UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
or
☒
ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Ontario
(Province or other jurisdiction
of incorporation or organization)
For the fiscal year ended December 31, 2017
Commission File Number 001-37403
The Stars Group Inc.
(Exact name of Registrant as specified in its charter)
7370
(Primary Standard Industrial
Classification Code Number)
200 Bay Street, South Tower, Suite 3205
Toronto, Ontario, Canada
M5J 2J3
+1 (437) 371-5742
98-0555397
(I.R.S. Employer
Identification Number)
(Address and telephone number of Registrant’s principal executive offices)
Stars Group Services USA Corporation
4000 Hollywood Blvd., Suite 360-N
Hollywood, Florida 33021
+1 (437) 371-5742
(Name, address (including zip code) and telephone number (including area code)
of agent for service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Common Shares, no par value
Name of each exchange on which registered
The NASDAQ Stock Market LLC
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
For annual reports, indicate by check mark the information filed with this Form:
☒ Annual information form
☒ Audited annual financial statements
Indicate the number of outstanding shares of each of the Registrant’s classes of capital or common stock as of the close of the period covered by this
annual report.
The Registrant had 147,947,874 Common Shares and 1,139,249 Class A Convertible Preferred Shares outstanding as at December 31, 2017.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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.
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted 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 and post such files).
Yes ☒ No ☐
Yes ☒ No ☐
Indicate by check mark whether the Registrant is an emerging growth company, as defined in Rule 12b-2 of the Exchange Act.
Emerging
Growth Company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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.
☐
† The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Cautionary Statement Regarding Forward-Looking Statements
Certain information and statements in this Annual Report on Form 40-F and the exhibits attached hereto (this “Annual Report”) of The Stars Group Inc. (the
“Registrant”) may constitute forward-looking information and statements (collectively, “forward-looking statements”) within the meaning of the Private
Securities Litigation Reform Act of 1995 and applicable securities laws. Forward-looking statements are subject to risks, uncertainties and contingencies that
could cause actual results to differ materially from those expressed or implied. Investors are cautioned not to put undue reliance on forward-looking
statements. Applicable risks and uncertainties include, but are not limited to, those identified under the heading “Risk Factors and Uncertainties” in the
Registrant’s Annual Information Form for the year ended December 31, 2017 (the “2017 AIF”) and “Risk Factors and Uncertainties”, “Limitations of Key
Metrics and Other Data” and “Key Metrics” in the Registrant’s Management’s Discussion & Analysis for the year ended December 31, 2017 (the “2017
MD&A”), attached as Exhibits 99.1 and 99.3 to this Annual Report, respectively, and in other filings that the Registrant has made and may make with
applicable securities authorities in the future. Additionally, the safe harbor provided in Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, applies to forward looking information provided pursuant to “Off Balance
Sheet Arrangements” and “Tabular Disclosure of Contractual Obligations” in this Annual Report. Please also see “Caution Regarding Forward-Looking
Statements” in each of the 2017 AIF and 2017 MD&A. Each forward-looking statement speaks only as of the date hereof, and The Stars Group undertakes no
obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by
applicable law.
Disclosure Controls and Procedures
The disclosure provided under the headings “Disclosure Controls and Procedures and Internal Control Over Financial Reporting—Disclosure Controls and
Procedures” and “—Limitations on Effectiveness of DC&P and ICFR” included in the 2017 MD&A is incorporated by reference herein.
Management’s Annual Report on Internal Control Over Financial Reporting
The disclosure provided under the headings “Disclosure Controls and Procedures and Internal Control Over Financial Reporting—Management’s Annual
Report on Internal Control Over Financial Reporting” and “—Limitations on Effectiveness of DC&P and ICFR” included in the 2017 MD&A is incorporated
by reference herein.
Attestation Report of the Registered Public Accounting Firm
The effectiveness of The Stars Group’s internal control over financial reporting has been audited by its independent external auditor, Deloitte LLP, London,
United Kingdom (“Deloitte”), the registered public accounting firm that also audited the Registrant’s audited consolidated financial statements for the year
ended December 31, 2017, attached as Exhibit 99.2 to this Annual Report (the “2017 Financial Statements”). Deloitte’s attestation report on The Stars
Group’s internal control over financial reporting as of December 31, 2017 is included in the 2017 Financial Statements and is incorporated by reference
herein.
Changes in Internal Control over Financial Reporting
The disclosure provided under the heading “Disclosure Controls and Procedures and Internal Control Over Financial Reporting—Changes to Internal Control
Over Financial Reporting” included in the 2017 MD&A is incorporated by reference herein.
Identification of the Audit Committee and Audit Committee Financial Expert
The disclosure regarding the Registrant’s audit committee and audit committee financial expert provided under the heading “Directors and Officers—Audit
Committee” included in the 2017 AIF is incorporated by reference herein.
Code of Ethics
The Registrant has adopted a “code of ethics” (as defined in paragraph (9) of General Instruction B to Form 40-F), known as its Code of Business Conduct
(the “Code”), that applies to all directors, officers and employees, including its principal executive officer, principal financial and accounting officer,
controller and persons performing similar functions, and has posted a copy of the same to its website at www.starsgroup.com. See also the 2017 AIF under the
heading “Directors and Officers—Ethical Business Conduct”.
To the extent the Registrant is required by paragraph (9) of General Instruction B to Form 40-F to disclose any amendments to or waivers of the Code, it may
do so by providing the applicable information on its website at www.starsgroup.com within five business days following the date of the amendment or
waiver, as permitted by the notes to paragraph (9) of General Instruction B to Form 40-F.
Principal Accountant Fees and Services
The disclosure regarding audit, audit-related, tax and all other fees billed to the Registrant in each of the last two fiscal years by the Registrant’s principal
accountant and certain audit committee pre-approval policies and procedures provided under the headings “Directors and Officers—External Auditor Service
Fees” and “Directors and Officers—Audit Committee—Pre-approval Policies and Procedures”, respectively, included in the 2017 AIF are incorporated by
reference herein.
Off Balance Sheet Arrangements
The disclosure provided under the heading “Off Balance Sheet Arrangements” included in the 2017 MD&A is incorporated by reference herein.
Tabular Disclosure of Contractual Obligations
The tabular and certain other disclosure regarding the Registrant’s contractual obligations as of December 31, 2017 provided under the heading “Liquidity
and Capital Resources—Contractual Obligations” included in the 2017 MD&A is incorporated by reference herein. For a discussion of the Registrant’s other
contractual obligations, see the 2017 MD&A.
Corporate Governance Practices
The Registrant believes that its corporate governance practices are consistent in all material respects with the applicable requirements of the corporate
governance guidelines established by the Canadian Securities Administrators, the applicable corporate governance rules of the Toronto Stock Exchange and
the NASDAQ Stock Market LLC (the “NASDAQ Rules”) and the applicable rules and regulations of the SEC. Disclosure of the NASDAQ Rules that the
Registrant does not follow and a brief statement of the home country practices it follows in lieu of such NASDAQ Rules, in each case as permitted
thereunder, are available on the Registrant’s website at www.starsgroup.com.
A. Undertaking
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
The Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the SEC staff, and to furnish
promptly, when requested to do so by the SEC staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which
the obligation to file an annual report on Form 40-F arises; or transactions in said securities.
B. Consent to Service of Process
A Form F-X signed by the Registrant and its agent for service of process was previously filed with the SEC on May 26, 2015, and amended on January 20,
2017 and August 11, 2017, in connection with the Registrant’s registration statement on Form 40-F with respect to its Common Shares.
Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused
this Annual Report to be signed on its behalf by the undersigned, thereto duly authorized.
Date: March 14, 2018
THE STARS GROUP INC.
SIGNATURES
/s/ Brian Kyle
By:
Name: Brian Kyle
Title:
Chief Financial Officer
Exhibit
Number
99.1
99.2
99.3
99.4
EXHIBIT INDEX
Description
Annual Information Form for the year ended December 31, 2017
Audited Consolidated Financial Statements for the year ended December 31, 2017
Management’s Discussion & Analysis for the year ended December 31, 2017
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002
99.5
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002
99.6
99.7
99.8
Certification of Chief Executive Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
Certification of Chief Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002
Consent of Deloitte LLP, London, United Kingdom
101.INS XBRL Instance Document
101.SCH XBRL Schema Document
101.CAL XBRL Calculation Linkbase Document
101.DEF XBRL Linkbase Document
101.LAB XBRL Label Linkbase Document
101.PRE XBRL Presentation Linkbase Document
Exhibit 99.1
ANNUAL INFORMATION FORM
FOR THE YEAR ENDED
DECEMBER 31, 2017
March 14, 2018
EXPLANATORY NOTES
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
TABLE OF CONTENTS
CORPORATE STRUCTURE
BUSINESS OF THE CORPORATION
GENERAL DEVELOPMENT OF THE BUSINESS
RISK FACTORS AND UNCERTAINTIES
DIVIDENDS
DESCRIPTION OF CAPITAL STRUCTURE
MARKET FOR SECURITIES
DIRECTORS AND OFFICERS
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
TRANSFER AGENT AND REGISTRAR
MATERIAL CONTRACTS
INTEREST OF EXPERTS
ADDITIONAL INFORMATION
SCHEDULE A – AUDIT COMMITTEE CHARTER
1
1
2
3
29
31
57
57
59
60
69
71
71
73
73
73
A-1
EXPLANATORY NOTES
Unless otherwise indicated, the information contained in this annual information form is as of December 31, 2017, and unless the context otherwise
requires, references to “The Stars Group”, the “Corporation”, “it”, “its” or similar expressions refer to The Stars Group Inc. and its consolidated subsidiaries.
This annual information form should be read in conjunction with the information contained in The Stars Group’s audited consolidated financial statements
and related notes for the year ended December 31, 2017 (the “2017 Annual Financial Statements”) and the Management’s Discussion and Analysis thereon
(the “2017 Annual MD&A”).
All references in this annual information form to “dollars”, “US$” and “$” are to U.S. dollars, references to “CDN$” are to Canadian dollars,
references to “€” are to Euros and references to “£” are to British pound sterling. The Corporation has certain proprietary rights to certain company names,
product names, trade names and trademarks used in this annual information form that are important to its business, including, without limitation, The Stars
Group, PokerStars and those brands listed under the heading “Business of the Corporation—Overview”. The Corporation has omitted the registered
trademark (®) and trademark (™) symbols and any other related symbols for such trademarks and all related trademarks, including those related to specific
products or services, when used in this annual information form. All other names and trademarks are the property of their respective owners.
Market data and certain industry data and forecasts included in this annual information form were obtained or derived from internal and market
research, publicly available information, reports of governmental agencies and industry publications and surveys. The Stars Group has relied upon industry
publications as its primary sources for third-party industry data and forecasts. Industry surveys, publications and forecasts generally state that the information
contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. The
Stars Group has not independently verified any of the data from third-party sources, nor has The Stars Group ascertained the underlying economic
assumptions relied upon therein. Similarly, industry forecasts and market research, which The Stars Group believes to be reliable based upon management’s
knowledge of the industry, have not been independently verified. By their nature, forecasts are particularly subject to change or inaccuracies, especially over
long periods of time. In addition, The Stars Group does not know what assumptions regarding general economic growth were used in preparing the third-party
forecasts that are or may be cited in this annual information form. While The Stars Group is not aware of any inaccuracies in The Stars Group’s industry data
presented herein, The Stars Group’s estimates that are based on the same involve risks and uncertainties and are subject to change based on various factors,
including those discussed under “Risk Factors and Uncertainties” and elsewhere in this annual information form.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This annual information form contains certain forward-looking information and statements (collectively, “forward-looking statements”) within the
meaning of the Private Securities Litigation Reform Act of 1995 and applicable securities laws, including, without limitation, statements relating to certain
expectations, projections, growth plans, new or improved product introductions, market expansion efforts, and other information related to The Stars Group’s
business strategy and future plans. Forward-looking statements can, but may not always, be identified by the use of words such as “seek”, “anticipate”,
“plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “would”, “should”,
“believe”, “objective”, “ongoing”, “imply”, “assumes”, “goal”, “likely” and similar references to future periods or the negatives of these words and
expressions and by the fact that these statements do not relate strictly to historical or current matters. These forward-looking statements are based on
management’s current expectations and are subject to a number of risks, uncertainties, and assumptions, including market and economic conditions, business
prospects or opportunities, future plans and strategies, projections, technological developments, anticipated events and trends and regulatory changes that
affect the Corporation, its subsidiaries and their respective customers and industries. Although the Corporation and management believe that the expectations
reflected in such forward-looking statements are reasonable and are based on reasonable assumptions and estimates as of the date hereof, there can be no
assurance that these assumptions or estimates are accurate or that any of these expectations will prove accurate. Forward-looking statements are inherently
subject to significant business, economic and competitive risks, uncertainties and contingencies that could cause actual events to differ materially from those
expressed or implied in such statements.
Actual results and developments are likely to differ, and may differ materially, from those anticipated by The Stars Group and expressed or implied by
the forward-looking statements contained in this annual information form. Such statements are based on a number of assumptions and risks which may prove
to be incorrect, including, without limitation, assumptions about:
•
•
the ability of the Corporation to secure, maintain and comply with all required licenses, permits, approvals, and certifications to offer and
market its products and services in the jurisdictions where the Corporation is currently doing business or intends to do business;
the anticipated regulation or prohibition of online gaming or activities related to or necessary for the operation and offering of online gaming in
various jurisdictions;
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•
•
•
•
•
•
•
•
•
•
•
•
•
the anticipated outcome of litigation involving the Corporation;
the overall business and economic conditions;
the potential financial opportunity of the Corporation’s addressable markets;
the potential financial opportunity of individual contracts signed by the Corporation with third parties;
the competitive environment;
the protection of the Corporation’s current and future intellectual property rights;
the ability of the Corporation to recruit and retain the services of its key technical, sales, marketing and management personnel;
the ability of the Corporation to develop commercially viable products and services as a result of its research and development (“R&D”)
activities;
the expected taxes to be imposed on the Corporation’s revenue streams, including but not limited to, gaming duty and value-added taxes
(“VAT”) on gaming revenue;
the ability of the Corporation to obtain additional financing on reasonable terms or at all;
the ability of the Corporation to integrate acquisitions and generate synergies;
the risks associated with advancements in technology, including artificial intelligence, and the risks associated with technology infrastructure,
cyber security and cyber attacks; and
the impact of new laws and regulations in Canada, the United States or any other jurisdiction where the Corporation is currently doing business
or intends to do business, particularly those related to online gaming or that could impact the ability to provide online gaming products and
services.
There can be no assurance that forward-looking statements will prove to be accurate as many factors could cause the Corporation’s actual results, level
of activity, performance or achievements or future events or developments to differ materially from those expressly or impliedly expected or estimated in such
statements, including, without limitation, the factors discussed under “Risk Factors and Uncertainties”. Shareholders and investors should not place undue
reliance on forward-looking statements as the plans, intentions or expectations upon which they are based might not occur. Although the Corporation cautions
that the foregoing list of risk factors, as well as those risk factors presented under the heading “Risk Factors and Uncertainties” and elsewhere in this annual
information form and in the 2017 Annual MD&A, including under the headings “Caution Regarding Forward-Looking Statements”, “Limitations of Key
Metrics and Other Data” and “Risk Factors and Uncertainties” therein, are not exhaustive, shareholders and investors should carefully consider them and the
uncertainties they represent and the risks they entail. The forward-looking statements contained in this annual information form are expressly qualified by this
cautionary statement. Unless otherwise indicated by the Corporation, forward-looking statements in this annual information form describe The Stars Group’s
expectations as of March 14, 2018 and, accordingly, are subject to change after such date. The Corporation does not undertake to update or revise any
forward-looking statements for any reason, except as required by applicable securities laws.
CORPORATE STRUCTURE
Name, Address and Jurisdiction of Incorporation
The Stars Group Inc. was originally incorporated under Part IA of the Companies Act (Québec) on January 30, 2004 under the name
9138‑5666 Québec Inc., and following a continuance under the Business Corporations Act (Ontario) (the “OBCA”) and name change from Amaya Inc. to The
Stars Group Inc. effective August 1, 2017, is now a corporation governed by the OBCA. Since its incorporation, the Corporation has amended its articles on
numerous occasions. The Corporation first amended its articles on May 14, 2007 to, among other things: (i) change its name to Gametronix Systems Inc.; and
(ii) subdivide its Class A shares. On November 2, 2007, the Corporation amended its articles to change its name to “Amaya Gaming Group Inc.” On May 11,
2010, the Corporation amended its articles to, among other things: (i) create an unlimited number of common shares (the “Common Shares”) and an unlimited
number of preferred shares; (ii) re-designate Class A shares as Common Shares on the basis of 1.7756 Common Shares for each Class A share;
(iii) re‑designate Class G shares as Common Shares on the basis of 100 Common Shares for each Class G share; and (iv) eliminate all classes of shares except
for Common Shares. The Corporation further amended its articles on each of July 30, 2014 and November 28, 2014 in connection with the Stars Interactive
Group Acquisition (as defined below) to, among other things: (i) replace the then current class of authorized preferred shares with a new class of non-voting
convertible preferred shares, called Class A Convertible Preferred Shares (the “Preferred Shares”); (ii) change the Corporation’s name to “Amaya Inc.”; and
(iii) add certain provisions affecting the Common Shares to facilitate the Corporation’s compliance with applicable gaming regulations. On
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August 1, 2017, the Corporation amended its articles through its current articles of continuance to, among other things: (i) change the Corporation’s name to
“The Stars Group Inc.”; and (ii) continue the Corporation as a corporation governed by the OBCA.
The Corporation’s head and registered office address is 200 Bay Street, South Tower, Suite 3205, Toronto, Ontario M5J 2J3, Canada, and the
Corporation’s telephone number is +1 (437) 371-5742. The Corporation’s website address is www.starsgroup.com. The information contained on, or that can
be accessed through, the Corporation’s website is neither part of nor incorporated by reference into this annual information form. The Corporation has
included its website address in this annual information form solely as an inactive textual reference.
Intercorporate Relationships
The activities of The Stars Group are conducted either directly or through its subsidiaries. The table below lists the principal subsidiaries of The Stars
Group as at December 31, 2017, as well as their jurisdiction of organization. Each of the principal subsidiaries is wholly owned, directly or indirectly, by The
Stars Group.
Name
Stars Group Holdings B.V.
