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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020
 
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to        
 
Commission file number: 001-38889 
SciPlay Corporation
(Exact name of registrant as specified in its charter)
Nevada
83-2692460
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
6601 Bermuda Road, Las Vegas, Nevada 89119
(Address of principal executive offices)
(Zip Code) 
(702) 897-7150
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, $.001 par valueSCPLThe NASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 
The registrant has the following number of shares outstanding of each of the registrant’s classes of common stock as of May 5, 2020:
Class A Common Stock: 22,720,000
Class B Common Stock: 103,547,021



SCIPLAY CORPORATION
INDEX TO FINANCIAL INFORMATION
AND OTHER INFORMATION
THREE MONTHS ENDED MARCH 31, 2020
Page
Item 1.


Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2


FORWARD-LOOKING STATEMENTS
        Throughout this Quarterly Report on Form 10-Q, we make “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and can often be identified by the use of terminology such as “may,” “will,” “estimate,” “intend,” “plan,” “continue,” “believe,” “expect,” “anticipate,” “target,” “should,” “could,” “potential,” “opportunity,” “goal,” or similar terminology. The forward-looking statements contained in this Quarterly Report on Form 10-Q are generally located in the material set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” but may be found in other locations as well. These statements are based upon management’s current expectations, assumptions and estimates and are not guarantees of timing, future results or performance. Therefore, you should not rely on any of these forward-looking statements as predictions of future events. Actual results may differ materially from those contemplated in these statements due to a variety of risks and uncertainties and other factors, including, among other things:
the impact of the COVID-19 pandemic and any resulting social, political, economic and financial complications;

our ability to attract and retain players;
our reliance on third-party platforms;
our dependence on the optional purchases of coins, chips and cards to supplement the availability of periodically offered free coins, chips and cards; 
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 and health crises that disrupt our operations or those of our providers or suppliers;
U.S. and international economic and industry conditions;
stock price volatility;
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;
3


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;
risks related 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; and compliance with applicable anti-money laundering, anti-bribery and anti-corruption laws;
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; and
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”).
        Additional information regarding risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated in forward-looking statements is included from time to time in our filings with the SEC, including under “Risk Factors” in Part II, Item 1A of this Quarterly Report of Form 10-Q and Part I, Item 1A “Risk Factors” in our 2019 Annual Report on Form 10-K filed with the SEC on February 18, 2020 (the “2019 Form 10-K”). Forward-looking statements speak only as of the date they are made and, except for our ongoing obligations under the U.S. federal securities laws, we undertake no and expressly disclaim any obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.
        This Quarterly Report on Form 10-Q may contain references to industry market data and certain industry forecasts. Industry market data and industry forecasts are obtained from publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of that information is not guaranteed. Although we believe industry information to be accurate, it is not independently verified by us and we do not make any representation as to the accuracy of that information. In general, we believe there is less publicly available information concerning international social gaming industries than the same industries in the U.S. Some data is also based on our good faith estimates, which are derived from our review of internal surveys or data, as well as the independent sources referenced above. Assumptions and estimates of our and our industry's future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A “Risk Factors” in our 2019 Form 10-K. These and other factors could cause future performance to differ materially from our assumptions and estimates.
        

4


PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)

SCIPLAY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in millions, except per share amounts)
Three Months Ended
March 31,
20202019
Revenue$118.3  $118.4  
Operating expenses:
  Cost of revenue(1)
37.9  45.7  
  Sales and marketing(1)
28.2  34.3  
  General and administrative(1)
10.2  10.3  
  Research and development(1)
7.3  5.8  
  Depreciation and amortization2.0  1.7  
  Restructuring and other0.5  0.6  
         Operating income32.2  20.0  
  Other income (expense), net0.5  (1.6) 
         Net income before income taxes32.7  18.4  
  Income tax expense1.6  4.7  
         Net income31.1  13.7  
Less: Net income attributable to the noncontrolling interest26.7    
         Net income attributable to SciPlay$4.4  $13.7  
Basic and diluted net income attributable to SciPlay per share:
  Basic$0.19  
  Diluted$0.19  
Weighted average number of shares of Class A common stock used in per share calculation:
  Basic shares22.7  
  Diluted shares23.7  
(1) Excludes depreciation and amortization.
See accompanying notes to condensed consolidated financial statements.


