from the adoption of this guidance.

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

(2) Prepaid Expenses and Other Current Assets

 Prepaid expenses and other current assets consisted of the following:

	As of December 31,
	2019				2018
Prepaid expenses and other	$	3.0			$	1.7
Deferred Offering Costs	—				2.7
Income tax receivable	1.1				1.0
Contract assets	0.2				0.2
	$	4.3			$	5.6

During the year ended December 31, 2019, we incurred $9.3 million in costs directly related to pursuing the IPO. These costs were charged against the gross offering proceeds.

(3) Property and equipment, net

Property and equipment, net are stated at cost, and when placed in service, are depreciated using the straight-line method over the estimated useful lives of the assets as follows:

Item		Estimated Life in Years
Computer equipment		3 - 5
Furniture and fixtures		5 - 10
Leasehold improvements		Shorter of the estimated useful life or remaining lease term

Property and equipment, net consisted of the following:

	As of December 31,
	2019				2018
Computer equipment	$	4.3			$	2.8
Furniture and fixtures	2.1				1.4
Leasehold improvements	2.7				1.2
Less: accumulated depreciation and amortization	(4.5		)		(3.6		)
Total property and equipment, net	$	4.6			$	1.8

The following reflects depreciation and amortization expense related to property and equipment included within depreciation and amortization:

	Years Ended December 31,
	2019				2018				2017
Depreciation and amortization expense	$	0.9			$	0.6			$	0.8

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Goodwill

$107.9 million of goodwill reflected in these financial statements was allocated based on an estimate of the relative fair value that existed at the time of origination of goodwill in connection with the Parent’s acquisitions of WMS Industries, Inc. (“WMS”) and Bally Technologies, Inc. (“Bally”). The carrying value of goodwill increased by $12.8 million, as a result of the April 7, 2017 SpiceRack acquisition.

We account for goodwill in accordance with ASC 350, Intangibles—Goodwill and Other ("ASC 350"). We test goodwill for impairment annually as of October 1 of each fiscal year, or whenever events or circumstances make it more likely than not that impairment may have occurred since completion of the last annual test. Impairment testing for goodwill is performed at the reporting unit level. We have identified a single reporting unit based on our management structure. The fair value of goodwill for this reporting unit is in excess of its carrying value.

Intangible Assets, net

Intangible assets reflected in these financial statements were allocated based on an estimate of the relative fair value that existed at the time of origination of intangible assets in connection with our SpiceRack acquisition and Parent’s acquisitions of WMS and Bally.  Identified intangible assets are amortized over two to ten years using the straight-line method, which materially approximates the pattern of the assets' use. Factors considered when assigning useful lives include legal, regulatory and contractual provisions, game or technology obsolescence, demand, competition and other economic factors.

The following table presents certain information regarding our intangible assets:

	Gross Carrying Amount				Accumulated Amortization				Net Balance
Balance as of December 31, 2019
Amortizable intangible assets:
Intellectual property	$	35.4			$	(33.4	)		$	2.0
Customer relationships	23.2				(18.0		)		5.2
Licenses	5.1				(2.4		)		2.7
Brand names	3.9				(3.3		)		0.6
	$	67.6			$	(57.1	)		$	10.5
Balance as of December 31, 2018
Amortizable intangible assets:
Intellectual property	$	33.0			$	(30.1	)		$	2.9
Customer relationships	23.2				(16.8		)		6.4
Licenses	5.1				(1.5		)		3.6
Brand names	3.7				(3.0		)		0.7
	$	65.0			$	(51.4	)		$	13.6

The following reflects amortization expense related to intangible assets included within depreciation and amortization:

	Years Ended December 31,
	2019				2018				2017
Amortization expense(1)	$	3.0			$	11.2			$	13.8
(1) Amortization expense for the years ended December 31, 2018 and 2017 includes $4.2 million in accelerated amortization of certain Dragonplay intellectual property recorded as a result of a change in estimate of the remaining useful lives.

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Estimated amortization expense for the years ending December 31, 2020 through 2024 and thereafter is as follows:

Year		Expense
2020		$	3.0
2021		3.0
2022		2.4
2023		1.5
2024		0.4
Thereafter		0.2
		$	10.5

Software, net

We capitalize direct costs of services used in the development of our games. Amounts capitalized are amortized over a period of three years on a straight-line basis.