Rational Entertainment Enterprises Limited
Rational Gaming Europe Limited
REEL Italy Limited
REEL Spain Plc
Jurisdiction Where Organized
Netherlands
Isle of Man
Malta
Malta
Malta
The Stars Group has other subsidiaries, but the assets and revenues of such subsidiaries individually did not exceed 10%, and in the aggregate did not
exceed 20%, of The Stars Group’s consolidated assets or consolidated revenues as at and for the year ended December 31, 2017.
BUSINESS OF THE CORPORATION
Overview
The Stars Group is a leading provider of technology-based products and services in the global gaming and interactive entertainment industries. The
Stars Group’s gaming business is its primary business and source of revenue and currently consists of the operations of Stars Interactive Holdings (IOM)
Limited and its subsidiaries and affiliates (collectively, “Stars Interactive Group”), which it acquired in August 2014 (the “Stars Interactive Group
Acquisition”), and CrownBet Holdings Pty Limited and its subsidiaries and affiliates (“CrownBet”), in which it acquired a majority equity interest in
February 2018.
Through its Stars Interactive Group division, which is based in the Isle of Man and operates globally, and CrownBet, which operates and is based in
Australia, The Stars Group owns and operates gaming and related interactive entertainment businesses, such as online (including desktop and mobile) real-
money poker, casino and sports betting (also known as sportsbook) and play-money poker and casino. The Corporation offers these products and services
under several ultimately owned brands, including, among others, PokerStars, PokerStars Casino, BetStars, Full Tilt, and the PokerStars Players No Limit
Hold’em Championship, European Poker Tour, PokerStars Caribbean Adventure, Latin American Poker Tour, Asia Pacific Poker Tour, PokerStars Festival,
and PokerStars MEGASTACK live poker tour and event brands. These brands together have millions of registered customers globally and collectively form
the largest poker business in the world, comprising online poker games and tournaments, sponsored live poker competitions, marketing arrangements for
branded poker rooms in popular casinos in major cities around the world, and poker programming and content created for television and online audiences.
The Stars Group currently estimates that PokerStars holds a significant majority of the market share of real-money poker player liquidity, or the volume of
real-money online poker players, in regions where it offers real-money online poker and is among the leaders in play-money online poker player liquidity.
The Stars Group also estimates that its combined online casino, including PokerStars Casino, is currently among the world’s largest and fastest growing and
currently has one of the largest active player bases among its competitors. The Stars Group also has an emerging sportsbook, BetStars, that is currently
primarily focused on regulated jurisdictions within the European Union and a majority equity interest in CrownBet, which currently operates in the regulated
Australian online sports betting market.
Online Poker
The Stars Group offers online poker primarily through its PokerStars and Full Tilt brands, including through its desktop client interface, and online
and mobile offerings. While the brands are distinct, all poker customers currently play on the same PokerStars platform, improving liquidity and allowing the
Corporation to focus R&D and operational resources on a single platform. Descriptions of these brands and their respective offerings are provided below.
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PokerStars
PokerStars, which launched in 2001, is the world’s largest online poker site with an estimated significant majority of the market share of real-money
online poker player liquidity in regions where it offers real-money online poker. PokerStars and its related brands (including Full Tilt) have millions of
registered customers globally, supported in 16 different languages. In online poker, PokerStars provides desktop (including through its downloadable client
interface), online and mobile offerings to its customers. Among PokerStars’ current real-money poker offerings are ring (or cash) games, including traditional
games and fast-fold variants, such as Zoom, and tournament-style games, including scheduled multi-table game variants and sit and go variants (which are
tournaments that do not have pre-assigned start times but rather begin when all the seats are filled), such as Spin & Go (which is a fast-paced sit and go with
variable prize pools that can be multiples of the applicable buy-in). PokerStars’ poker product offerings are also currently varied among buy-in and limit
amounts and types, as well as among numerous poker game variants (e.g., Texas Hold-‘Em, Omaha, Stud, Draw and mixed games). The Stars Group believes
that PokerStars is home to some of the largest online poker events and the biggest weekly tournaments, both in terms of dollar amount and number of players,
and has greater player liquidity and offers more daily tournaments than any other online poker site. More than 182 billion hands of poker have been dealt on
PokerStars since inception, which is more than any other online poker site. PokerStars has set many records, including the largest number of players in an
online poker tournament (more than 253,000), the largest prize pool awarded for a series of online tournaments (approximately $93.8 million), and the largest
ever single online tournament prize (approximately $12.4 million). PokerStars’ mobile applications are currently among the most popular real-money poker
applications on the iOS and Android platforms according to App Annie and Apple’s iTunes App Store and based on the number of downloads and overall
customer ratings.
PokerStars also offers play-money and social poker through its desktop client and/or mobile applications, including through PokerStars.net, and its
PokerStars Play, Solitaire Poker by PokerStars, Jackpot Poker by PokerStars and Casino Rush by PokerStars games, which are available on various online,
mobile, social and television platforms and applications, such as Facebook, Apple’s iOS and Apple TV, Google’s Android and Amazon’s Kindle. Play-money
and social poker involve playing poker games for play-money, or virtual currency, through free websites, social networks, or other mobile or television
applications. Such “free-to-play” products are designed to create social interaction, engagement and competition, provide PokerStars with an additional
customer acquisition channel, and globally promote the game of poker, and are monetized through advertising and the sale of play-money chips (although
cash prizes are not awarded).
The Stars Group’s product development team continuously analyzes the data generated by its customers’ game play and social interactions, as well as
customer feedback, to guide the creation of new content, features, games and game variants, and to enhance its platforms. For example, following the
launches of Rush in 2010, Zoom in 2012, Spin & Go in 2014 and Knockout Poker in 2016, The Stars Group continues to focus on developing new and
innovative poker products and variants to attract new audiences (including those who may not have previously considered playing real-money poker games,
such as play-money or social players and the video gaming community), reactivate inactive players with exciting new games, and continuously engage and
retain existing active customers. In 2017, PokerStars announced the beta launch of its PokerStars Power Up product, which is an innovative new variant of
online poker that combines traditional poker with modern video games through the ability of the player to influence hands and change game play in a variety
of ways.
The Stars Group believes it has a premier, scalable platform that diversifies its products and services both geographically and across verticals and as
such, continuously works to enhance this proprietary platform. The Corporation has invested significantly in its technology infrastructure since inception to
provide a positive, best-in-class experience for its customers, not only from a gameplay perspective, but most importantly, with respect to security and
integrity across its product and service offerings. The Stars Group dedicates nearly all of its R&D investments to its online gaming business, which seeks to
provide broad market applications for products and services derived from its technology base, and expects to continue investing significantly in R&D in an
effort to constantly improve customer experience and engagement. To support its strong reputation for security and integrity, The Stars Group employs what it
believes to be industry‑leading practices and systems with respect to various aspects of its technology infrastructure, including, but not limited to, information
and payment security, game integrity, customer fund protection, marketing and promotion, customer support, responsible gaming, and loyalty programs,
rebates and rewards (i.e., incentives).
The Stars Group also monitors and assesses its products and services, including through advanced business intelligence analytics regarding customer
engagement and behavior, to continuously improve the experience for all of its customers and to ensure a safe, competitive and enjoyable environment. This
includes implementing policies and controls over the use of abusive technological tools and software, assessing pricing and incentives, and introducing
improvements to product ecosystems. In particular, The Stars Group has implemented, and continues to implement, policies and controls to significantly
reduce or eliminate the use of certain sophisticated technology that may provide an artificial competitive advantage for certain customers over others. It has
also made, and may continue to make, changes to its pricing and incentives to ensure that they align with its objectives to reward customers for loyalty and
behavior that is positive to the overall customer experience and the particular product’s ecosystem. For example, since the beginning of 2016, The Stars
Group has introduced certain improvements in the poker ecosystem to benefit and attract high-value,
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net-depositing customers (primarily recreational players) and reduce incentives for high-volume, net-withdrawing customers, and adjust the pricing on poker
games and tournaments (also known as rake and tournament fees) on certain offerings (which resulted in an effective increase in pricing). Most recently, the
Corporation launched the Stars Rewards program in July 2017, which is an integrated cross vertical loyalty program focused on improving customer
engagement, retention and the player experience. The Stars Rewards program seeks to offer an exciting, personalized gaming experience that rewards players
for their overall gameplay across poker, casino and sportsbook, in each case where available. Stars Rewards gives players randomized prizes based on a
number of factors, including the time passed since the player made his or her first real-money deposit, volume of play, player impact on the overall
ecosystem, such as whether the player is a net-withdrawing versus net-depositing player, and product and game selection.
The Stars Group anticipates that these and future planned improvements, despite an expected overall decrease in volume of gameplay and total deposit
balances held by high-volume, net-withdrawing players, will create a more attractive environment and experience for recreational players, allowing them to
play longer on its platforms and engage in its various product offerings. The Stars Group believes these initiatives have led and may continue to lead to an
increase in net deposits (as defined in the 2017 Annual MD&A). The Stars Group has been, among other things, reinvesting resulting savings and funds from
the poker ecosystem improvements into marketing, increased incentives for certain customers, bonuses and promotions, new poker products and services,
R&D, and to help offset costs in the business, including gaming duties and other costs related to promoting the regulation of online gaming in various
jurisdictions.
See also “Business of the Corporation—Business Strategy of the Corporation” and “Business of the Corporation—Technology Infrastructure and
Research and Development”.
Full Tilt
Full Tilt, which launched in 2004, quickly became a popular online poker site by delivering what the Corporation believes was innovative and realistic
online poker game play, which evolved from and was based on input from some of the world’s leading poker players. Prior to its migration onto the
PokerStars platform in May 2016, Full Tilt served a global customer base of more than 23.9 million registered customers and had dealt more than 36.5 billion
hands of poker on its proprietary software. Similar to PokerStars, under the Full Tilt brand customers can play both ring games, including traditional games
and its fast-fold variants, such as Rush, and tournament-style games, including scheduled multi-table games and sit and go variants, such as Jackpot Sit &
Go.
Online Casino and Sportsbook
In addition to pursuing growth opportunities in poker in existing and new markets, including through the innovation of new product features and
enhancements, geographic expansion, improvements to the poker ecosystem, and increased marketing campaigns in 2018, The Stars Group believes there are
potentially significant opportunities for growth and diversification of revenues in the online casino and sportsbook verticals. The Stars Group believes that
such potential opportunities include the ability to leverage its brand and product recognition (particularly poker) to acquire new customers, including
recreational customers, and capitalize on network effects and cross-selling these new verticals to its existing and new customer base. The Stars Group
continues to improve its online casino and sportsbook product offerings, including through mobile applications and other enhancements, expanding its game
and sports portfolios and geographic reach, and launching external marketing campaigns. In addition to online casino and sportsbook, The Stars Group
currently intends to expand upon and explore other growth opportunities, including, without limitation, expanding upon its current social gaming offering,
and pursuing other interactive entertainment opportunities.
Casino
In January 2014, Full Tilt expanded its game portfolio by initially offering a variety of play-money table and casino games on its global online sites,
including a range of single- and multi-player variations of blackjack and roulette, online slots and live dealer games. In November 2014, The Stars Group
completed the introduction of play- and real-money casino games under the PokerStars brand to players in eligible markets, beginning with casino table
games, single- and multi-player blackjack and roulette through the PokerStars desktop client interface. Throughout 2015, The Stars Group expanded its
PokerStars online casino game offerings in certain markets to include live dealer games and slot machines as well as offering a limited selection of slot
machines on its mobile applications, and in 2016, The Stars Group introduced the PokerStars Casino brand while adding a standalone mobile application for
the brand, a “Vegas” tab, which provides access to additional slots, Millionaire’s Island, the Corporation’s first in-house developed progressive jackpot slot
game, and additional tier-one slot games. In 2017, The Stars Group launched Stars Mega Spin, its second in-house developed progressive jackpot slot game
with a $1 million jackpot guarantee, and just over 170 new slot games from industry-leading game studios.
Since the introduction of online casino, The Stars Group has focused on improving its casino offerings, including through the integration of more
games across platforms and expanding their availability into new geographies, and on cross-selling its casino offerings to its existing online poker customer
base. However, in addition to continued cross-sell efforts, the Corporation continued
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measured external marketing efforts for its online casino, which it began in late-2016, to attract new customers and retain existing customers and expects to
continue to do so throughout 2018.
While the Corporation continues to improve its product offerings, including by enhancing its mobile offering and expanding both its game portfolio
and, to a lesser extent, its geographic reach, it estimates that its combined online casino, including PokerStars Casino, is currently among the world’s largest
and fastest growing and currently has one of the largest active player bases among its competitors. Currently, approximately three quarters of The Stars
Group’s aggregate real-money active unique poker customers are located in jurisdictions where its online casino offerings are available (primarily in Europe).
To expand The Stars Group’s online casino offerings, it currently anticipates focusing on integrating additional casino games, including top performing slots
and additional in-house developed games, expanding into certain additional jurisdictions, adding to its portfolio of unique and bespoke promotion
tools, improving its Stars Rewards cross-vertical loyalty program and its VIP treatment program and the overall customer experience, enhancing its mobile
applications, and continuing its cross-sell efforts along with measured and targeted external marketing campaigns.
The Corporation also offers play-money and social casino through its desktop client and mobile applications, including through PokerStars, Jackpot
Poker by PokerStars and Casino Rush by PokerStars, which are available on various online, mobile, social and television platforms and applications, such as
Facebook, Apple’s iOS and Apple TV, Google’s Android and Amazon’s Kindle. Play-money and social casino involve playing casino games for virtual
currency through free websites, social networks, or other mobile or television applications. Such “free-to-play” products are designed to create social
interaction, engagement and competition, provide the Corporation with an additional customer acquisition channel and are monetized through advertising and
the sale of play-money chips (although cash prizes are not awarded).
Sportsbook
Real‑money online sportsbook involves online wagering on certain sporting and non-sporting events using real-money. The Stars Group initially
launched limited sports betting during 2015 and later announced the introduction of its BetStars brand in December 2015, under which it currently offers
sports betting products and services that are currently primarily focused on regulated jurisdictions within the European Union. Similar to real-money online
casino, The Stars Group believes that real-money online sportsbook may attract new customers, primarily by cross-selling PokerStars customers to the
BetStars brand, as well as acquiring new customers directly to the BetStars brand through external marketing.
Currently, almost two thirds of The Stars Group’s aggregate real-money active unique poker customers are located in jurisdictions where its online
sports betting offerings are available (primarily in the European Union) through both online domains and dedicated iOS and Android mobile applications. To
expand its offering in the future, BetStars intends to introduce innovative new betting products on the platform to distinguish the brand from competitors,
such as the Spin & Bet product introduced in January 2016, which provides customers with the opportunity to potentially enhance their odds and potential
payout, and expand into certain additional jurisdictions. In 2017, BetStars announced the launch of its new mobile betting application across certain
European Union markets, which was designed to enhance the overall user experience. The Stars Group intends to continue focusing on increasing its cross-
sell to poker players and developing sportsbook as a strong secondary customer acquisition channel to poker by, among other things, improving the
localization of its offering in certain European markets, improving the user experience, closing product gaps, enhancing its mobile applications, increasing
marketing initiatives and utilizing unique promotional programs.
BetStars offers a range of betting options across dozens of sports, including football, tennis, basketball and horseracing, as well as specialty offerings
such as eSports and poker. The brand also features a range of in-play betting options and exclusive offers and promotions.
The Corporation intends to leverage third-party services for certain features of its sports betting offering while it continues to control the payments,
customer service, marketing and other key differentiating factors of the business.
In addition to BetStars, the Corporation acquired a 62% equity interest in CrownBet from Crown Resorts Limited (ASX: CWN) in February 2018. On
March 6, 2018, the Corporation also entered into agreements to increase its equity interest in CrownBet from 62% to 80% and for CrownBet to acquire
William Hill Australia Holdings Pty Ltd. (“William Hill Australia”), an Australian-based online sportsbook. See also “Business of the Corporation—Business
Strategy of the Corporation” and the 2017 Annual Financial Statements and 2017 Annual MD&A.
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Business Strategy of the Corporation
The Stars Group focuses on the creation of long-term shareholder value by building upon its existing strengths and expanding and strengthening its
portfolio of products and services that it expects will deliver sustainable, profitable long-term growth. To do this, The Stars Group seeks certain ongoing,
principal strategic initiatives, including:
•
•
•
Strengthening and Expanding its Products and Services and Creating the Best Customer Experience: The Stars Group currently intends
to expand its current online gaming offerings through, among other means, the continued rollout and introduction of new and innovative poker
offerings and marketing campaigns, continued improvements in the poker ecosystem to benefit and attract high-value, net-depositing
customers (primarily recreational players), continued improvements to its customer loyalty program, Stars Rewards, the continued development
and expansion of its online sports betting and casino products and services, and increased marketing for its BetStars brand to facilitate customer
acquisition through a secondary channel. The Stars Group’s primary focus will continue to be on its core poker offerings, which are currently its
primary customer acquisition channels and in which the Corporation believes it currently has a competitive advantage. However, through the
continued expansion of its sports betting and casino offerings, The Stars Group expects to cross-sell to existing customers, attract new
customers, and keep customer leisure time and spending within The Stars Group’s various products and services, all while implementing a
consistent brand strategy across all three verticals. In addition, The Stars Group currently intends to selectively expand upon its current social
gaming offerings and pursue other interactive entertainment opportunities. The Stars Group seeks to become a global market leader across its
online gaming verticals through not only its comprehensive and innovative product offerings, but also its focus on creating the best customer
experience in the industry, by concentrating on customer enjoyment, engagement and service as well as its dedication to responsible gaming,
security, game integrity and transparency. Moreover, The Stars Group seeks to develop its products and services and the intellectual property
underlying them by, among other things, (i) developing product enhancements and improvements, including with respect to the security of its
technology and customer information, as well as new content and features to enhance the overall customer experience, (ii) expanding the
flexibility of its product offerings and technology infrastructure to allow for customization and integration to address new markets and
jurisdictional demands, including new niche markets, (iii) improving its product and service offerings and underlying software and technology
platform to adapt to the rapidly changing nature of the gaming and interactive entertainment industries and to ensure customers are engaged in a
safe, competitive and enjoyable environment, and that it is at the forefront of responsible and sustainable gaming, (iv) developing and
reinforcing its machine learning and data analytics capabilities to support the foregoing and future growth, and (v) protecting its intellectual
property in jurisdictions where it determines there are strategic or other benefits for doing so.