5


SCIPLAY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in millions)

Three Months Ended
March 31,
20202019
Net income$31.1  $13.7  
Other comprehensive income:
Foreign currency translation (loss) gain, net of tax
(0.8) 1.9  
Total comprehensive income 30.3  15.6  
Less: comprehensive income attributable to the noncontrolling interest
26.1    
Comprehensive income attributable to SciPlay$4.2  $15.6  
See accompanying notes to condensed consolidated financial statements.


6


SCIPLAY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in millions, except par value)
As of
March 31, 2020December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents
$132.6  $110.6  
Accounts receivable, net
42.4  32.1  
Prepaid expenses and other current assets
3.3  4.3  
Total current assets
178.3  147.0  
Property and equipment, net
4.4  4.6  
Operating lease right-of-use assets
5.4  6.0  
Goodwill
120.7  120.7  
Intangible assets and software, net
16.5  17.0  
Deferred income taxes and other assets
87.7  89.3  
Total assets
$413.0  $384.6  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$16.3  $12.8  
Accrued liabilities
9.6  13.7  
Due to affiliate
2.0  2.7  
Total current liabilities
27.9  29.2  
Operating lease liabilities4.5  5.2  
Liabilities under TRA72.7  72.7  
Total liabilities
105.1  107.1  
Commitments and contingencies (see Note 8)
Stockholders’ equity:
Class A common stock, par value $0.001 per share - 625.0 shares authorized, 22.7 issued and outstanding as of March 31, 2020 and December 31, 2019
    
Class B common stock, par value $0.001 per share - 130.0 shares authorized, 103.5 issued and outstanding as of March 31, 2020 and December 31, 2019
0.1  0.1  
Additional paid-in capital
41.9  41.7  
Retained earnings
16.4  12.0  
Accumulated other comprehensive income
0.1  0.3  
Total SciPlay stockholders’ equity
58.5  54.1  
Noncontrolling interest
249.4  223.4  
Total stockholders’ equity
307.9  277.5  
Total liabilities and stockholders’ equity
$413.0  $384.6  
See accompanying notes to condensed consolidated financial statements.

7


SCIPLAY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY/ACCUMULATED NET PARENT INVESTMENT
(Unaudited, in millions)

Class A common stockClass B common stockAdditional paid-in capitalRetained earningsAccumulated other comprehensive income (loss)Noncontrolling interestTotal
SharesAmountSharesAmount
December 31, 201922.7  $  103.5  $0.1  $41.7  $12.0  $0.3  $223.4  $277.5  
Net income—  —  —  —  —  4.4  —  26.7  31.1  
Stock-based compensation—  —  —  —  0.2  —  —  (0.1) 0.1  
Currency translation—  —  —  —  —  —  (0.2) (0.6) (0.8) 
March 31, 202022.7  $  103.5  $0.1  $41.9  $16.4  $0.1  $249.4  $307.9  

Accumulated net parent investmentClass A common stockClass B common stockAdditional paid-in capitalRetained earningsAccumulated other comprehensive income (loss)Noncontrolling interestTotal
SharesAmountSharesAmount
December 31, 2018$140.8    $    $  $  $  $(2.2) $  $138.6  
Net income13.7  —  —  —  —  —  —  —  —  13.7  
Transactions with Parent and affiliates, net6.2  —  —  —  —  —  —  —  —  6.2  
Currency translation—  —  —  —  —  —  —  1.9  —  1.9  
March 31, 2019$160.7    $    $  $  $  $(0.3) $  $160.4  
See accompanying notes to condensed consolidated financial statements.


8


SCIPLAY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in millions)
Three Months Ended
March 31,
20202019
Net cash provided by operating activities$23.5  $8.5  
Cash flows from investing activities:
  Capital expenditures(1.2) (1.6) 
Net cash used in investing activities(1.2) (1.6) 
Cash flows from financing activities:
  Payments on license obligations  (1.0) 
  Payments of debt issuance costs  (1.6) 
Net cash used in financing activities  (2.6) 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(0.3) 0.2  
Increase in cash, cash equivalents and restricted cash22.0  4.5  
Cash, cash equivalents and restricted cash, beginning of period110.6  10.0  
Cash, cash equivalents and restricted cash, end of period$132.6  $14.5  
Supplemental cash flow information:
Cash paid for income taxes$  $0.4  
Cash paid for contingent consideration included in operating activities4.0    
Non-cash deferred offering costs  1.8  
See accompanying notes to condensed consolidated financial statements.