              Software, net consisted of the following:

	As of December 31,
	2019				2018
Software	$	16.8			$	12.0
Accumulated amortization	(10.3		)		(7.7		)
Software, net	$	6.5			$	4.3

The following reflects amortization expense related to Software included within depreciation and amortization:

	Years Ended December 31,
	2019				2018				2017
Amortization expense	$	3.1			$	3.3			$	2.4

(5) Accrued liabilities

Accrued liabilities consisted of the following:

	As of December 31,
	2019				2018
Compensation and benefits	$	3.6			$	7.2
Contingent acquisition consideration	4.0				18.8
Taxes	0.4				1.2
Liabilities under the TRA	2.6				—
Operating lease liabilities	1.9				—
Other	1.2				0.8
	$	13.7			$	28.0

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On January 1, 2019, we adopted ASC 842 using the optional transition method provided by ASU 2018-11. Our operating leases primarily consist of real estate leases such as offices. Our leases have remaining terms of 8 months to 5 years. We do not have any finance leases. Our total variable and short term lease payments and operating lease expenses were immaterial for all periods presented.

Supplemental balance sheet and cash flow information related to operating leases is as follows:

	December 31, 2019
Operating lease right-of-use assets(1)	$	6.0
Accrued liabilities	1.9
Operating lease liabilities	5.2
Total operating lease liabilities	$	7.1
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases for the year ended December 31, 2019	$	2.1
Weighted average remaining lease term, years	4.16
Weighted average discount rate	5.0		%
(1) Right-of-use assets obtained in exchange for lease obligations for the year ended December 31, 2019 were immaterial.

Lease liability maturities:

	Operating Leases
2020	$	2.1
2021	1.7
2022	1.8
2023	1.3
2024	1.0
Thereafter	—
Less: Imputed Interest	(0.8		)
Total	$	7.1

As of December 31, 2019, we did not have material additional operating leases that have not yet commenced.

Stockholders’ Equity

Following the closing of the IPO and the partial exercise of the over-allotment option by the underwriters on June 4, 2019, there were 22,720,000 shares of our Class A common stock issued and outstanding and 103,547,021 shares of our Class B common stock issued and outstanding. Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to stockholders for their vote or approval, except where separate class voting is required by Nevada law. Each share of Class A common stock entitles its holder to one vote on all matters presented to our stockholders generally. Each share of Class B common stock entitles its holder to ten votes on all matters presented to our stockholders generally, for so long as the number of shares of our common stock beneficially owned by the SG Members and their affiliates represents at least 10% of our outstanding shares of common stock and, thereafter, one vote per share. Immediately following the IPO, all of our outstanding shares of Class B common stock were held by the SG Members on a one-to-one basis with the LLC Interests each SG Member then owned. Following the IPO and the partial exercise of over-allotment option by the underwriters on June 4, 2019, the holders of our issued Class A common stock collectively held 100%

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of the economic interests in us and 2.1% of the voting power in us, and Scientific Games, through its indirect ownership of all of the outstanding Class B common stock, held the remaining 97.9% of the voting power in us.

Noncontrolling Interest

We are a holding company, and our sole material assets are LLC Interests that we purchased from SciPlay Parent LLC and SG Holding I, representing an aggregate 18.0% economic interest in SciPlay Parent LLC. The remaining 82.0% economic interest in SciPlay Parent LLC is owned indirectly by SGC, through the ownership of LLC Interests by the indirect wholly owned subsidiaries of Scientific Games, the SG Members.

The organizational transactions (including the IP License Agreement), consummated in connection with the closing of the IPO and partial exercise of over-allotment option, as described in Note 1, were executed concurrently with a single economic objective; therefore, the net effect of these transactions along with accumulated net parent investment balance as of the IPO date was allocated on a pro rata basis between additional paid-in capital and noncontrolling interest.  

Stock-Based Compensation

During the second quarter of 2019, we adopted a Long-Term Incentive Plan (“LTIP”). The LTIP authorizes the issuance of up to 6.5 million shares of our Class A common stock to be granted in connection with awards of incentive and nonqualified stock options, restricted stock and stock units, stock appreciation rights and performance-based awards.

The Parent maintains an equity incentive awards plan under which the Parent may issue, among other awards, time‑based and performance‑based stock options and restricted stock units to our employees. Although awards under such plan result in the issuance of shares of the Parent, the amounts are a component of the total compensation for our employees and are included in our stock‑based compensation expense, which is accounted for as a component of Stockholders’ equity.