Expanding its Geographical Reach and Promoting Regulation: The Corporation currently intends to expand its geographical reach by
offering its products and services in certain additional jurisdictions, including through the promotion of the regulation of online gaming in new
and emerging markets and potential partnerships or arrangements with existing operators or other third parties, including, without limitation,
states within the United States, and certain countries within Asia, Latin America and Eastern Europe. The Stars Group currently expects that
these and other jurisdictions may become significant growth opportunities. With respect to the United States, certain subsidiaries of the
Corporation hold a transactional waiver authorizing them to conduct online gaming in New Jersey using the PokerStars and Full Tilt brands,
and The Stars Group intends to seek approval to offer its online gaming products in certain other U.S. states if and when they regulate and
establish an applicable licensing regime, including Pennsylvania, which passed legislation in late-2017 permitting certain online gaming within
that commonwealth. The Corporation’s current strategy in Asia, including India, Latin and South America and Eastern Europe primarily seeks
to promote brand awareness and market development through various gaming, non-gaming and land-based efforts, including, as applicable,
establishing relationships with existing operators, the PokerStars sponsorship of brand ambassadors, and sponsored live events, the PokerStars
LIVE branded poker rooms and the Corporation’s play-money offerings. The Stars Group also promotes shared liquidity for online poker in and
across jurisdictions where it believes there would be a benefit not only to its business, but also to its customers, those jurisdictions and the
overall online gaming industry. For example, in January 2018, the Corporation became the first online operator approved to offer a shared
player pool between the locally licensed markets of France and Spain, and it intends to seek approval to enter into additional shared player pool
markets in countries such as Italy and Portugal if and when they become available. The Stars Group’s overall strategy to expand its
geographical reach includes, but is not limited to, (i) building relationships with governments and private operators, and (ii) working with
regulators and government officials to implement regulations beneficial to its customers, the citizens of the regulating jurisdiction and the
industry as a whole. See also, “Business of the Corporation—Regulatory Environment—Regulatory Strategy” below.
Pursuing Operational Efficiencies: Beginning in 2016, the Corporation launched its operational excellence program to review its expense
structure and identify areas for improvement that it believes will enhance shareholder value. So far, this program has resulted in rationalizing
the Corporation’s operations, including consolidating and moving certain office locations. For example, during 2016 and 2017, certain office
locations and departments, including in London, Sydney and
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Dublin, underwent various adjustments and restructurings to reduce costs and increase efficiency and focus. In early 2018, the Corporation
opened an office in Bulgaria, which is generally a lower cost jurisdiction to place qualified personnel, and intends to relocate certain business
operations functions there beginning in 2018. The Corporation expects to continue to focus on further optimizing its operations to potentially
achieve a higher level of efficiency, effectiveness and quality throughout the organization, including capital investments to further automate and
improve the effectiveness of certain business processes. The Corporation will also continuously assess and monitor the overall impact of these
initiatives on its operations and performance throughout the year and expects to reinvest resulting savings into, among other things, R&D, and
to help offset costs in the business, including gaming duties and other costs related to promoting the regulation of online gaming in various
jurisdictions.
•
Pursuing Strategic Transactions: In August 2014, The Stars Group completed the Stars Interactive Group Acquisition, which along with
several previously announced divestitures of legacy businesses during 2015 and the divestiture of its non-core gaming investments in late 2017,
transformed the Corporation into the leading online gaming company it is today. The Stars Group may pursue additional strategic acquisitions,
partnerships or joint ventures to leverage its large customer base and further its strategy of long-term growth and to enhance shareholder value
if appropriate opportunities arise, such as the Corporation’s previously disclosed acquisition of a 62% equity interest in CrownBet in February
2018 and its agreement to acquire an additional 18% equity interest in CrownBet and for CrownBet to acquire William Hill Australia. Pending
any further strategic transactions, The Stars Group intends to continue its strategy of maximizing long-term shareholder value and pursuing
sustainable, profitable growth, particularly through the growth and development of its core product offerings, online poker, casino and
sportsbook.
Marketing Strategy and Revenue Model
Marketing Strategy
The Stars Group markets its brands, products and services through various platforms and channels, including, without limitation, various media
outlets, sponsored live poker tours and branded poker rooms (which also generate nominal revenue), and endorsement agreements. Below is a general
description of such platforms and channels. Although The Stars Group’s primary focus has been and currently is on online poker, it intends to begin
increasing its focus and attention on marketing efforts that highlight its online casino and sportsbook offerings.
Media
The Stars Group has a multimedia approach that focuses on acquiring and retaining customers both online and offline for its brands, products and
services. This multimedia approach includes, among other things, television programming and television advertisement campaigns, affiliate partnerships,
digital advertisements and online campaigns, paid search optimization, various social media campaigns, including live-streaming, and other productions and
content.
The Corporation broadcasts various televised poker programs and advertisement campaigns that run throughout the year at different intervals. Live
poker tournaments are also filmed at various PokerStars sponsored events, including The Stars Group’s PokerStars sponsored tours, and broadcast as
television shows in several countries. These sponsored live events are also broadcast online on various sites, including YouTube, Facebook, Twitch and
PokerStars.tv. Other forms of television programs that the Corporation broadcasts include reality shows and poker-based dramas, which are developed and
produced together with various production companies.
The Corporation also engages third-party search engine and online traffic optimization companies to increase the Corporation’s online presence and
traffic to its websites. In addition, the Corporation employs various display campaigns through banner advertisements, social media campaigns, and paid-for
placements in search engines. These campaigns are directed at both existing and new customers across all the Corporation’s platforms.
Poker Tours and Events
In addition to providing online and mobile gaming products and services, The Stars Group, through Stars Interactive Group, also sponsors some of the
world’s largest live poker tours and produces televised or streamed coverage of such poker events.
PokerStars’ primary sponsored global live tours include PokerStars Players No Limit Hold’em Championship, European Poker Tour, PokerStars
Caribbean Adventure, Latin American Poker Tour, Asia Pacific Poker Tour, PokerStars Festival and PokerStars MEGASTACK. As the sponsor, PokerStars
promotes the brand through each tour’s widespread television or other multimedia distribution. The live poker tours consist of a number of events operated by
local casinos and are largely marketed through various media sources and news coverage. In 2017 alone, PokerStars sponsored tours included more than
1,200 tournaments, with more than 200,000 player entries, representing over 100 different countries and awarding more than $265 million in prize money,
increasing the
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total prize money awarded at PokerStars sponsored live events since inception to more than $1.5 billion. In 2018, the Corporation expects the sponsored tours
and events to visit various cities and countries, including Barcelona, Dublin, Lille, London, Macau, Manila, Marbella, Monte-Carlo, Nassau, Prague and
Sochi.
Founded in 2004, the European Poker Tour is known in the industry as Europe’s most popular poker tour, and has staged and hosted successful
tournament series across Europe. The European Poker Tour is filmed and widely televised in various countries throughout the world and, in 2017, was live
streamed with over 16.8 million cumulative unique daily viewers. The European Poker Tour attracted more than 13,000 players from 80 countries and offered
lucrative prize pools, totaling approximately €150 million in 2017. The Asia Pacific Poker Tour, which hosts events at luxury casinos throughout Australasia,
started in 2007 and The Stars Group believes it helped expand the popularity of poker in Asia. The Asia Pacific Poker Tour is responsible for bringing the
first major government-sanctioned real-money “Texas Hold-‘em” poker tournaments to certain Asian countries, including South Korea. Founded in
May 2008, the Latin America Poker Tour brought world-class poker tournaments to locations such as Chile, Panama, Brazil, Peru and Uruguay, and attracted
more than 2,400 players from 30 countries with a total prize pool of approximately $4.5 million in 2017. The PokerStars Caribbean Adventure, which was
founded in 2004 on a popular Caribbean cruise ship, is held each year at the Atlantis Resort and Casino on Atlantis Paradise Island in the Bahamas. The
PokerStars Caribbean Adventure is considered in the industry as one of the most popular poker events in the world and, since inception, has awarded more
than $260 million in prize money. The PokerStars Caribbean Adventure has involved thousands of players since its inception, including hundreds of
qualifiers each year from PokerStars sites, as well as various professional athletes and celebrities. In 2017, each of the European Poker Tour, PokerStars
Caribbean Adventure, Asia Pacific Poker Tour and Latin America Poker Tour ran under the PokerStars Championship and PokerStars Festival names, but
will return under their original names in 2018.
In late 2016, The Stars Group introduced PokerStars Festival, which is a sponsored live poker series that offers players a more recreational, relaxed
atmosphere with lower buy-ins and greater prize pools and tours primarily throughout Europe, and in 2017, The Stars Group introduced PokerStars
MEGASTACK, which also brings low buy-ins, but provides players with a more professional experience at entry-level tournaments held at live venues around
Europe and the United States. In addition, in December 2017, The Stars Group launched the PokerStars Players No Limit Hold’em Championship, which is a
$25,000 buy-in poker tournament that will be held in the Bahamas in January 2019 as part of the PokerStars Caribbean Adventure and will include $8 million
in free tournament packages that The Stars Group will award to players throughout 2018 and an additional $1 million added by the Corporation to the winner
of the tournament.
Branded Poker Rooms
The Stars Group also has marketing arrangements for branded live poker rooms, under the PokerStars LIVE name, at popular casinos in major cities
around the world, including at the Hippodrome Casino in London, the Casino Barcelona in Barcelona and the City of Dreams Casino in Manila. The
Corporation strives to enter into marketing arrangements for branded poker rooms at premier leisure and entertainment destinations around the world,
particularly those that it believes have thriving gaming communities. These PokerStars LIVE branded rooms are operated by the local casino and adhere to
the same global design concept but are tailored to the specific location, which in each case is developed by the Corporation along with a design agency, and is
intended to provide a strong brand presence through common elements across each location.
Endorsement Agreements
The Stars Group endorses several ambassadors to promote its products and services, both at global and regional levels. These ambassadors include
some of the most prominent professional poker players in the industry, sports stars and professional athletes, global celebrities, and friends of the brand who
have a personal connection to or interest in poker, gaming or the Corporation’s brands in general. Each category is generally engaged to generate new
customer participation and vertical growth as well as to enhance the customer experience and customer retention.
Revenue Model
The Stars Group’s revenue model for its core product offerings is based primarily on two main offerings, real-money games and play-money games.
Nearly all of The Stars Group’s revenues during the year-ended December 31, 2017 were, and the Corporation expects its revenues to continue to be,
generated by its real-money online gaming offerings. For the same time period, the significant majority of The Stars Group’s revenues were generated
through the provision of real-money online poker offerings, followed by online casino and sportsbook offerings combined, in each case derived entirely by
group entities based outside of Canada and predominantly from customers based in the European Union. Gaming revenue comprises almost the entirety of the
Corporation’s reported gaming revenues, with the remaining reported revenues generated from certain related real-money gaming revenues, including
currency conversion fees. For additional information, see the 2017 Annual MD&A and 2017 Annual Financial Statements.
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The Corporation’s revenues can be influenced by numerous factors, many of which it is unable to predict or are outside of its control, including
without limitation, the impact of seasonality and the Corporation’s gross win margin, as described below under “Business of the Corporation—Seasonality
and Other Factors Impacting the Business”, and the other risks and uncertainties set forth in this annual information form and the 2017 Annual MD&A,
including under the headings “Risk Factors and Uncertainties” hereunder and thereunder.
Real-Money Games
The Corporation’s current core real-money online gaming offerings are poker, casino and sportsbook, each with its own revenue model.
In poker, players play against each other in either ring games (i.e., games for cash on a hand-by-hand basis) or in tournaments (i.e., players play
against each other for tournament chips with prize money distributed to the last remaining competitors) or variations thereof. The Corporation collects a
percentage of each pot, or the rake, up to a capped amount in ring games and a tournament entry fee for scheduled tournaments and sit and go tournaments,
and does not generally have any of its own capital at risk (with an exception being the Spin & Go product where the tournament prize pool is a randomly
determined multiple of the buy-in). These amounts are then reduced by applicable VAT in certain jurisdictions and offsets (as described below) to arrive at
revenue.
Online casino offerings typically include the full suite of games available in land-based casinos, such as blackjack, roulette and slot machines. For
these offerings, the Corporation functions similarly to land-based casinos, generating revenue through hold, or gross winnings, as players play against the
house, and then these amounts are reduced by applicable VAT in certain jurisdictions and offsets to arrive at revenue. In online casino, the Corporation
believes there is typically lower volatility from the statistical norm versus land-based casinos as there is generally a larger number of bets placed at small
denominations.
Sportsbook involves customers wagering on certain sporting and non-sporting events, also referred to as turnover. Like casino offerings, the
Corporation generates sportsbook revenues through hold based on a certain margin to ensure that the house has an advantage, and then these amounts are
reduced by applicable VAT in certain jurisdictions and offsets to arrive at revenue.
Offsets for each vertical are the portion of gross revenue that the Corporation allocates to rebates, incentives and promotions, which are awarded as a
result of game play or at the Corporation’s discretion, as applicable, though loyalty programs, free plays, sign-up bonuses, discounts, rebates, other rewards
and incentives, and tournament overlays. Offsets are generally used to acquire new customers and retain and reactivate existing customers.
Play-Money Games
Play-money gaming involves players receiving virtual currency for free, or paying a fee to receive additional virtual currency, which can be used to
play certain gaming offerings. Play-money gaming is permitted in various jurisdictions that may not otherwise permit real-money gaming, including most of
the states in the United States. In the future, the Corporation may also generate revenue from advertising through its play-money gaming offering. The
Corporation’s current play-money game offering primarily consists of poker, including on PokerStars.net and FullTilt.net and through the social gaming
brands PokerStars Play, Jackpot Poker by PokerStars and Casino Rush by PokerStars. In these circumstances, there are no cash prizes or other prizes for
monetary value, and in most cases, all the player fees are passed to the Corporation as revenue, unless the games are played through social platforms, in
which case the platform operator retains a certain percentage (typically 30%) for distributing the offering. The Corporation’s play-money games may be
played through the desktop client interface or through online, television and mobile platforms, including on social gaming platforms. The revenue for play-
money is the sum of fees paid by customers (net of any percentage of the same retained by the particular platform operators), less applicable VAT in certain
jurisdictions and certain promotional costs. The Corporation includes such revenue in its other gaming revenues.
Poker Tours and Events and Branded Poker Rooms
As described above, the Corporation sponsors certain live poker tours and events, uses its industry expertise to provide consultancy and support
services to the casinos that operate the events, and has marketing arrangements for branded poker rooms at various locations around the world. The
Corporation generates revenue from these sponsorships and marketing arrangements and includes such revenue in other gaming revenue.
Technology Infrastructure and Research and Development
The technology infrastructure used for The Stars Group’s online gaming business was designed to support its growth by having the flexibility and
scalability to adapt and conform to the demands and changes in its products and services. The Stars Group’s product development philosophy is focused on
continuous innovation in creating and improving its products and services. In addition, as the Corporation’s customer base grows, and the level of engagement
from its customers increases, including on mobile devices, the
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Corporation’s computing capabilities and power will need to expand. The Stars Group continuously develops its proprietary platforms, games and content,
and has invested significantly in its technology infrastructure to ensure a positive experience for its customers, not only from an entertainment perspective,
but most importantly with respect to security and integrity across business segments and verticals. To support The Stars Group’s strong reputation for security
and integrity, The Stars Group employs what it believes to be industry‑leading practices and systems, including machine learning based real-time data
analytics, led by an internal information security group with respect to various aspects of its technology infrastructure, including, but not limited to,
application level security, information and payment security, game integrity, customer fund, information and data protection, marketing and promotion,
customer support, responsible gaming and loyalty and VIP programs.
The Corporation also uses third parties to provide cyber security, including, without limitation, anti-virus software, network monitoring software,
firewalls, penetration testing and similar protection. These security and integrity systems routinely review and evaluate attempted breaches of the
Corporation’s infrastructure, as well as customer backgrounds, game play, financial and transactional activity and related risks through a variation of
management systems, including, without limitation, “know your customer” and related background screening (which collects age and identity information, as
well as monitoring against certain prohibited persons and other watch lists), location screening through geolocation and other software, deposit screening,
abnormal game play and movement of funds detection, withdrawals screening, collusion detection, bots and artificial intelligence detection (which detects
artificial intelligence-driven game play) and prevention (including through changing aspects of or enhancing current product offerings or innovating new
variants), multiple account alerts, account restriction and ban detection and a safe mode system (which is based on a customer’s risk profile and limits access
to high risk deposit methods). These systems also include controls that, among other things, (i) restrict the use of third-party software components, also
known as third-party tools (such as “heads-up displays” and “seating scripts”), for the purpose of collecting additional gameplay information or selecting
specific opponents and (ii) prohibit data-mining of certain products (or the practice of accumulating a large set of information, such as poker hand histories,
through the use of software as opposed to actual gameplay) for the purpose of analyzing and exploiting another customer’s activity, playing styles and
tendencies. The Stars Group’s technology infrastructure and software is also subject to rigorous management and certification process testing and meets
applicable compliance and regulatory requirements in numerous jurisdictions. See also “Regulatory Environment” and “Risk Factors and Uncertainties—
Risks Related to Regulation” and “—Risks Related to the Corporation’s Intellectual Property and Technology.”
The Corporation’s R&D strategy seeks to provide broad market applications for products derived from its technology base. The Corporation’s R&D
efforts are focused primarily on: (i) developing and delivering the Corporation’s pipeline of new products and services; (ii) revitalizing its existing product
and services offerings through continued innovation; (iii) developing core technology and platforms for existing and future verticals; (iv) evolving the
functionality, security and performance of its offerings and platforms; (v) continuously developing and extending the number of supported client platforms;
(vi) developing infrastructure systems to provide the underlying support for the Corporation’s offerings, systems and platforms; (vii) providing a platform and
tools for operations and marketing; and (viii) improving development and testing technologies. The Corporation also engages from time to time in longer term
fundamental research and may do so in the future either directly or through the funding of third-party projects. The Corporation currently dedicates nearly all
of its R&D investments to its online gaming business.