9


SCIPLAY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, amounts in USD, table amounts in millions, except per share amounts)

(1) Description of the Business and Summary of Significant Accounting Policies

Background and Nature of Operations

SciPlay Corporation was formed as a Nevada corporation on November 30, 2018 as a subsidiary of 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”). The IPO was completed on May 7, 2019. 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.

Basis of Presentation
The accompanying financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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.

In the opinion of management, we have made all adjustments necessary to present fairly our condensed consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in stockholders’ equity/accumulated net parent investment, and condensed consolidated statements of cash flows for the periods presented. Such adjustments are of a normal, recurring nature. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related Notes included in our 2019 Form 10-K. Interim results of operations are not necessarily indicative of results of operations to be expected for a full year.

Variable Interest Entities (“VIE”) and Consolidation

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 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.

Significant Accounting Policies
There have been no changes to our significant accounting policies described within the Notes of our 2019 Form 10-K.
New Accounting Guidance
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes, a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also
10


simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted. We early adopted this standard effective January 1, 2020. The adoption of this guidance did not have a material effect 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.
Revenue Recognition
We generate revenue from the sale of virtual coins, chips and bingo cards (collectively referred to as “coins, chips and cards”), which players can use to play casino-style slot games, table games and bingo games (i.e., spin in the case of slot games, bet in the case of table games and use 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, Amazon, with some of our games available on Microsoft and other web and mobile platforms. The games are primarily WMS, Bally, Barcrest™, and SHFL® branded games. In addition, we also offer third-party branded games and original content.
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:
Three Months Ended
March 31,
20202019
Mobile $101.2  $96.9  
Web 17.1  21.5  
Total revenue $118.3  $118.4  
The following table presents our revenue disaggregated based on the geographical location of our players:
Three Months Ended
March 31,
2020(1)
2019(2)
North America
$108.0  $108.4  
International
10.3  10.0  
Total revenue
$118.3  $118.4  
(1) For the three months ended March 31, 2020, North America revenue includes revenue derived from the U.S., Canada and Mexico. As a result of enhancements in the technologies and processes we use to obtain customer data, beginning with the first quarter of 2020, geographical location is now determined based on player location as reported by the platform provider.
(2) For the three months ended March 31, 2019, revenue is disaggregated between the U.S. and International. Revenues are assumed to be derived from the U.S. when data on geographical location was not available. We did not recast revenue for this period as it was deemed impractical due to lack of availability of similar data.

Contract Assets, Contract Liabilities and Other Disclosures
We receive customer payments based on the payment terms established in our contracts. Payment for the purchase of coins, chips and cards is made at purchase, and such payments are non-refundable in accordance with our standard terms of service. Such payments are initially recorded as a contract liability, and revenue is subsequently recognized as we satisfy our performance obligations.
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The following table summarizes our opening and closing balances in contract assets, contract liabilities and accounts receivable:
Accounts Receivable
Contract Assets(1)
Contract Liabilities(2)
Beginning of period balance
$32.1  $0.2  $0.6  
Balance as of March 31, 2020
42.4  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 each of the three months ended March 31, 2020 and 2019, we recognized $0.4 million of revenue that was included in the opening contract liability balance. Substantially all of our unsatisfied performance obligations relate to contracts with an original expected length of one year or less.

Concentration of Credit Risk
Our revenue and accounts receivable are generated via certain platform providers, which subject us to a concentration of credit risk. The following tables summarize the percentage of revenues and accounts receivable generated via our platform providers in excess of 10% of our total revenues and total accounts receivable:
Revenue
Concentration
Accounts
Receivable
Concentration
Three Months EndedMarch 31,December 31,
March 31, 2020March 31, 201920202019
Apple
46.0 %42.7 %60.9 %42.7 %
Google
36.2 %35.9 %26.5 %33.1 %
Facebook
14.5 %18.1 %10.1 %20.9 %