The following table summarizes stock‑based compensation expense that is included in general and administrative expenses:

		Years Ended December 31,
		2019				2018				2017
Related to SciPlay equity awards		$	5.7			$	—			$	—
Related to the Parent’s equity awards		3.2				4.0				4.3
Total		$	8.9			$	4.0			$	4.3

As of December 31, 2019, we had $13.4 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 $9.9 million relates to PRSUs.

Performance-Based Restricted Stock Units (PRSUs)

Starting with the second quarter of 2019, SciPlay employees including our senior executives and a non-employee director are granted PRSUs with respect to our Class A common stock. The performance criteria for vesting of such PRSUs granted is based on revenue and Adjusted EBITDA metrics set through the end of fiscal year 2022. Recipients of these awards generally must be actively employed by and providing services to the Company on the last day of the performance period in order to receive an award payout. In certain cases, upon death, disability or a qualifying termination, all or a pro-rata portion of the PRSUs will remain eligible to vest at the end of the performance period.

The fair value of the PRSUs granted was based on the closing price of our Class A common stock on the date of each grant. Stock-based compensation expense associated with these awards is recognized over the service period based on our projection as to the probable outcome of the above specified performance conditions. We reassess the probability of meeting the above specified performance conditions at each reporting period and adjust stock-based compensation expense to reflect current expected results, as necessary.

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The table below sets forth a calculation of basic earnings per share ("EPS") based on net income attributable to SciPlay divided by the basic weighted average number of Class A common stock. Diluted EPS of Class A common stock is computed by dividing net income attributable to SciPlay by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to all potentially dilutive securities, using the treasury stock method.

For purposes of calculating EPS for periods prior to the IPO, including the year ended December 31, 2019 for which a portion of the period preceded the IPO, we retrospectively presented EPS as if the IPO had occurred at the beginning of the earliest period presented.

We excluded Class B common stock from the computation of basic and diluted EPS, as holders of Class B common stock do not have an economic interest in us and therefore a separate presentation of EPS of Class B common stock under the two-class method has not been provided.

	Years Ended December 31,
	2019				2018				2017
Numerator:
Net income	$	93.5			$	39.0			$	23.1
Less: net income attributable to the noncontrolling interest	61.1				—				—
Net income attributable to SciPlay	$	32.4			$	39.0			$	23.1
Denominator:
Weighted average shares of Class A common stock for basic EPS	22.7				22.7				22.7
Effect of dilutive securities:
Stock-based compensation grants	—				—				—
Weighted average shares of Class A common stock for diluted EPS	22.7				22.7				22.7
Basic and diluted net income attributable to SciPlay per share:
Basic	$	1.43			$	1.72			$	1.02
Diluted	$	1.43			$	1.72			$	1.02

Income taxes are determined using the liability method of accounting for income taxes, under which deferred tax assets ("DTAs") and deferred tax liabilities ("DTLs") are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred income tax balances are reported using currently enacted tax rates and are adjusted for changes in such rates in the period of change.

We hold an economic interest of 18% in SciPlay Parent LLC subsequent to the IPO. The 82% 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 components of net income before income taxes are as follows:

	Years Ended December 31,
	2019				2018				2017
United States	$	101.1			$	50.8			$	62.2
Foreign	1.1				(1.4		)		(17.0		)
Net income before income taxes	$	102.2			$	49.4			$	45.2

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The components of income tax expense are as follows:

	Years Ended December 31,
	2019				2018				2017
Current
U.S. Federal	$	5.4			$	11.0			$	22.6
U.S. State	1.5				3.8				2.3
Foreign	0.9				1.6				0.9
Total	$	7.8			$	16.4			$	25.8
Deferred
U.S. Federal	0.6				(2.6		)		(1.7		)
U.S. State	0.5				(0.9		)		(0.2		)
Foreign	(0.2		)		(2.5		)		(1.8		)
Total	0.9				(6.0		)		(3.7		)
Total income tax expense	$	8.7			$	10.4			$	22.1

The reconciliation of the U.S. federal statutory tax rate to the actual tax rate is as follows:

	Years Ended December 31,
	2019			2018			2017
Statutory U.S. federal income tax rate	21.0	%		21.0	%		35.0	%
U.S. state income taxes, net of federal benefit	1.7	%		3.1	%		3.1	%
R&D credits	(0.4	)%		(1.7	)%		(0.7	)%
Impact of foreign rate differential	(0.1	)%		0.1	%		3.4	%
Permanent items	0.4	%		(1.4	)%		4.1	%
Noncontrolling interest	(12.2	)%		—	%		—	%
Other	(1.9	)%		—	%		—	%
Impact of U.S. Tax Reform	—	%		—	%		3.9	%
Effective income tax rate	8.5	%		21.1	%		48.8	%