Markets and Customers
The gaming industry in general operates in a large, dynamic and growing global market with a variety of segments, including online (including
mobile) and land-based poker, sports betting, casinos, bingo rooms, lotteries and other gaming mediums. According to gaming industry consultants, H2
Gambling Capital (“H2GC”), from 2003 to 2017, the combined global (including markets where The Stars Group does not currently operate real-money
online gaming) interactive gaming verticals, including online real-money poker, casino, sports betting, horseracing, bingo, lotteries and skill-based and other
games, have grown from approximately €6.6 billion to €40.5 billion in gross gaming revenues (“GGR”), defined as wagers or rakes plus bonuses, promotions,
overlays and loyalty rewards, less prizes or winnings. Of this total, H2GC estimates that in 2017 alone, betting, i.e., racing and sports betting, comprised 50%,
casino comprised 26%, state lotteries comprised 9%, poker comprised 6%, skill and other gaming and commercial lotteries comprised 5%, and bingo
comprised 4%. H2GC estimates that the combined global interactive gaming GGR to grow to approximately €56.7 billion in 2022 (data as at February 8,
2018). This reflects a compounded annual growth rate (“CAGR”) of 7.0% from 2017 to 2022.
Online gaming operators take advantage of scale and technology to provide gaming to large networks of customers. Originating in the mid 1990’s,
online gaming has grown steadily over time with improvements to technology, security and public sentiment coinciding with growth in national and local
regulation of online gaming.
Set forth below is a general overview of the current market for the Corporation’s core verticals, i.e., real-money online poker, casino and sportsbook.
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Online poker saw a rapid rise in popularity beginning in 2003 when Tennessee accountant Chris Moneymaker won the main event at the World Series
of Poker, a prize of $2.5 million, after winning his entry in a $39 buy-in online satellite tournament on PokerStars. This rise in popularity saw global online
poker grow significantly, notably in Europe and North America, until 2010. In 2011, two of the industry’s largest brands, PokerStars and Full Tilt, exited the
U.S. market, where they held a significant majority of the online poker market share, impacting global poker player liquidity. Currently, The Stars Group does
not offer its core real-money online poker offering in over 30 jurisdictions around the world, including the United States (except in the regulated market of
New Jersey, and potentially in the near future in Pennsylvania). The Stars Group’s primary markets for real-money online poker include the European Union,
certain other jurisdictions in the rest of Europe and the Americas (excluding the United States). Various industry data sources currently estimate that the
United States still represents a potential growth opportunity for real-money online poker between 2017 and 2022, subject to more U.S. states regulating online
poker, or online gaming or betting more broadly; currently, only New Jersey, Nevada, Delaware and Pennsylvania have, or recently passed legislation
regarding, regulated online poker or online gaming. However, in recent years multiple states have considered or are currently considering proposed legislation
to regulate online poker or online gaming, including Illinois, Michigan, New York, Massachusetts and California; while the Corporation currently believes
more states will regulate online poker or online gaming in the future, there can be no assurance when this will happen, if at all.
Online casino has also seen rapid growth over the past decade, with GGR from the global market growing from €1.6 billion in 2003 to €10.6 billion in
2017 according to H2GC (such estimates include markets where The Stars Group does not currently operate real-money online casino). As online casino
operators continue to expand content and increase product offerings, and more markets regulate online casino, H2GC forecasts GGR to grow to €15.1 billion
in 2022, or at a CAGR of 7.4% from 2017 to 2022. According to H2GC, the majority of this growth is currently expected to come from Europe. The primary
market for The Stars Group’s combined online casino offering is Europe, which comprised approximately 62% of the global online casino market in 2017
according to H2GC.
According to H2GC, online betting, comprising racing and sports betting, makes up the largest segment of the online gaming market at approximately
€20.2 billion in GGR in 2017. As with online poker and online casino, according to H2GC, online sports betting saw significant growth from 2003 through
2016 as technology improved, e-commerce became more mainstream and national regulation of online betting grew (such estimates include markets where
The Stars Group does not currently operate real-money online sportsbook). H2GC estimates online betting will continue to grow, with GGR reaching €27.4
billion in 2022, or at a CAGR of 6.3% from 2017 to 2022. The primary market for The Stars Group’s online sports betting offering is Europe, which
comprised approximately 43% of the global online betting market in 2017 according to H2GC. See below under “Regulatory Environment—Regulation of
the Corporation’s Business—Local Licenses and Approvals” regarding the potential future of sports betting in the United States.
For detailed information regarding the regulatory environment in which The Stars Group currently operates, The Stars Group’s current licenses and
approvals, and The Stars Group’s current regulatory strategy, see “Regulatory Environment” below.
Seasonality and Other Factors Impacting the Business
The Stars Group’s business can fluctuate due to seasonal trends and other factors. Historically, given the geographies where the majority of the
Corporation’s customers are located, and the related climate and weather in such geographies, among other things, revenues from the Corporation’s operations
have been generally higher in the first and fourth fiscal quarters than in the second and third fiscal quarters. In addition, changes to the Corporation’s Stars
Rewards loyalty program have an impact on net gaming revenue, which could also cause fluctuations in The Stars Group’s business. In online sports betting,
fluctuations can also occur around applicable sports seasons, with increased customer activity around notable or popular sporting events, and with respect to
gross win margin (or the total customer wagers less customer winnings as a proportion of the total amount wagered). As such, prolonged periods of high gross
win margin can negatively impact customer experience, enjoyment and engagement levels thereby resulting in lower customer wagering volumes on sports
betting or other gaming verticals. Conversely, while periods of low gross win margin tend to negatively impact revenues, this may be mitigated to an extent
by increased customer wagering volume (generally referred to as recycling of winnings) due to the positive impact of customer-friendly results on customer
experience, enjoyment and engagement. Notwithstanding, the impact on revenues may be mitigated by the positive or negative impact of gross win margins
on customer wagering, which can fluctuate inversely with such margins.
As a result of the foregoing, results for any quarter are not necessarily indicative of the results that may be achieved in another quarter or for the full
fiscal year. There can be no assurance that the seasonal trends and other factors that have impacted The Stars Group’s historical results will repeat in future
periods as The Stars Group cannot influence or forecast many of these factors. For other factors that may cause The Stars Group’s business and results to
fluctuate, including, without limitation, market risks, such as foreign exchange risks, see “Risk Factors and Uncertainties” below, and the 2017 Annual
MD&A.
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Competition
The industries in which The Stars Group currently operates are highly competitive, constantly evolving and subject to regulatory and rapid
technological change. The Stars Group faces significant competition in all aspects of its business and competes for customers with other online (including
mobile) and land-based gaming and interactive entertainment developers and operators on the basis of many factors, including, without limitation, the quality
of the customer experience, brand awareness, reputation, security, integrity and access to other distribution channels. Although the Corporation believes that it
competes favorably, its competitors could develop more compelling products, services, content and offerings, which could adversely affect the Corporation’s
ability to attract and retain customers. As the Corporation introduces new products, as its existing products evolve, or as other companies introduce new
products and services or merge with competitors into larger entities, the Corporation may become subject to additional and/or more intense competition. The
Stars Group’s competitors, whether known or unknown, may also take advantage of large user and customer bases and networks through social networks to
grow rapidly. See also “Risk Factors and Uncertainties—Risks Related to the Corporation’s Business”.
There are multiple competitors specializing in offering online gaming and interactive entertainment products, including developers for online, mobile
and social networks, operators of regulated online real-money gaming, live poker tournaments, developers for consoles and other platforms, and other forms
of media, content and entertainment. For example, although the Corporation has and continues to be a significant market leader in online poker, and is seeing
meaningful growth and revenue from its online casino, it is still in the relatively early stages of its entry into casino and sportsbook, where competition is
significant and formidable. The Stars Group’s competitors range from small, localized companies to large multinational corporations in the jurisdictions
where it conducts business. These competitors include, among others, bet365, William Hill, GVC (including bwin.party), Ladbrokes Coral Group (which is
currently under agreement to be acquired by GVC), Paddy Power Betfair, 888 Holdings, Kindred Group, Betsson, Sky Betting & Gaming, Winamax,
Jackpotjoy, Cherry, Mr. Green, LeoVegas and certain government operators and smaller operators in specific regions. Also, there is increasing competition
with social and video gaming companies, such as Zynga, Playtika, the social gaming divisions of Sony, IGT, Scientific Games, Tencent, Penn National
Gaming, PlayAGS, Aristocrat, Activision Blizzard (including King), and Riot Games, as well as interactive content and media companies, such as Netflix,
which provide monetized interactive entertainment offerings that offer competition to real-money online gaming companies for time and wallet share of
consumers.
The Stars Group’s ability to compete effectively with its competitors is based on a number of factors, including, but not limited to, its ability to (i)
maintain its strong reputation among its customers and brand awareness throughout the world, (ii) maintain appropriate liquidity in online poker, and continue
to grow its large customer base and customer engagement across existing and new verticals, (iii) provide comprehensive and varied gaming and entertainment
offerings at competitive prices, (iv) provide a superior customer experience, including through appropriate responsible gaming policies and related customer
support tools, promotions, incentives, features, customer protections, and best-in-class software development and back-office infrastructure, customer service,
payment processing, security and integrity, as applicable, (v) develop products and offerings designed for distribution across multiple channels and to new,
large audiences with superior functionality and efficient implementation, including through the use of innovative architecture and technologies that the
Corporation believes will result in a higher degree of customer acceptance and player preference, and (vi) successfully promote the regulation of online
gaming and maintain its existing and obtain new licenses or approvals to operate and offer online gaming in existing and new jurisdictions, as applicable. See
above under “—Online Poker—PokerStars” for additional information regarding The Stars Group’s improvements in the poker ecosystem to benefit and
attract recreational players and improve the overall customer experience.
Manufacturing and Supply Chain Management
The Corporation primarily develops and produces its products and services internally through, among other resources, internal engineering teams,
software architects, internal network operations teams and production operations staff. The Stars Group’s development and production includes, without
limitation, software development and quality assurance, hosting of software within the Corporation’s data centers and transit points of presence, development
of network infrastructure and operations monitoring and maintenance of its products and services. The Corporation engages third parties to assist in
development and production on an as-needed basis.
As applicable, the Corporation seeks to negotiate competitive pricing with its third-party service providers and suppliers, and generally believes that
the availability of software, components and other supplies that it uses are adequate and can be sourced from more than one provider or supplier.
For additional information, see also “—Technology Infrastructure and Research and Development”, “—Human Resources” and “—Facilities”.
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Intellectual Property Rights
The development and protection of intellectual property is a core part of the Corporation’s business strategy and a key element to its success. The
Corporation believes that its intellectual property rights currently provide broad and comprehensive coverage for its products and services. The Corporation
follows a policy and practice of protecting its intellectual property rights in its core business areas through a combination of patents, copyrights, industrial
designs, trademarks and trade secret laws, and generally through contractual provisions with third parties who have access to or are otherwise involved in the
creation, development or use of its intellectual property. These protections generally include non-disclosure and confidentiality policies and provisions and the
use of appropriate intellectual property ownership and assignment provisions and restrictive covenant agreements with, among others, the Corporation’s
employees, contractors, consultants, manufacturers, suppliers, customers and stakeholders. The Corporation actively seeks to protect and enforce its
intellectual property rights to prevent unauthorized use by third parties, including through applications for injunctive relief and pursuing further litigation, as
necessary.
In addition, the Corporation seeks to preserve the integrity and confidentiality of its data, trade secrets and know-how by maintaining the physical
security of its facilities and the electronic security of its information technology systems. Measures taken by the Corporation to maintain confidentiality of its
facilities and systems include the use of monitoring methods to prevent third-party or unauthorized employee access to confidential information and certain
software, such as the underlying source code, as well as systems, practices and procedures designed to prevent unauthorized third-party or employee access to
such information and software, such as restrictions on using USB devices and only permitting access to certain approved file-sharing sites. While the
Corporation has confidence in these individuals, organizations and systems, the Corporation’s security measures may be breached, and legal recourse may not
provide adequate remedies for any such breach.
The Corporation’s active intellectual property portfolio currently contains, among other rights, approximately 40 granted patents, 30 patent
applications, 624 registered trademarks, 918 trademark applications, 15 industrial designs, 9 copyright registrations and 5 copyright applications. In addition,
the Corporation currently owns approximately 4,628 domain names, as well as unregistered intellectual property, which includes copyright works, such as
source codes, software codes, logos, audio-visual elements, graphics, original music, story lines, interfaces, advertisements, films and videos, copyrights and
databases (including customer lists), unregistered trademark rights, confidential information and trade secrets. Issued and registered rights (and applications
for such rights) are held by the Corporation in numerous jurisdictions around the world, including the United States, Canada, Europe, Russia, certain Latin
American countries, China and certain Australasian countries. The terms and extent of protection afforded under the Corporation’s issued and registered
rights or unregistered rights vary depending on the jurisdiction and, as applicable, the date of filing.
The Corporation’s patent strategy focuses on protecting novel elements of its technology design covering the principal jurisdictions where the
Corporation currently carries on business and where it believes filing for such protection is strategically, commercially, technologically or otherwise,
appropriate and beneficial. These elements include, among others, core design features, implementation technologies and inventions and developments of
games, in each case, where possible. In addition to the granted patents mentioned above, the Corporation has pending patent applications in the United States
and certain key commercial foreign countries, such as Canada and in Europe, and files new patent applications as and where it deems appropriate. The actual
protection afforded by a patent depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the applicable jurisdiction.
In addition to patent rights, the Corporation has registered trademarks or trademark applications for, among other things, its primary brands, including
The Stars Group, PokerStars, BetStars, Full Tilt, and related sub-brands, as well as its live poker tours in more than 40 jurisdictions around the world where
the Corporation believes there is a commercial benefit for having such registrations. The Corporation continuously monitors its trademark portfolio and files
new registration applications as and when it deems appropriate.
To complement the Corporation’s owned intellectual property, the Corporation has in the past and may in the future enter into brand licensing
agreements with various third parties to develop product offerings based on their respective marks, characters and themes. The Stars Group believes that its
use of licensed brand names and related intellectual property may contribute to the appeal and success of its products. These licensing agreements may be
subject to various conditions and typically involve The Stars Group paying royalties to each licensor. Licensors also typically have the right to inspect and
approve the use of licensed property.
The source code for the Corporation’s software is generally protected under trade secret law and confidential information law, as the case may be in a
particular jurisdiction, as well as applicable copyright law. The Corporation recognizes, however, that effective protection may be limited or not available in
some countries in which it offers its products and services. The Corporation licenses the use of its software to end-users, which may provide additional
protection through the use of contractual provisions in the applicable license agreements. In particular, these licenses contain, among other restrictions,
customary provisions prohibiting the unauthorized
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reproduction, disclosure, reverse engineering and transfer of the Corporation’s licensed software and related intellectual property. Moreover, any licensing of
the Corporation’s core intellectual property and brands is on what the Corporation believes to be strict licensing terms, with licenses being non-exclusive and
limited in duration and scope.
The Corporation also seeks to protect its copyright works through either or both the registration of such works with applicable governmental
authorities (where available and it deems registration strategically beneficial) and reliance on international treaties. The Corporation believes that such
protection is adequate for its purposes in the jurisdictions in which it operates, or currently expects to operate in the near term. Similar to its other intellectual
property rights, the Corporation continuously monitors its copyright portfolio and updates its policy regarding the registration of copyrights to seek the
appropriate protection available under applicable laws.
In addition, the Corporation also enters into various types of licensing and transfer agreements related to technology and intellectual property rights.
The Corporation enters certain of these agreements to obtain rights that may be necessary to produce and sell its products and services. The Corporation may
also license its technology and intellectual property to third parties through various licensing agreements.
Notwithstanding the Corporation’s efforts to protect its intellectual property, the Corporation may not be successful in obtaining the patents,
trademarks, industrial designs and other protections for which it has applied. The Stars Group’s granted patents and registered intellectual property rights and
those that may be granted or registered in the future, may be challenged, narrowed, circumvented or found to be invalid or unenforceable, which could limit
The Stars Group’s ability to stop competitors from marketing related products or services or the length of term of protection that The Stars Group may have
for its products or services. Despite efforts to protect its proprietary rights, third parties may infringe on the Corporation’s intellectual property rights and in
such situations the Corporation may be required to defend such rights. The defense of such rights may divert management’s attention to the business and
involve a significant expense, and the Corporation may not be successful in defending its rights. In addition, others, including The Stars Group’s competitors,
may be able to independently develop substantially equivalent intellectual property, and the rights granted to The Stars Group under any of its issued or
registered intellectual property, or future rights, may not provide it with any meaningful competitive advantages against these competitors. See also “Risk
Factors and Uncertainties” below.
Regulatory Environment
General
The development and operation of online real-money gaming in jurisdictions where a system of law and regulation has been developed to cover those
activities is typically subject to extensive regulation and approval by various federal, state, provincial and foreign authorities (collectively, “gaming
authorities”). Gaming laws generally require the Corporation to obtain licenses or a determination of suitability from the responsible gaming authorities. This
typically covers each of the Corporation’s subsidiaries engaged in the regulated activities, certain of the Corporation’s directors, officers and employees and,
in some instances, significant shareholders (typically, beneficial owners of more than 5% of a company’s outstanding equity, or lower in certain jurisdictions,
such as Great Britain, where the threshold is 3% or more).
The term “gaming license” for the purposes of this annual information form refers collectively to all the different licenses, consents, permits,
authorizations, and other regulatory approvals that are necessary to be obtained in order for the recipient to lawfully conduct (or be associated with) gaming in
a particular jurisdiction.
The criteria used by gaming authorities to make determinations as to the suitability of an applicant to conduct gaming varies among jurisdictions, but
generally requires extensive and detailed application disclosures followed by a thorough investigation. Gaming authorities have broad discretion in
determining whether an applicant should be found suitable to conduct gaming. Gaming authorities generally look to the following criteria when determining
to grant a gaming license to an applicant: (i) the financial stability, integrity and responsibility of the applicant (including verification of the applicant’s
sources of funding); (ii) the quality and security of the applicant’s online real-money gaming platform, hardware and related software, including the ability of
that platform to operate in compliance with local regulation, as applicable; (iii) the past history of the applicant; (iv) the ability of the applicant to operate its
gaming business in a socially-responsible manner; and (v) in certain circumstances, the effect on competition.