(2) Intangible Assets and Software, net
The following table presents certain information regarding our intangible assets and software:
Gross
Carrying
Amount
Accumulated
Amortization
Net
Balance
Balance as of March 31, 2020
Intellectual property$34.3  $(32.5) $1.8  
Customer relationships23.2  (18.3) 4.9  
Software17.9  (11.2) 6.7  
Licenses5.1  (2.6) 2.5  
Brand names3.8  (3.2) 0.6  
Total intangible assets and software$84.3  $(67.8) $16.5  
Balance as of December 31, 2019
Intellectual property$35.4  $(33.4) $2.0  
Customer relationships23.2  (18.0) 5.2  
Software16.8  (10.3) 6.5  
Licenses5.1  (2.4) 2.7  
Brand names3.9  (3.3) 0.6  
Total intangible assets and software$84.4  $(67.4) $17.0  

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The following reflects amortization expense related to intangible assets and software included within depreciation and amortization:
Three Months Ended
March 31,
20202019
Amortization expense
$1.7  $1.6  

(3) Leases
Our operating leases primarily consist of real estate leases such as offices. Our leases have remaining terms of 1 year 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:
March 31, 2020December 31, 2019
Operating lease right-of-use assets(1)
$5.4  $6.0  
   Accrued liabilities2.0  1.9  
   Operating lease liabilities4.5  5.2  
Total operating lease liabilities$6.5  $7.1  
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases for the three months ended March 31, 2020 and 2019$0.6  $0.5  
Weighted average remaining lease term, years4.04.2
Weighted average discount rate5.0 %5.0 %
(1) Right-of-use assets obtained in exchange for lease obligations for the three months ended March 31, 2020 were immaterial.

Lease liability maturities:
Operating Leases
Remainder of 2020$1.5  
20211.7  
20221.7  
20231.3  
20240.9  
Less: Imputed Interest(0.6) 
Total$6.5  
As of March 31, 2020, we did not have material additional operating leases that have not yet commenced.

(4) Income Taxes
We hold an economic interest of 18% in SciPlay Parent LLC subsequent to the IPO. The 82% economic interest that we do not own represents a noncontrolling interest for financial reporting purposes. SciPlay Parent LLC is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As such, SciPlay Parent LLC is not subject to income tax in most jurisdictions, and SciPlay Parent LLC’s members, of which we are one, are liable for income taxes based on their allocable share of SciPlay Parent LLC’s taxable income. The effective income tax rates for the three months ended March 31, 2020 and March 31, 2019 were 4.9% and 25.5%, respectively. The effective income tax rates were determined using an estimated annual effective tax rate after considering any discrete items for such periods.
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Our effective tax rate differs from the statutory rate of 21% 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. U.S. federal, state and local income tax provision of $4.7 million is included in the income tax expense under the Separate-return Method for the three months ended March 31, 2019.

The impact of COVID-19 pandemic disruptions on our income taxes was not material for the three months ended March 31, 2020. However, we continue to monitor tax implications resulting from new legislation passed in response to COVID-19 in the federal, state, and foreign jurisdictions where we have an income tax presence.

(5) Related Party Transactions
The following is the summary of expenses paid to Scientific Games and settled in cash:
Three Months Ended
March 31,
20202019Financial Statement Line Item
Royalties for Scientific Games IP$  $7.3  Cost of revenue
Royalties to Scientific Games for third-party IP1.7  2.6  Cost of revenue
Parent services1.4  1.4  General and administrative

The following is the summary of balances due to affiliates:
March 31, 2020December 31, 2019
Royalties under intercompany IP License Agreement$0.6  $0.5  
Parent services0.4  0.8  
Reimbursable expenses to Scientific Games and its subsidiaries1.0  1.4  
$2.0  $2.7  

(6) Stockholders’ Equity and Noncontrolling Interest          

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 SGC, the SG Members.

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Stock-Based Compensation

The following table summarizes stock-based compensation expense that is included in general and administrative expenses:
Three Months Ended
March 31,
20202019
Related to SciPlay equity awards$(0.1) $  
Related to the Parent’s equity awards0.2  2.7  
Total$0.1  $2.7  

As of March 31, 2020, we had $8.6 million in unrecognized stock-based compensation expense that is expected to be recognized over a weighted-average expected vesting period of 1.2 years, of which $4.6 million relates to performance-based restricted stock units. 