Our effective tax rate for the year ended December 31, 2019 differs from the statutory rate of 21.0% primarily because we do not record income taxes for the noncontrolling interest portion of pre-tax income. Additionally, the periods prior to the IPO are presented using historical results of operations and cost basis of the assets and liabilities as if we operated on a standalone basis during those periods, and the tax provision is calculated as if we completed separate tax returns apart from our Parent (“Separate-return Method’’). Certain legal entities that are included in these financial statements under the Separate-return Method were included in tax filings of affiliated entities that are not part of these financial statements.

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The tax effects of significant temporary differences representing net deferred tax assets and liabilities consisted of the following:

	As of December 31,
	2019				2018
Deferred tax assets:
Compensation not currently deductible	$	0.3			$	8.1
Liabilities under the TRA	18.2				—
Investment in LLC	75.0				—
Other	1.3				1.3
Valuation allowance	(7.7		)		—
Realizable deferred tax assets	87.1				9.4
Deferred tax liabilities:
Other	—				(3.0		)
Total deferred tax liabilities	—				(3.0		)
Net deferred tax assets on balance sheet	$	87.1			$	6.4

As a result of the IPO, we recorded a deferred tax asset for the difference between the financial reporting value and the tax basis of our investment in SciPlay Parent LLC. We also recorded a deferred tax asset for the tax basis increases that will be generated from future payments under the Tax Receivable Agreement. The TRA liability represents 85% of the tax savings we expect to receive from the amortization deductions associated with the step-up in basis of depreciable assets under Internal Revenue Code Section 754. This DTA will be realized as cash payments are made to the TRA participants.

As of December 31, 2019, we did not have any material NOL or credit carryforwards.

The following table summarizes our valuation allowances:

	As of December 31,
	2019				2018
Federal	$	(5.7	)		$	—
State	(0.9		)		—
Foreign	(1.1		)		—
	$	(7.7	)		$	—

At each reporting period, we analyze the likelihood of our deferred taxes assets to be realized. If, based upon all available evidence, both positive and negative, it is more likely than not that such deferred tax assets will not be realized, a valuation allowance is recorded. As a result of this analysis, we determined that a portion of the DTA related to our investment in SciPlay Parent LLC is not expected to be realized; therefore, we recorded a valuation allowance on this portion of the outside basis difference in our investment.

We apply a recognition threshold and measurement attribute related to uncertain tax positions taken or expected to be taken on our tax returns. We recognize a tax benefit for financial reporting of an uncertain income tax position when it has a greater than 50% likelihood of being sustained upon examination by the taxing authorities. We measure the tax benefit of an uncertain tax position based on the largest benefit that has a greater than 50% likelihood of being ultimately realized including evaluation of settlements. For the years ended December 31, 2019 and 2018, we had no unrecognized tax benefits.

We file income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions. There are no material state, local or non-U.S. examinations by tax authorities currently ongoing.

The following is the summary of expenses paid to Scientific Games and settled in cash:

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	Years Ended December 31,
	2019				2018				2017				Financial Statement Line Item
Royalties for Scientific Games IP(1)	$	10.2			$	26.1			$	23.6			Cost of revenue
Royalties to Scientific Games for third-party IP	6.9				7.7				5.5				Cost of revenue
Parent services(2)	5.0				5.7				7.0				General and administrative
(1) In accordance with the IP License Agreement, we did not incur any additional royalty expense related to Scientific Games IP after the effective date of the IP License Agreement. (2) Parent services expense for the year ended December 31, 2017 includes $1.6 million in digital shared services. Digital shared services represent shared general and administrative expenses within the Parent's Digital segment, including but not limited to, executive, finance, human resources and legal.

The following is the summary of balances due to affiliates:

	As of December 31,
	2019				2018
Royalties under intercompany IP License Agreement(1)	$	0.5			$	4.5
Parent services	0.8				0.5
Reimbursable expenses to (from) Scientific Games and its subsidiaries	1.4				(1.3		)
	$	2.7			$	3.7
(1) For 2019 all such royalties payable are related to royalties for use of third-party IP.