Gaming authorities may, subject to certain administrative proceeding requirements, (i) deny an application, or limit, condition, restrict, revoke or
suspend any gaming license issued by them, (ii) impose fines, either on a mandatory basis or as a consensual settlement of regulatory action, (iii) demand that
named individuals be disassociated from a gaming business, and (iv) in serious cases, liaise with local prosecutors to pursue legal action, which may result in
civil or criminal penalties. Events that may trigger revocation of a gaming license or another form of sanction vary by jurisdiction. However, typical events
include, among others: (i) conviction in any jurisdiction of certain persons with an interest in, or key personnel of, the licensee of an offense that is either
punishable by imprisonment or may otherwise cast doubt on such person’s integrity; (ii) failure without reasonable cause to comply with any material term or
condition of the gaming license; (iii) declaration or otherwise engaging in certain bankruptcy, insolvency, winding up or discontinuance activities, or an order
or application with respect to the same; (iv) obtaining the gaming license by a materially false
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or misleading representation or in some other improper way; (v) violation of applicable anti-money laundering or terrorist financing laws or regulations; (vi)
failure to meet commitments to players, including social responsibility commitments; (vii) failure to pay in a timely manner all gaming or betting taxes or fees
due; or (viii) determination by the gaming authority, in its sole discretion, that there is another material and sufficient reason to revoke or impose another form
of sanction upon the licensee.
Gaming authorities also have the right to investigate any individual or entity having a relationship to, or involvement with, the Corporation or any of
its subsidiaries, to determine whether such individual or entity is suitable as a business associate of the Corporation. If any director, officer, employee or
significant shareholder of the Corporation fails to qualify for a gaming license or is found unsuitable (including due to the failure to submit required
documentation) by a gaming authority, the Corporation may deem it necessary, or be required, to sever its relationship with such person, which may include
terminating the employment of any such person or divesting any such person of any interest in the Corporation, as permitted under the redemption provision
in the Corporation’s articles.
In addition, certain gaming authorities monitor the activities of the entities they regulate in jurisdictions other than their own in order to ensure that
such entities are not conducting business elsewhere in a manner that might adversely affect their financial stability, integrity and responsibilities to comply
with local laws.
As a regulated entity, the Corporation is subject to various conditions and requirements under its multiple gaming licenses. Conditions of these
gaming licenses vary by license type and jurisdiction. Typical conditions generally include (i) adherence to the various laws and regulations to which the
Corporation’s licensed entities are subject, (ii) maintenance of strong corporate governance standards, (iii) filing periodic reports with gaming authorities, and
(iv) reporting of material adverse events affecting the Corporation’s business, including suspicious activity reports related to anti-money laundering and
terrorist financing. The requirement to file periodic reports, as well as the contents and frequency of such reports, varies by gaming license. If required,
periodic reports generally must be filed quarterly or annually, and must contain certain information, metrics, details or audit findings related to revenues and
other financial information, specific games or activities, anti-money laundering and terrorist financing activities, and information and data security. Certain
gaming licenses also require licensed companies to implement a system that grants the gaming authority real-time access to certain player-related data of the
licensed company, thus enabling the gaming authority to perform audits or analysis at its discretion. For example, the Italian regulator requires a real-time
interface to enable it to assess gaming duty. Additionally, certain regulators, such as the Gambling Commission of Great Britain (the “Gambling
Commission”), require licensed companies to file an annual assurance statement which provides the applicable gaming authority with information regarding
matters such as significant changes in control systems, risk management and governance since the last assurance statement, how the licensed company is
addressing problem and at-risk gambling, and any improvements that the licensed company plans to implement to its control systems, risk management and
governance and/or its approach to addressing problem and at-risk gambling, including actions to address the National Responsible Gambling Strategy.
In addition, there are various other factors associated with its gaming operations that could burden the Corporation’s business, including, without
limitation, compliance with multiple, and sometimes conflicting, regulatory requirements, jurisdictional limitations on contract enforcement, foreign currency
risks, certain restrictions on gaming activities, potentially adverse tax risks and tax consequences, including, without limitation, the imposition of new or
additional taxes, such as additional corporate tax, VAT payable on the Corporation’s costs or chargeable on a point of consumption basis on its revenue (which
commercially cannot be passed onto the consumer), turnover taxes and gaming duties, and changes in the political and economic stability, regulatory and
taxation structures and the interpretation thereof in the jurisdictions in which the Corporation and its licensee subsidiaries operate or otherwise offer their
products and services. Any or all of such factors could have a material adverse effect on the Corporation’s business, operating results and financial condition.
See also “Risk Factors and Uncertainties—Risks Related to Regulation” below. Further, as a public company the Corporation is required to, among other
things, maintain effective internal controls over its financial reporting and disclosure controls and procedures, maintain systems for accurate record keeping
and maintain strict compliance with various laws and regulations applicable to it.
Regulation of the Corporation’s Business
The Corporation, through certain of its subsidiaries, is licensed or approved to offer, including under third-party gaming licenses, its gaming products
and services in various jurisdictions throughout the world, including in Europe, both within and outside of the European Union, which is currently its primary
market, North America and elsewhere. In particular, and as of the date hereof, PokerStars is the world’s most licensed online gaming brand, holding gaming
licenses in 17 jurisdictions.
The Corporation views its gaming licenses in two categories: (i) jurisdictions where the relevant operating subsidiary of the Corporation has either
obtained a local gaming license directly from the local gaming authority or where it offers the Corporation’s products under a third-party gaming license
through a third-party relationship (for example, Belgium); and (ii) jurisdictions where its real-money online gaming products and services are offered
pursuant to a “multi-jurisdictional” gaming license.
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See also “Regulatory Environment—Regulatory Strategy” below.
Local Licenses and Approvals
Set forth below is an overview of certain of The Stars Group’s various local gaming licenses (including arrangements with third parties) covering the
operation of its real-money online gaming offerings. Poker customers in certain jurisdictions, however, are permitted to participate in the Corporation’s
shared-liquidity global player pool on its .com and .eu sites. Applicable gaming duty and/or VAT is payable on the Corporation’s revenue from online gaming
offered through these local gaming licenses.
Australia
The Northern Territory Racing Commission (“NTRC”) is responsible for licensing, regulating and supervising gambling activities authorized under
the Racing and Betting Act 1983 (NT) (“Racing and Betting Act”), including the conduct of a sports betting business. Holders of sportsbook licenses issued
by the NTRC are permitted to provide sports betting services over the Internet to customers throughout Australia. Australian licensed sportsbooks can also
provide services to persons located in New Zealand pursuant to the Gambling Act 2003 (NZ).
The NTRC conducts ongoing suitability and due diligence investigations in relation to its license holders, their shareholders and key management
personnel. NTRC license holders are also required to comply with all relevant Australian state and territory laws as well as applicable federal legislation,
including the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth).
On February 22, 2018, the NTRC conditionally approved the acquisition by a subsidiary of the Corporation of a majority interest in CrownBet, the
holding company of each of CrownBet Pty Limited (“CrownBet OpCo”) and Draftstars Pty Limited (“Draftstars”). The Corporation is also seeking the
approval of the NTRC:
•
•
for the acquisition by CrownBet OpCo of William Hill Australia, the holding company of William Hill Australia Wagering Pty Ltd
(“William Hill OpCo”); and
for the acquisition by a subsidiary of the Corporation of an additional interest in CrownBet.
Each approval is conditional upon, among other things, the NTRC successfully completing its suitability review of the Corporation and key personnel.
Each of CrownBet OpCo, Draftstars and William Hill OpCo holds a license to conduct sports betting issued by the NTRC under the Racing and Betting Act.
The licenses issued to each of CrownBet OpCo and Draftstars are valid through June 30, 2024, and the license issued to William Hill OpCo is valid through
June 30, 2020. Other than as described above, the Corporation’s online real-money gaming products and services are not offered to persons physically located
in Australia.
Belgium
The Belgium Gaming Commission (the “Belgian Commission”) is responsible for issuing gaming licenses for the operation of games of chance in
Belgium, ensuring the proper supervision of these games and implementing any regulations promulgated under applicable law. Belgian law generally
prohibits the operation of a gaming establishment or the offering of gaming in any form, in any place, or in any direct or indirect way, unless a license is
granted by the Belgian Commission in accordance with Belgian law. A feature of the Belgian regime is that only land-based licensees may offer online
gaming in the form of a supplementary product to the land-based gaming offerings, meaning that online gaming operators that do not also operate a land-
based gaming business in Belgium typically need to enter into supply arrangements with an existing land-based licensee.
Gambling Management S.A., the owner and operator of Casino de Namur in Belgium, was granted a license to offer online gaming operated by a
Maltese subsidiary of the Corporation through one of the Corporation’s domain names. The Maltese subsidiary is a provider of online gaming to Casino de
Namur, which in turn offers such gaming to its customers in Belgium, and on April 20, 2011, it was awarded a Class E gaming license as a service provider to
Gambling Management S.A. So long as the applicable license fees are paid, the Maltese subsidiary remains compliant with applicable licensure requirements
and the license is not suspended, revoked or otherwise surrendered, the Corporation expects that the license will remain valid for 10 years with a renewal
procedure available no later than 5 months prior to its expiration.
Bulgaria
In Bulgaria, the State Commission for Gambling (“Bulgarian Commission”) issues and maintains licenses for “gambling games” including online
casino games. A license for organizing online gaming must explicitly state the intended gaming activity by the holder, and may not be transferred. Bulgaria
requires that the licensee be registered in a European Union member state, another state signatory to the European Economic Area Agreement or in the Swiss
Confederation. The licensee must also appoint an authorized representative with an address in Bulgaria, with the authority to represent the licensee before
state authorities or Bulgarian courts. The Bulgarian Gambling Act also requires that certain communication equipment must be located in Bulgaria for
reporting purposes.
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On February 18, 2014, one of the Corporation’s subsidiaries was awarded a license to offer online poker and casino to Bulgarian residents. The license
is valid for 10 years.
Czech Republic
Under the Act on Gambling Coll. 186/2016, the State Supervision of Gambling and Lotteries Department of the Ministry of Finance of the Czech
Republic (the “MFCR”) maintains the licensing procedure for individuals and entities seeking to provide betting and online casino services to customers in
the Czech Republic. The MFCR defines online casino services as “an internet game, the gambling participant shall play against the operator’s software-based
gaming system or against another person mediated by that system.” Online casino games can include “Technical Games”, which are games of chance
operated via a technical device directly handled by the bettor, such as slot reel games, and “Live Games”, which include roulette, card games and games
operated in the form of a tournament.
On January 28, 2017, one of the Corporation’s subsidiaries was granted a six-year license to provide online casino and poker games to customers in
the Czech Republic, which will expire on January 27, 2023. On October 4, 2017, this same subsidiary was granted approval from the MFCR to provide sports
betting to customers in the Czech Republic, which will expire on October 3, 2023.
Pursuant to Czech anti-money laundering requirements, in order for customers to establish an online gaming account, customers must perform a face-
to-face verification, which can be done at authorized “CzechPoints”, such as post offices in the Czech Republic.
Denmark
Under the Danish Gambling Act, the Danish Gambling Authority (the “DGA”) maintains the licensing procedure for individuals and entities looking
to provide betting and online casino services to customers in Denmark. The DGA defines online casino services as “those where the player and operator do
not meet physically, for instance where games are sold via the internet, telephone or television.” Online casino games can include roulette, blackjack,
baccarat, punto banco, poker and “combination games”. A license to operate online casino services is valid for a term of five years. If the applicant has not yet
obtained the required certifications for its gaming system through testing, the DGA will issue a fixed-term one-year license until such certifications are
complete.
One of the Corporation’s subsidiaries renewed a five-year license to provide online casino and poker games that will expire on December 31, 2021 and
was granted a five-year license to provide online sports betting that will expire on November 30, 2020.
Estonia
The Estonian Tax and Customs Board maintains responsibility for the issuance of “activity licenses” and “operating permits” for the supply of gaming
and lotteries to customers in Estonia, and also acts as the gaming supervisory agency in Estonia.
The Estonia Gambling Act, RT I 2008, 47, 261 (the “Estonia Gambling Act”) was enacted to establish strict requirements for gaming operators,
provide measures for the protection of players and reduce the negative consequences of gaming and its impact on society. “Remote gambling” under the
Estonia Gambling Act is defined as “the organisation of gambling in a manner where the outcome of the game is determined by an electronic device and the
player can participate in the game by electronic means of communication, including telephone, Internet and media services”.
On August 18, 2010, one of the Corporation’s subsidiaries was awarded an activity license, which became effective on August 23, 2010. Activity
licenses are generally valid for an unspecified period of time. On September 20, 2010, that subsidiary was further awarded an operating permit for the
organizing of games of chance in the form of remote gambling concerning one of the Corporation’s domain names. This operating permit, which was
subsequently renewed in September 2015, is valid through September 21, 2020.
France
The Collège De L’Autorité de Régulation des Jeux En Ligne (the “ARJEL”) oversees gaming licensing with respect to customers in France. Act No.
2010-476 of 12 May 2010 authorized online gaming with respect to customers in France for poker and betting on sports, horse races and circle games. Each
type of online gaming requires a separate gaming license. Government decrees and orders are also a part of the French regulatory system. The decrees and
orders that the Corporation believes are relevant to its business, address, among other topics, changes of control, customer accounts and the licensing process.
French regulation requires the submission of an annual certification audit, which is a technical and security audit relating to the hosting platforms that power
the services provided under the applicable ARJEL gaming license. Additionally, licensees are required to submit weekly financial reports to the ARJEL.
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One of the Corporation’s subsidiaries renewed a five-year license granted by ARJEL for online poker games that will expire on June 24, 2020. On
June 7, 2016, one of the Corporation’s subsidiaries was granted a five-year license by ARJEL for sports betting, which will expire on June 6, 2021.
On July 6, 2017, the gaming authorities of Portugal, Spain, France and Italy signed an agreement in Rome providing for online poker liquidity to be
pooled across all four jurisdictions. This concordat has taken some time to implement as it depends upon each jurisdiction issuing local clearance for its
players to take part. On December 14, 2017, the Corporation’s subsidiary licensed by ARJEL received authorization to include French players into the merged
player pools. On December 29, 2017, the Spanish gaming regulator, Dirección General de Ordenación del Juego (the “DGOJ”), signed a similar resolution
authorizing pooled poker liquidity including Spanish players and the Corporation received its authorization on January 15, 2018. The Corporation’s relevant
subsidiaries therefore inaugurated pooled Franco-Spanish poker gameplay on January 16, 2018. The Corporation anticipates the necessary local
authorizations from the gaming authorities in Italy and Portugal to permit players from those jurisdictions to join the Franco-Spanish pooled liquidity in the
near future. See “—Italy”, “—Portugal” and “—Spain”, below.
Germany - Schleswig Holstein
The German state of Schleswig Holstein issued a gaming license to one of the Corporation’s subsidiaries pursuant to a state law adopted in 2012 that
regulated and licensed online gaming. Although the law has since been repealed, the Corporation’s gaming license will remain valid until December 21, 2018.
Under such gaming license, and only until the expiration date, which may not be extended, a Maltese subsidiary of the Corporation is licensed to offer poker
games and certain casino games to customers in Schleswig Holstein.
Greece
In Greece, the Hellenic Gaming Commission (the “HGC”), in partnership with the Greek Ministry of Finance (the “Greek Ministry”) is responsible for
regulating and supervising the online gaming industry. In 2011, the Greek government enacted new legislation relating to all forms of gaming (the “Greek
Gambling Act”). Under the Greek Gambling Act, companies that have been licensed by the Greek Ministry through public tenders are authorized to offer
online gaming. The Greek Gambling Act also allows for companies that hold gaming licenses in other member states of the European Union to apply for
interim temporary licenses, which will remain valid until the formal licenses are awarded. The HGC issued twenty-four temporary gaming licenses under the
Greek Gambling Act.
In November 2013, the Corporation partnered with Diamond Link Ltd., a Maltese entity (“Diamond Link”), to allow Greek customers to utilize the
Corporation’s online gaming products. Diamond Link is one of the twenty-four temporary gaming license holders in Greece, and through the Corporation’s
partnership, two of the Corporation’s websites operate under that authorization utilizing Diamond Link’s Maltese gaming license. In May 2017, a subsidiary
of the Corporation purchased all the outstanding interests of Diamond Link, and maintains the temporary gaming license pursuant to which it allows Greek
customers to utilize the Corporation’s online gaming products.
Ireland
In Ireland, sports betting services are regulated by the Betting Acts 1931 – 2015 and licensed through the Irish National Excise Licence Office. The
primary suitability and probity requirement of the Irish authorities is that personal applicants for betting licenses as well as officers of corporate applicants
must hold a “Certificate of Personal Fitness” issued by the Department of Justice and Equality as well as a “Tax Clearance” certificate.
In July 2015, a subsidiary of the Corporation received an online betting license from the Irish National Excise Licence Office to provide online sports
betting to customers in Ireland. All Irish online betting licenses are valid for two years and commence and expire on the same dates, having been renewed as a
class in June 2017 and therefore currently valid through June 30, 2019.
Poker and casino games are made available to persons in Ireland through the Corporation’s Maltese multi-jurisdictional gaming license (discussed
below in more detail) pending the Irish government’s enactment of the more comprehensive gaming licensing regime based on the “General Scheme of the
Gambling Control Bill” that has been stalled in the Irish legislature since 2013.
Italy
Currently, the Agenzia delle Dogane e dei Monopoli (the “ADM”), formerly known as L’Amministrazione Autonoma dei Monopoli di Stato, regulates
gaming in Italy. All operators, both foreign and domestic, are required to obtain a gaming license from the ADM to provide online gaming products to
residents in Italy. Applicants based in the European Economic Area (“EEA”), or those with their registered office within the EEA, are eligible for a license.
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On December 17, 2010, a concession to operate, among other things, poker, casino and sports betting in Italy was awarded to one of the Corporation’s
subsidiaries. This gaming license was supplemented in March 2011, and was set to expire on June 30, 2016. The Corporation filed a renewal application for
the gaming license and is permitted to continue operating until the Corporation has had an opportunity to obtain a new gaming license (or renew its current
gaming license) under the new licensing regime announced by the ADM on January 8, 2018. Under the new tender process, a maximum number of 120
gaming licenses will be awarded and will be valid until December 31, 2022. The deadline for submission of applications for an online gaming license is
March 19, 2018. There can be no assurance that such new gaming license (or renewal) will be granted to the Corporation or any of its subsidiaries.
As noted above, on July 6, 2017, the gaming authorities of Portugal, Spain, France and Italy signed an agreement in Rome providing for online poker
liquidity to be pooled across all four jurisdictions. This concordat has taken some time to implement as it depends upon each jurisdiction issuing local
clearance for its players to take part. The relevant subsidiaries of the Corporation commenced shared poker liquidity involving French and Spanish players on
January 16, 2018 but the necessary ADM authorization for the addition of Italian players has not yet been finalized.