(7) Earnings per Share
The table below sets forth a calculation of basic earnings per share ("EPS") based on net income attributable to SciPlay for the three months ended March 31, 2020, divided by the basic weighted average number of Class A common stock for the three months ended March 31, 2020. Diluted EPS of Class A common stock is computed by dividing net income attributable to SciPlay by the weighted average number of shares of Class A common stock outstanding adjusted to give effect to all potentially dilutive securities, using the treasury stock method. No material number of restricted stock units was excluded from the calculation of diluted weighted-average common shares outstanding for the three months ended March 31, 2020.

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

The calculation of basic and diluted EPS for the three months ended March 31, 2019 have not been presented as SciPlay had no business transactions or activities prior to the completion of the IPO on May 7, 2019 and had no assets or liabilities during the three months ended March 31, 2019. The accompanying unaudited condensed consolidated financial statements for the three months ended March 31, 2019 have been derived from the consolidated financial statements and accounting records of SG Social Holding Company II, LLC, the predecessor of SciPlay for financial reporting purposes.

Three Months Ended
March 31, 2020
Numerator:
Net income$31.1  
Less: net income attributable to the noncontrolling interest26.7  
Net income attributable to SciPlay$4.4  
Denominator:
Weighted average shares of Class A common stock for basic EPS22.7  
Effect of dilutive securities:
Stock-based compensation grants1.0  
Weighted average shares of Class A common stock for diluted EPS23.7  
Net income attributable to SciPlay per share of Class A common stock - basic$0.19  
Net income attributable to SciPlay per share of Class A common stock - diluted$0.19  
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(8) Litigation
From time to time, we are subject to various claims, complaints and legal actions in the normal course of business, including the Washington State Matter described in Note 11 within our 2019 Form 10-K. There have been no material changes to these matters since our 2019 Form 10-K was filed with the SEC, except as described below. In addition, we may receive notifications alleging infringement of patent or other intellectual property rights.

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 initial public offering (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 initial public offering, which commenced 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, the defendants moved to dismiss the consolidated action.

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.

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, SGC, and SciPlay’s underwriters with respect to SciPlay’s initial public offering. The plaintiff seeks to represent a class of all persons who purchased Class A common stock of SciPlay in or traceable to SciPlay’s initial public offering 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. On February 27, 2020, the trial court entered a stipulated order that, among other things, stayed the lawsuit pending entry of an order resolving the motion to dismiss that is pending in the SciPlay IPO matter in New York state court.

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.

For additional information regarding our pending litigation matters, see Note 11 in our 2019 Form 10-K.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to enhance the reader’s understanding of our operations and current business environment and should be read in conjunction with the description of our business included under Part I, Item 1 “Condensed Consolidated Financial Statements” and Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and under Part I, Item 1 “Business”, and Item 1A “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2019 Form 10-K. The terms “we” and “our” as used herein refer to SciPlay and its consolidated subsidiaries, including SG Social Holding Company II, LLC for periods presented prior to May 7, 2019, which is SciPlay’s predecessor for financial reporting purposes.

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be read in
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conjunction with the disclosures and information contained and referenced under “Forward-Looking Statements” and “Risk Factors”, included in this Quarterly Report on Form 10-Q and “Risk Factors” included in our 2019 Form 10-K.

You can access our filings with the SEC through the SEC website at https://www.sec.gov or through our website, and we strongly encourage you to do so. We routinely post information that may be important to investors on our website at https://www.sciplay.com/investors/, and we use this website address as a means of disclosing material information to the public in a broad, non-exclusionary manner for purposes of the SEC’s Regulation Fair Disclosure (Reg FD). The contents of our website are not incorporated by reference in this Form 10-Q and shall not be deemed “filed” under the Securities Exchange Act of 1934, as amended.

BUSINESS OVERVIEW

On May 7, 2019 we completed the IPO as described in Note 1 to our 2019 Form 10-K.

We are a leading developer and publisher of digital games on mobile and web platforms. We currently offer seven core games, including social casino games Jackpot Party CasinoGold Fish CasinoHot Shot Casino and Quick Hit Slots, and casual games MONOPOLY SlotsBingo Showdown and 88 Fortunes Slots. Our social casino games typically include slots-style game play and occasionally include table games-style game play, while our casual games blend slots-style or bingo game play with adventure game features. All of our games are offered and played on multiple platforms, including Apple, Google, Facebook and Amazon, with some of our games available on Microsoft and other web and mobile platforms. In addition to our internally created game content, our content library includes recognizable, real-world slot and table games content from Scientific Games. This content allows players who like playing land-based slot machines to enjoy some of those same titles in our free-to-play games. We have access to Scientific Games’ library of more than 1,500 iconic casino titles, including titles and content from third-party licensed brands such as JAMES BONDMONOPOLYCIRQUE DU SOLEIL, FLINTSTONESCHEERS and THE GODFATHER.