IP Royalties

In connection with the IPO, we entered into the IP License Agreement from which we obtained an exclusive (subject to certain limited exceptions), perpetual, non-royalty-bearing license from SG Gaming, Inc. (formerly known as Bally Gaming, Inc.) (“SG Gaming”) for intellectual property created or acquired by SG Gaming or its affiliates on or before the third anniversary of the date of the IP License Agreement in any of our currently available or future social games that are developed for mobile platforms, social media platforms, internet platforms or other interactive platforms and distributed solely via digital delivery, and a non-exclusive, perpetual, non-royalty-bearing license for intellectual property created or acquired by SG Gaming or its affiliates after such third anniversary, for use in our currently available games. So long as the IP License Agreement remains in effect, we do not expect to pay any future royalties or fees for our use of intellectual property owned by SG Gaming or its affiliates in our currently available games. The purchase price of the license was $255.0 million, which was determined based on the appropriate valuation methodology performed by a third-party valuation specialist. This transaction was treated as a deemed distribution to the Parent as it constitutes a transaction between entities under common control.

The Parent frequently licenses intellectual property (“IP”) from third parties, which we use in developing our games pursuant to the IP License Agreement. Royalties allocated for use of third‑party IP are charged to us and are typically based upon net social gaming revenues and the royalty rates defined and stipulated in the third‑party agreements.

Parent Services

On September 5, 2016, we entered into a Services Agreement with the Parent pursuant to which the Parent and its subsidiaries provide us various corporate services. In connection with the IPO described above, we entered into a new Services Agreement under which the Parent and its subsidiaries will continue to provide us the below services on substantially the same terms.

Parent services represent charges of corporate level general and administrative expenses that pay for services related to, but not limited to, finance, corporate development, human resources, legal, information technology, and rental fees for shared assets. These expenses have been charged to us on the basis of direct usage and costs when identifiable, with the remainder charged on the basis of revenues, operating expenses, headcount or other relevant measures, which we believe to be the most meaningful methodologies.

TRA

As described in Note 1 and in connection with the IPO, we entered into the TRA with the SG Members. The annual tax benefits are computed by comparing the income taxes due including such tax benefits and the income taxes due without such benefits. Our estimated liability under the TRA as of December 31, 2019 was $75.3 million, of which $2.6 million was included in Accrued liabilities.

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The amount of aggregate payments due under the TRA may vary based on a number of factors, including the amount and timing of the taxable income SciPlay Parent LLC generates each year and applicable tax rates, with payments generally due within a specified period of time following the filing of our tax return for the taxable year with respect to which the payment obligation arises. The TRA will remain in effect until all such tax benefits have been utilized or expired unless we exercise our right to terminate the TRA. The TRA will also terminate if we breach our obligations under the TRA or upon certain change of control events specified in the agreement. If the TRA is terminated in accordance with its terms, our payment obligations would be accelerated based upon certain assumptions, including the assumption that we would have sufficient future taxable income to utilize such tax benefits.

Benefit plans

            We have a 401(k) plan for U.S.-based employees. Those employees who participate in our 401(k) plan are eligible to receive matching contributions from us for the first 6% of participant contributions (as defined in the plan document). Contribution expense for the years ended December 31, 2019, 2018 and 2017 amounted to $1.5 million, $1.2 million and $1.0 million, respectively.

Litigation

From time to time, we are subject to various claims, complaints and legal actions in the normal course of business. In addition, we may receive notifications alleging infringement of patent or other IP rights.

Washington State Matter

On April 17, 2018, a plaintiff filed a putative class action complaint, Fife v. Scientific Games Corp., against our Parent, in the United States District Court for the Western District of Washington. The plaintiff seeks to represent a putative class of all persons in the State of Washington who purchased and allegedly lost virtual coins playing our online social casino games, including but not limited to Jackpot Party Casino and Gold Fish Casino. The complaint asserts claims for alleged violations of Washington’s Recovery of Money Lost at Gambling Act, Washington’s consumer protection statute, and for unjust enrichment, and seeks unspecified money damages (including treble damages as appropriate), the award of reasonable attorneys’ fees and costs, pre‑ and post‑judgment interest, and injunctive and/or declaratory relief. On July 2, 2018, our Parent filed a motion to dismiss the plaintiff’s complaint with prejudice, which the trial court denied on December 18, 2018. Our Parent filed its answer to the putative class action complaint on January 18, 2019. We are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible loss. Although the case was brought against Scientific Games, pursuant to the Intercompany Services Agreement, we would expect to cover or contribute to any damage awards due to the matter arising as a result of our business.