Portugal
Under the Online Gambling and Betting Legal Regime, approved by Decree Law No. 66/2015, the Serviço de Regulação e Inspeção de Jogos, or
the Gambling Inspection and Regulation Service, is responsible for the control, inspection and regulation of gambling activities, including through any
electronic, computer-based, telematic or any other interactive means (i.e., online gaming). Portuguese regulation requires the submission of monthly financial
reports regarding, among other things, customer liability information and gaming duty reporting.
On November 25, 2016, one of the Corporation’s subsidiaries was granted a three-year license to offer certain online poker and casino games to
customers in Portugal, which will expire on November 24, 2019.
As noted above, on July 6, 2017, the gaming authorities of Portugal, Spain, France and Italy signed an agreement in Rome providing for online poker
liquidity to be pooled across all four jurisdictions. This concordat has taken some time to implement as it depends upon each jurisdiction issuing local
clearance for its players to take part. The relevant subsidiaries of the Corporation commenced shared poker liquidity involving French and Spanish players on
January 16, 2018 but the necessary Gambling Inspection and Regulation Service authorization with respect to the relevant subsidiaries of the Corporation for
the addition of Portuguese players has not yet been finalized.
Romania
In Romania, the Oficiul National pentru Jocuri de Noroc (the “ONJN”) issues and maintains licenses for online gaming. In August 2015, one of the
Corporation’s subsidiaries was awarded an interim gaming license by the ONJN to offer online casino, poker and sports betting to customers in Romania. The
interim gaming license was valid for one year and on August 12, 2016, the ONJN awarded the Corporation’s relevant subsidiary a full license for organizing
remote gambling games, which is valid for ten years and allows such subsidiary to provide online poker, casino and sports betting to customers in Romania.
The gaming license is subject to an annual reauthorization by the ONJN, which is based on a review of the licensee’s compliance with the applicable license
requirements and conditions.
Spain
In Spain, gaming is traditionally regulated by each of the seventeen autonomous regions. Spain’s Gambling Act (the “Spanish Gambling Act”) became
effective on May 29, 2011, in order to, among other things, regulate online gaming nationwide. The Spanish Gambling Act covers “gaming operations
through electronic, interactive, and technological means” including the internet, television, mobile phones and land lines. The types of gaming activities
controlled under the Spanish Gambling Act include sports betting, horse racing betting, raffles, competitions and “other games”, which includes poker and
casino games. The DGOJ is responsible for enforcement of the Spanish Gambling Act and has sanctioning authority.
The Spanish Gambling Act establishes two categories of gaming licenses: general and single, as well as a permit for offering occasional games. A
“general license” is required to offer certain types of betting games, raffles and games categorized as other games. General licenses are valid for a ten year
term, and may be renewed for additional ten-year periods. The DGOJ offers general licenses through a competitive and public tendering process. The
Gambling Act requires applicants to apply for provisional registration in the General Register of Gambling Licenses prior to requesting a call, or public notice
of application, for a general license. The Gambling Act grants the DGOJ the authority to restrict the number of licenses awarded for each type of game based
on public interest and whether a company requests a call, in each case allowing the DGOJ to control the license review and authorization process. If the
number of licenses for a particular type of game is restricted, the licenses offered during that call are not automatically renewable.
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On June 1, 2012, one of the Corporation’s subsidiaries was granted a general license for the development and operation of games in the other games
category and a “singular license” for the offering of online poker. The same subsidiary is also authorized to conduct the advertising, sponsorship and
promotion of the games authorized by the gaming licenses. The general license is valid for a ten-year term, and the singular license is valid for a five-year
term and has been renewed through June 1, 2022. This subsidiary has also been granted singular licenses for blackjack, roulette and sports betting and a
general license for sports betting. The gaming licenses for blackjack and roulette expire on February 2, 2021. The singular and general sports betting licenses
expire on June 2, 2025 and June 2, 2020, respectively.
On January 15, 2018, the Corporation’s subsidiary licensed by the DGOJ received authorization for shared liquidity permitting it to offer merged
player pools comprising players from Italy, Portugal and France. Pooled tables between Spanish and French players were launched accordingly on January
16, 2018. The Corporation is awaiting the necessary local authorizations to enable the addition of Italian and Portuguese players. For additional information,
see “—France”, “—Italy” and “—Portugal” above.
United Kingdom
Gaming with respect to customers in Great Britain (England, Scotland and Wales, but excluding Northern Ireland) is regulated by the Gambling Act
2005 (the “2005 Act”). The 2005 Act established the Gambling Commission as the regulator that is responsible for granting licenses to operate gaming as
well as overseeing compliance with applicable law and regulation. In 2014, the Gambling (Licensing and Advertising) Act 2014 was passed by the United
Kingdom Parliament, which required all remote gambling operators serving customers in the United Kingdom and advertising in the United Kingdom to
obtain a license from the Gambling Commission. On November 1, 2014, one of the Corporation’s subsidiaries obtained a “continuation” (i.e., interim) license
issued by the Gambling Commission, and on March 18, 2015 a full operating license was issued along with the separate software and “key personnel”
individual licenses. So long as the applicable license fees are paid and the British license is not suspended, revoked or otherwise surrendered, the Corporation
expects that the license will remain valid indefinitely.
British regulations require licensed companies to file quarterly returns as well as a more extensive “annual assurance statement” to provide the
Gambling Commission with information regarding matters such as significant changes in control systems, risk management and governance since the last
assurance statement, how the licensed company is addressing problem and at-risk gambling, and any improvements that the licensed company plans to
implement to its control systems and risk management and governance and/or its approach to addressing problem and at-risk gambling, including actions to
address the National Responsible Gambling Strategy.
United States
Generally, intrastate online gaming is lawful in the United States provided the relevant gaming complies with the Unlawful Internet Gambling
Enforcement Act and the particular state has enacted legislation or otherwise properly authorized the same. Further, the Federal Wire Act of 1961 (the
“Federal Wire Act”) makes it unlawful to use electronic communications to make interstate bets or wagers, or transmit information that assists in making such
bets or wagers, on any sporting event or contest. In December of 2011, the United States Department of Justice (the “DOJ”) issued an opinion from its Office
of Legal Counsel indicating that it is the official opinion of the DOJ that the Federal Wire Act “prohibits only the transmission of communications related to
bets or wagers on sporting events or contests. More specifically, “interstate transmissions of wire communications that do not relate to a ‘sporting event or
contest’ [. . .] fall outside of the reach of the Wire Act.” Pursuant to this guidance, the legislatures of New Jersey, Nevada, Delaware and Pennsylvania
authorized intrastate online gaming, provided that the gambling does not concern a sporting event or contest.
On September 27, 2017, New Jersey joined the Multi-State Internet Gaming Agreement (the “MSIGA”), which was previously entered into between
Delaware and Nevada. This agreement permits New Jersey, Nevada and Delaware to share liquidity among players in both online poker and certain online
casino games. Under the MSIGA, customers can only access online gaming sites that are licensed by the state in which they are located, i.e., Nevada
residents can play online games on sites licensed in Nevada. The MSIGA sets forth certain minimum standards that each state is expected to have in place,
including common standards in the regulated gaming industry, such as age and identity verification, anti-money laundering and related protocols, data
security, and other measures intended to assure the integrity of wagering conducted pursuant to the MSIGA. The Corporation believes MSIGA is intended to
be expanded beyond its current membership of New Jersey, Nevada and Delaware.
On December 4, 2017, the United States Supreme Court (the “Supreme Court”) heard oral arguments in Murphy v. National Collegiate Athletic
Association (formerly known as Christie v. National Collegiate Athletic Association), No. 16-476, related to the constitutionality of the Federal Professional
and Amateur Sports Protection Act (“PASPA”). PASPA prohibits a state from “authorizing by law” any form of sports betting. Under the current case before
the Supreme Court, the State of New Jersey repealed its criminal prohibitions on sports betting to the extent such prohibitions applied to casinos and
racetracks. New Jersey’s position is that such a law did not run afoul of PASPA because it did not amount to the “authorization” of any form of sports
betting. Although there can be no assurance as to timing or outcome, the Supreme Court is expected to rule on this matter in or before June 2018. One
potential outcome could be the Supreme Court striking down the PASPA prohibition resulting in potential state authorization of sports
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betting. Regardless of the Supreme Court’s decision regarding PASPA, sports betting in the United States may be subject to additional laws, rules and
regulations, including those discussed in this annual information form.
More detail on the regulatory framework in New Jersey, where the Corporation currently holds a transactional waiver, is provided directly below.
New Jersey
The provision of online gaming, and other aspects of casino gaming in New Jersey, are subject to the requirements of New Jersey Casino Control Act
(the “NJ Act”) and the regulations promulgated thereunder. Under the online gaming legislation, third-party companies may provide services to casino
licensees to facilitate the conduct of online gaming, including website hosting, and the provision of game content. Such service providers must first obtain a
casino service industry enterprise (a “CSIE”) license. The New Jersey Division of Gaming Enforcement (the “NJ DGE”) has the responsibility to investigate
all license applications and to prosecute violations of the NJ Act.
Due to the length of investigative time prior to issuing of a plenary CSIE license, the New Jersey regulations allow a CSIE applicant to petition the NJ
DGE for a transactional waiver, which allows a CSIE applicant to conduct business with a casino licensee prior to the issuance of a license at the discretion of
the NJ DGE and subject to certain conditions.
Certain subsidiaries of the Corporation were issued an initial six-month transactional waiver on September 30, 2015 in relation to an agreement
entered into with Resorts Casino Hotel in Atlantic City, New Jersey through Resorts Digital Gaming, LLC, the interactive affiliate of Resorts Casino Hotel, to
conduct online gaming in the state. Additional six-month renewal transactional waivers have been granted to these subsidiaries to continue operations with
the most recent transactional waiver granted on September 30, 2017 and valid until March 30, 2018. The transactional waiver may be renewed in six-month
intervals until a full, five-year license is issued; there can be no assurance that such a license will be issued. The transactional waiver contains certain
conditions, including, without limitation, prohibiting certain individuals from having any relationship with the Corporation and informing the NJ DGE of
various actions of such individuals, providing the NJ DGE with notice of certain corporate actions and copies of records relating to the same, and providing
certain inspection rights to the NJ DGE. In connection with the initial grant of the transactional waiver, the Corporation was also required to escheat certain
funds to the State of New Jersey and separate certain individuals from employment.
Multi-Jurisdictional Licenses
The Corporation, through certain subsidiaries, holds gaming licenses in Malta and the Isle of Man, which are often referred to as “multi-jurisdictional”
or “point-of-supply” licenses (as opposed to the local, territory-specific or “point-of-consumption” licenses detailed in “—Local Licenses and Approvals”
above). These multi-jurisdictional licenses are used by the Corporation’s various subsidiaries to supply the Corporation’s online gaming products to persons
located in jurisdictions where the Corporation does not possess a local, territory-specific or point-of-consumption gaming license authorizing the same.
Where online gaming products hosted on Maltese or Isle of Man servers pursuant to the relevant multi-jurisdictional licenses are made available by the
Corporation for online usage by customers in other jurisdictions it is done on the basis of the well-established general principle of e-commerce and Internet
law that deems the provision of online products and services to take place where the operator’s server and/or the operator itself is established and located.
This principle is widely relied upon by online gaming operators as well as by many other e-commerce businesses.
Accordingly, the Corporation relies on the fact that its supply of online gaming products and services is lawfully licensed or approved within the
jurisdiction of origin (i.e., Malta or the Isle of Man) as the rationale for the Corporation’s lawful offer of gaming products and services to other jurisdictions
where either: (i) such other jurisdictions have not established a regulatory and licensing framework for online gaming, (ii) the availability to citizens of online
gaming hosted outside its jurisdictional boundaries is not clearly prohibited by the law of the jurisdiction, or (iii) the local laws of such other jurisdiction lack
extra-territorial effect, including where local law is contrary to any supra-national law from which the Corporation benefits (which, for example, is the
position in European Union member states such as Germany, where domestic law is widely held to be incompatible with the basic principles of European
Union law).
Where, however, any jurisdiction has enacted local domestic laws that clearly prohibit the availability to citizens of online gaming products hosted
abroad, and where it is clear that such local domestic law has extra-territorial application to the Corporation to the extent that the principle of extra-
territoriality described above is clearly overridden, the Corporation will take technical and administrative measures aimed at preventing persons from the
relevant jurisdictions accessing the Corporation’s gaming products. For additional information, see below under “—Regulatory Strategy”.
Set forth below is an overview of the Corporation’s multi-jurisdictional licenses.
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Isle of Man
Under the Online Gambling Regulation Act 2001, the Isle of Man Gambling Supervision Commission (the “GSC”) maintains responsibility for the
regulation and supervision of all online gaming activities in the Isle of Man, and for the investigation of the character and financial status of any person
applying for or holding a license in connection with online gaming. The GSC is authorized to grant a license to conduct online gaming to a company if the
GSC is satisfied: (i) that the company is under the control of persons of integrity; (ii) as to the beneficial ownership of the share capital of the company;
(iii) that the activities of the company are under the management of persons of integrity and competence; and (iv) that the company has adequate financial
means available to conduct online gaming. Licenses are generally valid for a maximum of five years. The GSC may revoke a gaming license if the licensee
fails, at any time, to meet any of the initial licensure requirements. The GSC may suspend or revoke a gaming license if the holder of the gaming license or
designated official is convicted of certain offenses, or is convicted “by a court in any country or territory in the world of an offense punishable (in that country
or territory) in the case of an adult by custody for an unlimited period or a term of two years or more.” Gaming licenses may also be suspended or revoked for
other reasons, including the failure to pay required fees or failure to comply with license conditions or obligations.
One of the Corporation’s subsidiaries holds a gaming license issued by the GSC allowing the Corporation to provide poker, casino and betting
products and services. The license was renewed on March 10, 2014 and expires on March 9, 2019. Gaming duty is payable in the Isle of Man on the
Corporation’s worldwide gaming revenue. With respect to online gaming offered under this license to customers in certain other jurisdictions, such as
Switzerland, the Corporation also pays applicable gaming duty or VAT in those jurisdictions.
With the exception of the United States, outside the European Union, the Isle of Man license granted to one of the Corporation’s subsidiaries generally
permits the licensee to accept customers in various jurisdictions around the world where domestic laws do not clearly prohibit the availability to citizens of
online gaming products hosted abroad, and where it is clear that such local domestic law has extra-territorial application or where there is no national
regulatory and licensing system that specifically requires licensure by foreign operators.
Russian Federation
For example, the Corporation’s online poker and casino products are currently accessible in Russia pursuant to its Isle of Man gaming license. Federal
Russian Law No.244-FZ (“Law 244”) limits the operation of gambling activities in the territory of the Russian Federation but it is not clear whether offering
online gaming from websites and servers established outside of Russia is considered as an activity taking place “in Russia”. Russian courts have generally
taken a very narrow approach to the extra-territorial application of Russian law, including Law 244. In certain Internet service provider blocking cases the
Russian courts determined that it would not be possible to take direct enforcement action against companies outside of Russia and that operators of foreign
online gaming websites cannot be held liable in accordance with Russian law because they do not operate in Russia and Russian courts do not have
jurisdiction over them. In 2017, the Corporation sponsored the PokerStars Championship Sochi, which included dozens of events with a centerpiece 150
million RUB (approximately $2.6 million) guaranteed main event, the largest guaranteed prize pool event in Russian poker history.
In November 2017, Russian President Putin signed a bill into law that introduced financial blocking measures in Russia for offshore gambling services
(the “Financial Blocking Bill”), enforcement of which is expected to start on May 25, 2018 (provided that the necessary government ordinances have been
drafted by then). Although the Financial Blocking Bill does not clearly specify enforcement measures, the Corporation expects that measures to block certain
transactions using domestic credit and debit cards will be implemented and that certain offshore payment processors and gambling companies will be
“blacklisted”, which may cause locally licensed banking institutions to cease conducting business with such payment processors and gambling
companies. The Corporation is currently monitoring and assessing the potential impact and disruptions to its business that may be caused by the Financial
Blocking Bill and engaging in various activities that it believes may mitigate the potential impact of the Financial Blocking Bill. Nevertheless, the Financial
Blocking Bill could materially adversely affect the Corporation’s business, results of operations and financial condition.
Canada
In Canada, gaming regulation exists in a type of shared jurisdiction between the federal government of Canada and the provincial and territorial
governments across the country. At the federal level, the Canadian Criminal Code contains provisions that both prohibit and allow certain types of gambling
activity. Each province has the exclusive jurisdiction and power to regulate and offer or further restrict, within its borders, gambling activity.
Part VII of the Criminal Code establishes a number of offences related to gaming, betting, and lottery schemes, and also sets out a number of
exemptions. The applicability of the various Criminal Code offences depends to a great extent on the nature of the
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specific gaming or betting activity itself, ancillary and related activities, and the extraterritorial limits of the Criminal Code. The Criminal Code does not
specifically contemplate online gambling. The relevant provisions of the Criminal Code prohibit: (a) keeping a common gaming house (which requires a
specific physical location); (b) betting activities; (c) games of pure chance; or (d) traditional gambling.
The Corporation, aided by input from external legal advisors and the Corporation’s Compliance Committee (as defined below), has formed the
reasoned view that Part VII of the Criminal Code does not prohibit peer-to-peer online poker services, which are currently the Corporation’s only real-money
services accessible in Canada. Although no Canadian court has yet considered this question, the Corporation holds this view because, among other reasons:
(a) online poker does not take place in a specific physical location; (b) playing poker constitutes gaming and not “betting”; (c) poker is a game of skill with
some element of chance and (d) online poker, where the stakes are won and lost between the players who participate directly in peer-to-peer interactions
around a virtual table, is not “traditional gambling” where players compete against the house. As such, the Corporation does not currently hold or believe that
it is required to hold a gaming registration or license in any Canadian jurisdiction with respect to its online peer-to-peer poker offering. In this regard, a
number of prosecutions have been brought by the Canadian authorities in relation to gaming, but these are understood to have involved physical gaming
operations based within the jurisdiction. A different interpretation of the Criminal Code may be adopted by a court of competent jurisdiction, which could
have a material adverse effect on the Corporation’s business, financial condition and operating results.