We generate substantially all of our revenue from the sale of coins, chips and cards, which players of our games can use to play casino-style slot games and table games and bingo games. Players who install our games receive free coins, chips and cards upon the initial launch of the game and additional free coins, chips and cards at specific time intervals. Players may exhaust the coins, chips and cards that they receive for free and may choose to purchase additional coins, chips and cards in order to extend their time of game play. Once obtained, coins, chips and cards (either free or purchased) cannot be redeemed for cash nor exchanged for anything other than game play within our apps.

Recent Events

In March 2020, the World Health Organization declared the rapidly spreading COVID-19 outbreak a pandemic. In response to the COVID-19 pandemic, governments across the world are implementing measures to prevent its spread, including the temporary closure of all non-essential businesses and travel restrictions. Many of our current and potential players may have significantly more free time to play our games, however they may also experience sustained consumer unease and have lower discretionary income. Beginning late March, we have experienced increased player engagement as a result of the stay at home measures across U.S.

During the first quarter of 2020, we deployed significant updates across a number of our portfolio games, and we continue testing in certain international markets in order to position ourselves for international expansion. We expect to begin deployment of updates across the rest of the games starting in the third quarter of 2020.

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RESULTS OF OPERATIONS

Summary of Results of Operations

Three Months Ended
March 31,Variance
($ in millions)202020192019 vs. 2018
Revenue$118.3  $118.4  $(0.1) — %
Operating expenses86.1  98.4  (12.3) (13)%
Operating income32.2  20.0  12.2  61 %
Net income31.1  13.7  17.4  127 %
Net income attributable to SciPlay4.4  13.7  (9.3) (68)%
AEBITDA$34.8  $25.0  $9.8  39 %
Net income margin26.3 %11.6 %14.7 ppnm
AEBITDA margin29.4 %21.1 %8.3 ppnm
pp = percentage points.
nm = not meaningful.

Non-GAAP Financial Measures

Adjusted EBITDA, or AEBITDA, as used herein, is a non-GAAP financial measure that is presented as supplemental disclosure and is reconciled to net income attributable to SciPlay as the most directly comparable GAAP measure as set forth in the below table. We define AEBITDA to include net income attributable to SciPlay before: (1) net income attributable to noncontrolling interest; (2) interest expense; (3) income tax (benefit) expense; (4) depreciation and amortization; (5) restructuring and other, which includes charges or expenses attributable to: (a) employee severance; (b) management changes; (c) restructuring and integration; (d) M&A and other, which includes: (i) M&A transaction costs; (ii) purchase accounting adjustments; (iii) unusual items (including certain legal settlements) and (iv) other non-cash items; (e) contingent acquisition consideration and (f) cost-savings initiatives; (6) stock-based compensation; (7) loss (gain) on debt financing transactions; and (8) other expense (income) including foreign currency (gains) and losses. We also use AEBITDA margin, a non-GAAP measure, which we calculate as AEBITDA as a percentage of revenue. 

Our management uses AEBITDA and AEBITDA margin to, among other things: (i) monitor and evaluate the performance of our business operations; (ii) facilitate our management’s internal comparisons of our historical operating performance and (iii) analyze and evaluate financial and strategic planning decisions regarding future operating investments and operating budgets. In addition, our management uses AEBITDA and AEBITDA margin to facilitate management’s external comparisons of our results to the historical operating performance of other companies that may have different capital structures and debt levels.

Our management believes that AEBITDA and AEBITDA margin are useful as they provide investors with information regarding our financial condition and operating performance that is an integral part of our management’s reporting and planning processes. In particular, our management believes that AEBITDA is helpful because this non-GAAP financial measure eliminates the effects of restructuring, transaction, integration or other items that management believes have less bearing on our ongoing underlying operating performance. Management believes AEBITDA margin is useful as it provides investors with information regarding the underlying operating performance and margin generated by our business operations.