SciPlay IPO Matter (New York)

On or about October 14, 2019, the Police Retirement System of St. Louis filed a putative class action complaint in New York state court against SciPlay, certain of its executives and directors, and SciPlay’s underwriters with respect to its IPO (the “PRS Action”). The complaint was amended on November 18, 2019. The plaintiff seeks to represent a class of all persons or entities who acquired Class A common stock of SciPlay pursuant and/or traceable to the Registration Statement filed and issued in connection with SciPlay’s IPO on or about May 3, 2019. The complaint asserts claims for alleged violations of Sections 11 and 15 of the Securities Act, 15 U.S.C. § 77, and seeks certification of the putative class; compensatory damages of at least $146.0 million, and the award of the plaintiff’s and the class’s reasonable costs and expenses incurred in the action.

On or about December 9, 2019, Hongwei Li filed a putative class action complaint in New York state court asserting substantively similar causes of action under the Securities Act of 1933 and substantially similar factual allegations as those alleged in the PRS Action (the “Li Action”). On December 18, 2019, the New York state court entered a stipulated order consolidating the PRS Action and the Li Action into a single lawsuit. On December 23, 2019, we moved to dismiss both complaints. We are currently unable to determine the likelihood of an outcome or estimate a range of reasonably possible loss, if any. We believe that the claims in the lawsuit are without merit, and intend to vigorously defend against them.

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SciPlay IPO Matter (Nevada)

On or about November 4, 2019, plaintiff John Good filed a putative class action complaint in Nevada state court against SciPlay, certain of its executives and directors, Scientific Games, and SciPlay’s underwriters with respect to SciPlay’s IPO. The plaintiff seeks to represent a class of all persons who purchased Class A common stock of SciPlay in or traceable to SciPlay’s IPO that it completed on or about May 7, 2019. The complaint asserts claims for alleged violations of Sections 11 and 15 of the Securities Act, 15 U.S.C. § 77, and seeks certification of the putative class; compensatory damages, and the award of the plaintiff’s and the class’s reasonable costs and expenses incurred in the action. 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.

(12) Selected Quarterly Financial Data, unaudited

	Three Months Ended
	December 31,				September 30,				June 30,				March 31,				December 31,				September 30,				June 30,				March 31,
	2019				2019				2019				2019				2018				2018				2018				2018
Revenue(2)	$	112.9			$	116.4			$	118.1			$	118.4			$	113.7			$	105.3			$	99.7			$	97.5
Cost of revenue(2)	35.4				36.9				40.5				45.7				43.8				40.6				38.4				37.6
Net income (loss)(2)	28.6				25.0				26.2				13.7				18.7				9.2				12.2				(1.1		)
Net income (loss) attributable to SciPlay(2)	4.4				2.0				12.3				13.7				18.7				9.2				12.2				(1.1		)
Basic and diluted net income (loss) attributable to SciPlay per share(1):
Basic	$	0.19			$	0.09			$	0.54			$	0.60			$	0.82			$	0.41			$	0.54			$	(0.05	)
Diluted	$	0.19			$	0.09			$	0.54			$	0.60			$	0.82			$	0.41			$	0.54			$	(0.05	)
Weighted average number of shares of Class A common stock used in per share calculation:
Basic shares	22.7				22.7				22.7				22.7				22.7				22.7				22.7				22.7
Diluted shares	22.7				22.7				22.7				22.7				22.7				22.7				22.7				22.7

(1) For purposes of calculating EPS for periods prior to the IPO, including the quarter ended June 30, 2019 for which a portion of the period preceded the IPO, we retrospectively presented EPS as if the IPO had occurred at the beginning of the earliest period presented.

(2) Subsequent to the issuance of the Company’s September 30, 2019 report on Form 10-Q, we identified prior interim and annual errors related to revenues denominated in foreign currencies. As a result, the Company recorded an out of period adjustment during Q4 2019 as set forth in the following table which also presents the amount and time periods in which the errors originated:

(overstatement)/understatement					Originating Period
	Total impact on Q4 2019				Q1 through Q3 2019				2018				2017				Periods from inception through 2016
Revenue	$	6.3			$	(2.1	)		$	(1.7	)		$	(1.1	)		$	(1.4	)
Net income	3.6				(1.3		)		(0.9		)		(0.6		)		(0.8		)

We concluded that these errors were not material to any prior interim or annual periods.

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