Brazil
In addition, in Brazil, Article 50 of Decree Law 3688/1941 (“Article 50”) prohibits certain types of gaming activities. The law defines gaming as
games in which the gain or loss depends on luck. There have been several judicial opinions, administrative opinions, and other reports and legal opinions
holding that poker is a game of skill, and accordingly, that poker is not prohibited under Article 50. While there have also been conflicting views, the
consideration of poker as a game of skill appears to be the majority view in Brazil and the Brazilian Sports Ministry has also recognized poker as a
“sport”. Further, it is not clear whether the restrictions set forth in Article 50 apply to online gaming supplied into the jurisdiction from offshore as the law
does not mention Internet gaming and there are no specific laws or regulations concerning Internet gaming. The Corporation also believes that Brazilian law
may take a narrow approach to the extra-territorial effect of Brazilian law with respect to the Internet. A different interpretation of Article 50 may be adopted
by a court of competent jurisdiction, which could have a material adverse effect on the Corporation’s business, financial condition and operating results.
Switzerland
With respect to Switzerland, the Corporation has been advised that, in the absence of any territorial connection to Switzerland, a foreign gaming
operator cannot be liable for breach of gaming regulations under Swiss law. To the Corporation’s knowledge, as of the date of this annual information form,
the Swiss authorities have not sought to initiate any enforcement actions against offshore gaming operators. The Corporation therefore relies on certain
arguments on the lack of extra-territorial applicability and enforceability of Swiss law to support its continued offering of its online gaming products to
customers located in Switzerland pursuant to its multi-jurisdictional licenses. In addition, the Corporation continues to pay applicable gaming duty or VAT on
its online gaming offerings in Switzerland.
Malta
Under the Maltese Lotteries and Other Games Act 2001 and the Remote Gaming Regulations (S.L. 438) (collectively, the “Maltese Regulations”), the
Malta Gaming Authority (the “Maltese Authority”) regulates all aspects of gaming in Malta. Pursuant to the Maltese Regulations, any person who operates,
promotes, sells, supplies or manages interactive gaming in or from Malta must obtain the appropriate license from the Maltese Authority. The Maltese
Authority issues four classes of Remote Gaming Licenses: (i) a Class 1 Remote Gaming License which is a remote gaming license; (ii) a Class 2 Remote
Gaming License - remote betting office license; (iii) a Class 3 Remote Gaming License - license to promote and/or abet remote gaming from Malta; and (iv) a
Class 4 Remote Gaming License - license to host and manage remote gaming operators, excluding the licensee. The above-referenced licenses or an
authorized equivalent from a European Economic Area jurisdiction approved by the Maltese Authority are required to operate, promote, sell or abet Internet
gaming in or from Malta.
Two of the Corporation’s subsidiaries hold an aggregate of 11 gaming licenses issued by the Maltese Authority, including Class 1, Class 2, Class 3 and
Class 4 licenses, which enables such subsidiaries to offer all respective products and services listed above. Absent any renewals or extension under the terms
of the governing licensing agreements, the Class 1 license is set to expire on November 13, 2019, the Class 2 license is set to expire on January 20, 2020, the
Class 3 license are set to expire on December 22, 2021 and the Class 4 license is set to expire on December 22, 2021.
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Gaming duty is payable in Malta on the Corporation’s revenue from online gaming offered through these gaming licenses. With respect to online
gaming offered under these gaming licenses to customers in certain jurisdictions such as Germany (other than Schleswig-Holstein) and Ireland (poker and
casino), the Corporation also pays applicable gaming duty or VAT in those jurisdictions on some or all of the online gaming offerings in those jurisdictions.
In accordance with European Union law, the Corporation’s Maltese gaming licenses entitle its Maltese subsidiaries to provide online gaming services
to other European Union member states in compliance with established European Union rules and principles on the free movement of services, unless those
countries have their own national regulatory and licensing regime that is compatible with those same European Union rules and principles and in particular
the core principles of the Treaty on the Functioning of the European Union (“TFEU”).
Germany (other than Schleswig-Holstein)
With respect to Germany (other than Schleswig-Holstein), the Corporation’s online poker, casino and sports betting products and services are
accessible to customers in Germany pursuant to its Maltese licenses in accordance with the right to offer services freely across European Union member state
borders set out in the TFEU. For information on the Corporation’s operations in the State of Schleswig Holstein in Germany, see “—Germany - Schleswig
Holstein” above.
The “Glücksspielstaatsvertrag” or Interstate Treaty on Gambling of 1 July 2012 (the “Treaty”) generally provides for Germany’s 16 states to assume
responsibility for aspects of gambling regulation. Attempts have been made in Germany to maintain the state monopoly on lotteries, prohibit the offering of
online casino games (including poker), and permit the licensing of only 20 sports betting operators. The German authorities, however, have been reluctant to
initiate any enforcement actions regarding unlicensed online gaming services due to uncertainty over the compatibility of the Treaty with the TFEU,
particularly in relation to sports betting subsequent to the February 2016 decision of the Court of Justice of the European Union (“CJEU”) in the Ince case (C-
336/14). In the Ince case, the CJEU ruled that Germany runs an unlawful de facto state monopoly on sports betting due to the non-transparent, discriminatory
licensing procedure under which private betting licenses could not be granted in practice all while the state-owned gaming operators are allowed to continue
their respective businesses.The CJEU cited the incompatibility of the Treaty with the TFEU on the basis it does not observe the principles of equal treatment
and non-discrimination on grounds of nationality and the consequent obligation of transparency. The CJEU’s judgment also called into question the regulation
of online gaming in Germany as a whole, demanding clear licensing criteria. Given the CJEU’s position in February 2016 as well as wider European Union
and domestic German concerns with the lawfulness of the Treaty, the Corporation currently believes that it is justified in deriving revenue from the supply of
the Corporation’s online poker, casino and sports betting services to German customers using its Maltese licenses on the basis of the Treaty’s incompatibility
with Germany’s obligations under the TFEU.
On October 27, 2017, the Bundesverwaltungsgericht (the “Federal Administrative Court of Germany”) sitting at Leipzig published a press release
detailing its decision to confirm the lawfulness of the Treaty’s current ban on unlicensed gambling. The Federal Administrative Court of Germany upheld two
prohibition orders issued by the authorities of Baden-Württemberg against online gaming and sports betting operators based in Malta and Gibraltar. The
Corporation currently believes that the decision is unlikely to affect operators who applied for one of the 20 online betting licenses in Germany because in
addition to the Ince case noted above, there exist various lower court decisions holding that process to have been deficient. In relation to online gaming,
including poker, the Corporation currently believes that there are still good arguments as to why the Treaty remains non-compliant with the TFEU. As such,
the Corporation continues to believe that it is justified in deriving revenue from the supply of the Corporation’s online poker, casino and sports betting
services to German customers using its Maltese licenses on the basis of the Treaty’s incompatibility with Germany’s obligations under the TFEU.
The Netherlands
The Corporation’s poker, casino and sportsbook offerings are also accessible to customers in the Netherlands pursuant to its Maltese licenses. The
Dutch Betting and Gaming Act 1964 (the “BGA”) contains a general prohibition on the provision of gambling without a license. It has been debated whether
the BGA also applies to gambling provided via the Internet and if it is also applicable to actions taken outside of the Netherlands. However, the Dutch
legislature passed a new law on July 7, 2016 to introduce a new licensing framework for remote (and non-remote) gambling products as well as the remote
gambling regulations to implement the licensing regime. The Corporation currently expects that the new law will be implemented in 2018. When
implemented, the new law will introduce a point-of-consumption regime to allow operators wishing to provide their remote gambling products to persons in
the Netherlands to apply for, and obtain, a license to do so.
In the meantime, the Dutch Gaming Authority has set out its approach to enforcement in the period pending the introduction of the new licensing
regime. The Dutch Gaming Authority’s approach to enforcing the general prohibition of unlicensed gambling is based upon certain “prioritisation
criteria”. These criteria are those activities which, if undertaken by unlicensed operators, will
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increase the risk of enforcement action being taken against them. The criteria are, in order of the priority in which infringing operators will be pursued, as
follows: (i) making gambling websites available in the Dutch language; (ii) making gambling available online through a “.nl” website; and (iii) advertising of
gambling websites through television, radio or print media. The Dutch authorities have refrained from initiating any enforcement proceedings to date against
operators who respect the criteria. The Corporation has formally confirmed to local authorities in the Netherlands that it fully complies with the criteria. The
Corporation intends to apply for an online gaming license as soon as the application process becomes available.
Sweden
In Sweden, the Lotteries Act 1994 (Sw: Lotterilagen 1994:1000) (the “Lotteries Act”) is the primary legislation with respect to gambling and governs
all categories of gambling offered to the public in Sweden. The Lotteries Act prohibits the arrangement of unlicensed lotteries and the promotion of
participation, in commercial operations or otherwise for the purpose of profit, in unlawful domestic lotteries or foreign lotteries. The definition of “lottery” is
broad and explicitly includes betting, bingo, casino games and other similar games. The Lotteries Act does not in any material way distinguish between land-
based gambling and online gambling. Under the current regime it is not possible for a private commercial entity to obtain a license to provide online
gambling services to Swedish customers. It is however, not illegal for private operators established in another European Union member state to offer
gambling services to Swedish customers. On October 16, 2014, the European Commission took two separate decisions to bring infringement proceedings
against the Swedish government to the CJEU in relation to the Swedish legislation for gambling services.
In Sweden, court cases have found that the only activity covered by the Lotteries Act is the local advertising carried out by local media companies.
These cases are against the media companies and courts tend to find that the prohibition of advertising for operators not holding a Swedish license is
unenforceable because the Lotteries Act is widely regarded as being in violation of the TFEU. Furthermore, the launch of infringement proceedings against
Sweden reinforces the Corporation’s position that the supply of gambling services to Swedish players from another European Union member state is
permitted. New legislation has been proposed that would introduce a point-of-consumption based licensing system similar to other European “regulated
markets” regimes. This draft law is currently undergoing constitutional review, and once complete and assuming constitutionality, the Swedish government is
expected to submit the law to its parliament for consideration.
Regulatory Strategy
The Corporation seeks to ensure that it obtains all permits, authorizations, registrations and/or licenses necessary to develop and offer its products and
services in the jurisdictions in which it operates, where its customers are located and/or where it is otherwise required to do so. In particular, the Corporation
intends to seek licensure with respect to more European Union member states if and when such member states introduce their own independent regulatory and
licensing regimes compliant with European Union law. Outside of the European Union, the Corporation anticipates there may be a potential for the regulation
of online gaming, including online poker, casino and/or sports betting, including with respect to shared liquidity, and that this may result in potential licensing
or partnerships with private operators in various jurisdictions. The Corporation supports the regulation of online gaming, including licensing and taxation
regimes and pooled poker liquidity, which it believes will promote sustainable online gaming markets that are beneficial for consumers, governments and the
citizens of the regulating jurisdiction, operators and the gaming industry as a whole. The Corporation expects to continue to invest substantial resources into
these efforts, particularly in markets that management believes may in the future have the greatest impact on its business. The Corporation strives to work
with applicable governmental authorities to develop regulations that it expects would protect consumers, encourage responsible gaming, ensure efficient
taxation and promote regulated gameplay. The Corporation also strives to be among the first licensed operators to obtain gaming licenses and provide online
gaming to customers in newly-regulated jurisdictions, in each case to the extent it would be in furtherance of the Corporation’s business goals and strategy
and in compliance with its policies and procedures.
The Corporation also seeks to ensure that its systems, products and services comply with all the regulations and guidelines published by the gaming
authorities that license the Corporation. The Corporation works with regulatory and governmental bodies to ensure its products, including the software and
technological infrastructure underlying the same, undergo comprehensive, exhaustive and rigorous testing by such regulatory and governmental bodies, as
well as by independent industry leading testing, accreditation and certification laboratories (including, without limitation, GLI and BMM). The objective of
this testing is to certify to, among other things, security, conformity to applicable regulations and game integrity. The Corporation seeks to meet or exceed
best operational and customer protection practice requirements, each with a particular emphasis on fair and responsible gaming.
The methods and tools The Stars Group uses to permit or restrict access to its online gaming products and services within a territory are mandated or
approved by the applicable gaming regulatory authority in each licensed, permitted or approved jurisdiction where a subsidiary of the Corporation holds such
license, permit or approval. In particular, The Stars Group employs the following methods and tolls across such jurisdictions: (i) IP address blocking, which
identifies the location of the player and blocks his or her IP address; and (ii) country-specific blocking based on the residence of the player. In certain
jurisdictions, the Corporation also employs
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geolocation blocking, which restricts access based upon the player’s geographical location determined through a series of data points such as, without
limitation, mobile devices and wi-fi networks.
The Corporation further seeks a zero-tolerance approach to money laundering, terrorist financing, fraud, collusion and other forms of cheating and
works with regulators and law enforcement globally on such matters. The Corporation believes that it has a robust and extensive set of policies and
procedures designed to identify such issues. Among other measures, it conducts escalating risk-based customer due diligence investigations and routinely
monitors customer activity, including to identify the use of potential “proceeds of crime” in gaming. Customer activities that can trigger customer interactions
initiated by the Corporation include, without limitation, abnormal deposit and cashout patterns, customer-to-customer transfers and game play and prolonged,
repetitive and unprofitable gaming. These are all monitored in accordance with local regulations and the guidelines of the relevant gaming authorities. The
Corporation also has a dedicated compliance team that works with the Corporation’s employees and various departments to implement routine business
activity monitoring and seeks to ensure that the Corporation complies with its regulatory obligations under its gaming licenses, as well as with all the other
law and regulation that applies to its business in each jurisdiction to which it is subject.
For further information regarding the Corporation’s regulatory strategy and its commitment to ethical business conduct, see “Business of the
Corporation—Technology Infrastructure and Research and Development” and “Directors and Officers—Ethical Business Conduct”.
Other Regulatory Considerations
The Corporation handles, collects, stores, receives, transmits and otherwise processes certain personal information of its customers and employees,
which is subject to the laws relating to privacy as well as the protection and use of personal information that apply in various jurisdictions in which it operates
and/or where its customers are located. Privacy and information protection laws, require, among other things, that entities collecting and processing such
personal information do so in accordance with applicable legal and regulatory conditions. For example, the European Union General Data Protection
Regulation (Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016) (the “GDPR”) cites as its core principles: (i) lawful,
fair and transparent processing; (ii) processing for specific, explicit and legitimate purposes; (iii) that personal information be adequate, relevant and limited
to what is necessary for the purposes in hand; (iv) that personal information be accurate and kept updated; (v) that personal data be retained for only as long
as necessary; and (vi) appropriate security against loss, destruction, damage or theft is implemented. Failure to comply with applicable laws on privacy and
personal information can give rise to regulatory sanctions, fines and, in certain limited cases, criminal liability.
With regards to the Corporation’s operations in Europe, particularly where the personal information being processed relates to residents of the
European Union member states, the European Union has created the GDPR to replace EU Directive 95/46/EC as well as the national implementing legislation
in each European Union member state, for example in the United Kingdom, the Data Protection Act 1998. The GDPR takes effect on May 25, 2018 and will
impose more stringent operational requirements for entities processing personal information and significant penalties for non-compliance. For instance, the
GDPR will introduce two categories of administrative fines depending on the seriousness of the breach that will range from: (a) up to €20 million or 4% of
worldwide revenues of the preceding year (whichever is the higher) for serious infringements; or (b) up to €10 million or 2% of worldwide revenues of the
preceding financial year for less serious infringements. In preparation for the GDPR, the Corporation has been taking and continues to take certain measures,
including undergoing a fundamental review of its data processing activities, introducing certain automated tools to delete personal information that is no
longer in use and performing a full gap analysis to better understand the flows and uses of personal information within the Corporation. Additionally, to help
ensure that personal information belonging to the Corporation’s customers and employees will be processed in accordance with the GDPR (as well as any
other relevant privacy and data and information protection legislation) the Corporation intends to post its revised privacy statements together with updated
terms and conditions for use of its products and services on its websites.
The Corporation is also subject to numerous other domestic and foreign laws and regulations. See also “Risk Factors and Uncertainties—Risks Related
to Regulation”. These can take the form of complex and evolving domestic and foreign laws and regulations regarding the Internet, privacy, data protection,
competition, consumer protection and other matters. Many of these laws and regulations are subject to change and uncertain interpretation and could result in
claims, changes to the Corporation’s business practices, monetary penalties, increased cost of operations, or declines in customer growth or engagement, or
otherwise harm its business.
Responsible Gaming
The Stars Group is committed to industry-leading responsible gaming practices and seeks to provide its customers with the resources and services they
need to play responsibly, including, without limitation, through its dedicated responsible gaming department. These practices, resources and services include,
without limitation, deposit limits, table and game play limits, voluntary
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restrictions on access and use of certain games, temporary self-exclusion and cooling off periods, and voluntary permanent exclusions from The Stars Group’s
services, sites and applications. The Stars Group has also partnered with various responsible gambling organizations that conduct research and offer education
and direct counselling for players. These organizations include Adictel in France, GamCare and GambleAware in the United Kingdom, the National Council
on Problem Gambling in the United States and GamblingTherapy.org worldwide.
The Stars Group regularly submits its responsible gaming policies and procedures for independent accreditation via various expert organizations that
have developed comprehensive responsible gaming standards and measurements designed to determine the effectiveness of a gaming company’s policies,
procedures and practices in addressing problem gambling. Independent organizations that have accredited The Stars Group’s responsible gaming program
include GamCare and the Responsible Gambling Council of Canada. In addition, The Stars Group has recently submitted its responsible gaming program to
the United States’ National Council on Problem Gambling for accreditation.
Human Resources
As of December 31, 2017, the Corporation, directly and through its subsidiaries, had approximately 2,110 employees of which approximately 1,502
were located in Europe, approximately 307 were located in Canada, approximately 55 were located in the United States, approximately 200 were located in
Latin America, and approximately 46 were located in Asia. These employees provide services in either general and administrative, marketing, operations,
including customer support and services, information technology or R&D capacities, with operations comprising the largest department.
Although certain of The Stars Group’s employees in Italy may be party to collective bargaining or related agreements and certain of The Stars Group’s
employees in the European Union may be represented by labor unions, to its knowledge, the vast majority of its employees are not. The Corporation has
never experienced any employment-related work stoppages and believes its relationship with its employees is good.