The following table reconciles Net income attributable to SciPlay to AEBITDA and AEBITDA margin:

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Three Months Ended
March 31,
($ in millions, except percentages)20202019
Net income attributable to SciPlay$4.4  $13.7  
Net income attributable to noncontrolling interest26.7  —  
Net income31.1  13.7  
Restructuring and other0.5  0.6  
Depreciation and amortization2.0  1.7  
Income tax expense1.6  4.7  
Stock-based compensation0.1  2.7  
Other (income) expense, net(0.5) 1.6  
AEBITDA$34.8  $25.0  
Revenue$118.3  $118.4  
Net income margin (Net income/Revenue)26.3 %11.6 %
AEBITDA margin (AEBITDA/Revenue)29.4 %21.1 %
Royalties for Scientific Games Corporation IP$—  $7.3  

Revenue, Key Performance Indicators and Other Metrics

Three Months Ended
March 31,Variance
($ in millions)202020192020 vs. 2019
Mobile$101.2  $96.9  $4.3  %
Web17.1  21.5  (4.4) (20)%
Total revenue$118.3  $118.4  $(0.1) — %

Revenue information by geography is summarized as follows:

Three Months Ended
March 31,Variance
($ in millions)
2020(1)
2019(2)
2020 vs. 2019
North America$108.0  $108.4  $(0.4) — %
International10.3  10.0  0.3  %
Total revenue $118.3  $118.4  $(0.1) — %
(1) For the three months ended March 31, 2020, North America revenue includes revenue derived from the U.S., Canada and Mexico. As a result of enhancements in the technologies and processes we use to obtain customer data, beginning with the first quarter of 2020, geographical location is now determined based on player location as reported by the platform provider.
(2) For the three months ended March 31, 2019, revenue is disaggregated between the U.S. and International. Revenues are assumed to be derived from the U.S. when data on geographical location was not available. We did not recast revenue for this period as it was deemed impractical due to lack of availability of similar data.
        
The following reflects our Key Performance Indicators and Other Metrics:

We manage our business by tracking several key performance indicators, each of which is referred to in our discussion of operating results. Our key performance indicators are impacted by several factors that could cause them to fluctuate on a quarterly basis, such as platform providers’ policies, restrictions, seasonality, user connectivity and addition of new content to certain portfolios of games. Future growth in players and engagement will depend on our ability to retain current players, attract new players, launch new games and features and expand into new markets and distribution platforms.

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For a description of the definitions of our key performance indicators and other metrics and their usefulness to our investors, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2019 Form 10-K.

(in millions, except ARPDAU, Average monthly revenue per payer, and percentages)Three Months Ended
March 31,Variance
202020192020 vs. 2019
Mobile Penetration85 %82 %3.0 ppnm
Average MAU7.5  8.4  (0.9) (10.7)%
Average DAU2.6  2.7  (0.1) (3.7)%
ARPDAU$0.49  $0.48  $0.01  2.1 %
Average MPUs0.5  0.5  —  — %
Average monthly revenue per payer$83.58  $76.51  $7.07  9.2 %
Payer conversion rate6.3 %6.1 %0.2 ppnm
pp = percentage points.
nm = not meaningful.

Mobile platform revenue increased primarily due to the ongoing popularity of Jackpot Party Casino and MONOPOLY Slots. Web platform revenue decreased due to a decline in player levels as a result of player migration to mobile platforms.

The increase in mobile penetration percentage primarily reflects a continued trend of players migrating from web to mobile platforms to play our games.

Average MAU and average DAU decreased due to turnover in users while paying users stayed consistent. Consequently, ARPDAU and average monthly revenue per payer increased due to decreased average MAU and average DAU base.

The increase in payer conversion rates was due to the growing popularity of our games and increased interaction with the games by our players as a result of the introduction of new content and features into our games.

Operating Expenses

Three Months Ended
March 31,VariancePercentage of Revenue
($ in millions)202020192020 vs. 2019202020192020 vs. 2019 Change
Select operating expenses:
Cost of revenue(1)
$37.9  $45.7  $(7.8) (17)%32.0 %38.6 %(6.6)pp
Sales and marketing(1)
28.2  34.3  (6.1) (18)%23.8 %29.0 %(5.2)pp
Research and development(1)
7.3  5.8  1.5  26 %6.2 %