The Corporation values the benefits diversity can bring to its business, including diversity of personal characteristics such as age, gender, character,
geographic residence, business experience (including financial skills and literacy), functional expertise, demonstrated leadership, stakeholder expectations and
culture. The Corporation believes that diversity promotes the inclusion of different perspectives and ideas, and ensures that the Corporation has the
opportunity to benefit from all available talent. Women represent 32% of the Corporation’s workforce. Although the Corporation has one woman in a key
senior management position, currently none of the Corporation’s executive officers are women, and as of the date of this annual information form it has not
adopted a target for female executive officers. The Corporation has identified a need to increase the number of women employees in the organization and to
include diversity, including gender diversity, in its talent management programs. The Corporation has begun identifying and reporting to senior management
and the Corporate Governance, Nominating and Compensation Committee on the diversity of its workforce with a view to identifying diversity gaps,
workplace policies to better recruit and retain female employees and the Corporation’s progress in increasing the number and proportion of female officers
and executive officers.
The Corporation has numerous policies and practices, including, without limitation, a Code of Business Conduct, a Disclosure, Confidentiality and
Trading Policy, an Anti-Bribery Policy, an Anti-Fraud Policy and a Whistleblower Policy, that are collectively designed to deter and detect wrongdoing and
promote, among other things, legal, honest, ethical, healthy and safe conduct, good governance, and transparency and effective communication between and
among employees, management and the public. The Code of Business Conduct and The Stars Group’s Anti-Bribery Policy, as applicable, also provide rules
and guidelines regarding compliance with Canada’s Corruption of Foreign Public Officials Act (the “CFPOA”), the U.S. Foreign Corrupt Practices Act (the
“FCPA”), and any local anti-bribery or anti-corruption laws that may be applicable, such as the U.K. Bribery Act (2010) (the “U.K. Bribery Act”) and the Isle
of Man Bribery Act (2013) (the “IOM Bribery Act”), and to evidence The Stars Group’s commitment to full compliance, including compliance by its officers,
directors and employees, therewith. The Corporation is committed to operating in accordance with the highest ethical standards and conducting business in an
honest and transparent manner that is in compliance with applicable law, its Code of Business Conduct and applicable internal policies. See also “Directors
and Officers—Ethical Business Conduct” and “Legal Proceedings and Regulatory Actions”. In addition, the Corporation has a policy of entering into
confidentiality and non-disclosure agreements with its employees and limiting access to and dissemination of its proprietary technology and confidential
information.
Specialized Skill and Knowledge
The development, design, marketing and distribution of the Corporation’s current products and services require specialized skills and knowledge,
particularly in the areas of software architecture, development, conceptualization, and graphic design, as well as in the online poker, casino and sports betting
verticals. The Stars Group believes it has personnel with the required specialized skills and knowledge to carry out its operations. While the current labor
market in the industries in which the Corporation operates is highly competitive, the Corporation expects to, but there can be no assurance that it will, attract
and maintain appropriately qualified
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employees for fiscal year 2018. If the Corporation fails to attract and maintain appropriately qualified employees, its business, financial condition and
operating results could be materially adversely affected. See also “Risk Factors and Uncertainties”, including “Risk Factors and Uncertainties—Failure to
attract, retain and motivate key employees may adversely affect the Corporation’s ability to compete and the loss of the services of key personnel could have
a material adverse effect on its business.”
Facilities
The Corporation maintains approximately 13 offices internationally. The Corporation’s headquarters are located in Toronto, Ontario, Canada, where its
general and administrative departments and its corporate finance functions are based and primarily operate. These premises are leased and consist of
approximately 5,283 square feet of space, with a lease term that expires on August 31, 2022.
Stars Interactive Group is headquartered in Douglas, Isle of Man, and its senior management is based there as well as staff in its general and
administrative, marketing and technology departments. Stars Interactive Group’s headquarters consists of approximately 65,000 square feet of office space,
which is owned by a subsidiary of The Stars Group. Technology services are also provided by staff based out of offices in Dublin and suburban Toronto.
The Corporation, through its subsidiaries, also leases office space in or near Austin (Texas, United States), Fort Lauderdale (Florida, United States),
Linwood (New Jersey, United States), London (England), Malta, San Jose (Costa Rica), Sofia (Bulgaria), Toronto (Ontario, Canada) and elsewhere
internationally.
The Corporation, through its subsidiaries, has data centers and transit points of presence throughout Europe and in certain other locations around the
world. These include (i) approximately 23 data center facilities leased in the Isle of Man, France, Germany, Italy, Portugal, Spain, Malta, the Netherlands,
Bulgaria, Romania, the United States and the United Kingdom, as well as in India and Belgium through the Corporation’s partners in those jurisdictions, and
(ii) approximately seven transit points of presence leased in the United Kingdom, the United States, the Netherlands, France and Italy.
The Stars Group believes that its facilities are suitable and adequate for its current needs.
GENERAL DEVELOPMENT OF THE BUSINESS
The Stars Group was incorporated in 2004 and completed its initial public offering (“IPO”) on the TSX Venture Exchange in July 2010. The Stars
Group graduated to the Toronto Stock Exchange (“TSX”) in October 2013, was added to the S&P/TSX Composite Index in September 2014, and was listed
on the Nasdaq Global Select Market in June 2015. In August 2014, The Stars Group completed the $4.9 billion Stars Interactive Group Acquisition, which
transformed its operations into its current online gaming business. Following the Stars Interactive Group Acquisition and as described below, The Stars Group
explored additional strategic opportunities resulting in the divestment of its then-remaining business-to-business (“B2B”) assets and its transformation into a
pure-play consumer technology company. For a description of The Stars Group’s current online gaming business and the general development of the same
since the Stars Interactive Group Acquisition, see “Business of the Corporation” above. The Corporation believes that these strategic transactions, along with
certain financings and capital markets activities, corporate initiatives and other announcements, each as further detailed below or elsewhere in this annual
information form and the 2017 Annual MD&A, have been the primary influence on the general development of its business during the last three completed
financial years.
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Divestiture of the Former B2B Business and Non-Core Gaming Investments (2015-2017)
Until July 31, 2015, the date on which the Corporation completed the disposition of its then-remaining B2B assets, the Corporation’s B2B business
consisted of the operations of certain of its subsidiaries, which offered interactive and land-based gaming solutions. The Stars Group’s B2B business at that
time included the design, development, manufacturing, distribution, sale and service of technology-based gaming solutions for the regulated gaming industry
worldwide, primarily to land-based and online gaming operators and governmental agencies and bodies. The Stars Group’s former B2B solutions were
designed to provide end-users with popular, engaging and cutting-edge content across multiple formats and through a secure technology environment, all of
which was intended to improve the profitability, productivity, security and brands of the operators. The Stars Group developed its former portfolio of
solutions through both internal development and strategic acquisitions, including, without limitation, Ongame Network Ltd. (“Ongame”), Amaya (Alberta)
Inc. (formerly Chartwell Technology Inc.) (“Chartwell”), CryptoLogic Ltd. (“CryptoLogic”), Cadillac Jack Inc. (“Cadillac Jack”), and Diamond Game
Enterprises (“Diamond Game”), all of which provided technology, content and services to a diversified base of customers in the regulated gaming industry.
As of the date of this annual information form, and as previously reported, The Stars Group has divested these and other non-core gaming investments. The
fundamental objective of such divestitures was to expedite the Corporation’s overall business strategy and maximize shareholder value.
Cadillac Jack Inc.
In June 2015, The Stars Group announced the completion of the sale of Cadillac Jack (the “Cadillac Jack Sale”) to AGS, LLC, an affiliate of funds
managed by Apollo Global Management, LLC (NYSE: APO), for approximately $382 million, comprising cash consideration of $370 million, subject to
adjustment, and a $12 million payment-in-kind note, bearing interest at 5.0% per annum and due on the eighth anniversary of the closing date. The Stars
Group used the net proceeds from the Cadillac Jack Sale for deleveraging, which included the repayment of approximately $344 million of debt and related
fees that it had incurred in connection with the purchase of Cadillac Jack. In mid-2017, the $12 million payment-in-kind note was satisfied.
Innova Gaming Group Inc.
In May 2015, The Stars Group completed the spin-off of Diamond Game, which it had purchased in February 2014 for approximately $25 million,
through the initial public offering (the “Innova Offering”) of common shares of what was then known as Innova Gaming Group Inc. (“Innova”). The Innova
Offering resulted in The Stars Group receiving aggregate net proceeds of approximately CDN$34.1 million and maintaining ownership of approximately 40%
of the issued and outstanding common shares of Innova, which it subsequently disposed of in August 2017 for net cash proceeds of $16.1 million when
Pollard Banknote Ltd. acquired Innova.
NYX Gaming Group Limited
In connection with The Stars Group’s December 2014 sale of Ongame to what was then known as NYX Gaming Group Limited (“NYX Gaming
Group”), The Stars Group and NYX Gaming Group entered into a strategic investment transaction pursuant to which The Stars Group purchased from NYX
Gaming Group CDN$9 million unsecured convertible debentures (initially CDN$10 million but The Stars Group subsequently sold and assigned an aggregate
of CDN$1 million to four individuals), which were later amended to, among other things, adjust the repayment terms such that they would be repayable solely
in cash. The debentures were redeemed in full in July 2017 in conjunction with a refinancing at NYX Gaming Group.
In July 2015, The Stars Group announced that it completed the disposition of Cryptologic to NYX Gaming Group and Chartwell to NYX Digital
Gaming (Canada) ULC, a subsidiary of NYX Gaming Group (the “NYX Sub”) (together, the “Chartwell/Cryptologic Sale”) for gross proceeds of
approximately CDN$150 million, subject to adjustment, of which CDN$110 million was paid in cash and CDN$40 million was paid by the NYX Sub through
the issuance of exchangeable preferred shares (the “NYX Sub Preferred Shares”). The Corporation used the majority of the cash net proceeds from the
Chartwell/Cryptologic Sale for deleveraging, including the 2015 refinancing of the debt incurred as part of the financing for the Stars Interactive Group
Acquisition.
In November 2017, The Stars Group completed the disposition of all its securities of NYX Gaming Group, including NYX Gaming Group ordinary
shares, NYX Gaming Group ordinary share purchase warrants, and the NYX Sub Preferred Shares, representing approximately 13.7% of NYX Gaming
Group’s ordinary shares on a partially diluted basis, for net cash proceeds of $26.3 million when Scientific Games Corporation (NYSE: SGMS) acquired
NYX Gaming Group.
In connection with the Chartwell/Cryptologic Sale, a subsidiary of The Stars Group and NYX Gaming Group entered into a supplier licensing
agreement (the “Licensing Agreement”) for a term of six years, under which NYX Gaming Group is expected to provide certain casino gaming content to The
Stars Group’s real-money online casino offering. Pursuant to the Licensing Agreement, a subsidiary of The Stars Group will pay NYX Gaming Group a
minimum license commitment in the amount of CDN$12 million per year for each of the first three years of the Licensing Agreement, ending in October
2018.
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Jackpotjoy plc
In connection with the January 2017 London Stock Exchange (“LSE”) listing of Jackpotjoy plc (LSE: JPJ) (“Jackpotjoy”), parent company of The
Intertain Group Ltd. (“Intertain”) and WagerLogic Malta Holdings Ltd. (“WagerLogic”), a former subsidiary of The Stars Group which it sold in February
2014, and in exchange for its 4,920,000 Intertain common shares (which The Stars Group acquired between 2014 and 2015, including through open market
purchases, the exercise of common share purchase warrants and an exchange for shares it acquired from the purchaser of WagerLogic) and the conversion of
certain CDN$3.85 million 5.0% Intertain convertible debentures, The Stars Group, after exchanging certain exchangeable shares, received 5,561,666
Jackpotjoy ordinary shares. In December 2017, The Stars Group completed the sale of its ordinary shares in Jackpotjoy, representing approximately 7.5% of
Jackpotjoy’s then issued and outstanding ordinary shares, for net cash proceeds of $59.5 million.
RISK FACTORS AND UNCERTAINTIES
Certain factors may have a material adverse effect on the Corporation’s business, financial condition, and results of operations. Current and
prospective investors should consider carefully the risks and uncertainties described below, in addition to other risks and information included in this annual
information form, the 2017 Annual Financial Statements and 2017 Annual MD&A, as well as in other filings The Stars Group has made and may make in the
future with the applicable securities authorities. Additional risks and uncertainties that The Stars Group is currently unaware of, or that it currently believes
are not material, may also become important factors that should consider. If any of the following or other risks actually occur, The Stars Group’s business,
financial condition, results of operations, and future prospects could be materially and adversely affected. In that event, the trading price of its securities could
decline, and investors could lose part or all of their investment.
Risks Related to the Corporation’s Substantial Indebtedness
The Corporation’s substantial indebtedness requires that it use a significant portion of its cash flow to make debt service payments, which could have
significant adverse consequences on the Corporation and its business.
As at December 31, 2017, the Corporation had approximately $2.45 billion of outstanding long-term indebtedness, and the Corporation currently
estimates that its fiscal year 2018 debt service will be approximately $150 million, including both required principal and interest payments. The Corporation’s
substantial indebtedness could have significant adverse consequences on the Corporation and its business, including:
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requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on its indebtedness,
therefore reducing its ability to use cash flow to fund its operations, growth strategy, working capital, capital expenditures, potential future
business opportunities, and other general corporate purposes;
making it more difficult for the Corporation to make payments on its indebtedness, and any failure to comply with the obligations of any of its
debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing
its indebtedness;
limiting its ability to obtain additional financing for working capital, capital expenditures, debt service requirements, R&D, acquisitions and
general corporate or other purposes;
reducing the Corporation’s flexibility in planning for, or reacting to, changes in its operations, business or industry;
prohibiting the Corporation from making strategic acquisitions, developing new products and product features, introducing new technologies,
exploiting business opportunities, expanding within existing or into new verticals or geographies, or causing the Corporation to make non-
strategic divestitures;
placing the Corporation at a competitive disadvantage as compared to its less-leveraged competitors;
making the Corporation more vulnerable to downturns in its business, industry or the economy;
negatively affecting the Corporation’s ability to renew gaming and other licenses; and
exposing the Corporation to the risk of increased interest rates as certain of its borrowings are at variable rates of interest.
For additional information on the Corporation’s outstanding long-term debt, including, without limitation, amounts outstanding, interest, certain
restrictions and excess cash flow sweep requirements, see the 2017 Annual MD&A under the heading “Liquidity and Capital Resources—Long-Term Debt”
and the 2017 Annual Financial Statements.
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The Corporation’s secured credit facilities and terms governing the Preferred Shares contain covenants and other restrictions that may limit its flexibility
in operating its business.
The Corporation’s secured credit facilities and terms governing the Preferred Shares, as applicable, contain various provisions that may limit the
Corporation’s ability to, among other things:
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incur additional indebtedness or issue preferred shares;
pay dividends on, redeem or repurchase capital stock, redeem or repurchase subordinated debt or make other restricted payments;
make investments, engage in acquisitions, create liens, or consolidate, merge, sell or otherwise dispose of all or substantially all of the
Corporation’s assets;
plan for, or react to, changes in the Corporation’s business and the industries in which it operates;
engage in certain transactions or take certain actions if maximum leverage ratios are exceeded;
enter into agreements that restrict dividends or other payments from its restricted subsidiaries to the Corporation;
engage in transactions with affiliates;
enter into hedging contracts;
create unrestricted subsidiaries; and
enter into sale and leaseback transactions.
A breach of any of the covenants or undertakings in the agreements governing the secured credit facilities could result in an event of default under the
same. Upon the occurrence of an event of default under the Corporation’s secured credit facilities, if the Corporation does not cure such default, the lenders
could elect to declare all amounts outstanding thereunder to be immediately due and payable and terminate all commitments to extend further credit. If the
Corporation were unable to repay those amounts, then the lenders under such facility could proceed against the collateral granted to them to secure that
indebtedness. If any of the Corporation’s lenders accelerate the repayment of respective borrowings, the Corporation cannot assure that it will have sufficient
assets to repay the amounts outstanding, which could have a material adverse effect on the Corporation’s business, financial condition and results of
operation. In addition, if the Corporation fails to comply with certain undertakings required by the terms of the Preferred Shares, the applicable Conversion
Ratio (as defined below) may be increased between a range of 2% and 6% per annum, depending on which undertaking is breached, for each year in which
the breach occurs, which would result in, among other things, dilution to the Corporation’s shareholders and increased share ownership by the holders of the
Preferred Shares.
The Corporation may not be able to generate sufficient cash flows to meet its debt service obligations.
The Corporation’s ability to make scheduled payments on or to refinance its debt obligations and to make distributions to enable it to service its debt
obligations depends on a number of variables that may affect its and its subsidiaries’ financial and operating performance and the ability to generate cash
from their operations. These variables are subject to prevailing economic and competitive conditions and to certain financial, business, legal, regulatory and
other factors beyond the Corporation’s and its subsidiaries’ control, including fluctuations in interest rates, market liquidity conditions, operating costs and
trends in the industries in which they operate. If the Corporation’s and its subsidiaries’ cash flows and capital resources are insufficient to fund its debt service
obligations, then the Corporation may be forced to reduce, delay or cease business activities, investments, expansion or capital expenditures, sell assets, seek
additional capital, including through additional indebtedness or through dilutive financings, or restructure or refinance its indebtedness. Depending on the
capital markets at the time of any such restructuring or refinancing, it is possible that such restructuring or refinancing could be available only on unattractive
terms, if at all, leading to potentially significant increases in debt service costs and interest expenses and could potentially result in additional restrictions on
the Corporation’s operations. Any required refinancing, restructuring or capital raise may not be successful and may not permit the Corporation to meet its
scheduled debt service obligations. In such circumstances, the Corporation could face inadequate liquidity and might be required to dispose of material assets
or operations, or reduce, delay or cease business activities, investments, expansion or capital expenditures to meet debt service and other obligations. Any
default by the Corporation in meeting its debt service obligations in a timely manner would have a material adverse effect on its business, operating results
and financial condition.
Although the Corporation has entered into, and from time to time in the future may enter into additional, cross-currency swap agreements, forward
contracts and other hedging instruments, which it anticipates will result in lower interest payments on existing debt and potentially mitigate the impact of
fluctuations in the Euro to U.S. dollar exchange rate with respect to such debt, there can be no assurance that the anticipated benefits will be realized and as
such, the Corporation remains subject to the risk of increased interest rates described herein.
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As of December 31, 2017, a significant portion of the Corporation’s total debt was subject to variable rates of interest, which exposes the Corporation
to interest rate risk. If interest rates were to increase, the Corporation’s debt service obligations on the variable rate indebtedness would increase even though
the amount borrowed remained the same, and as a result, the Corporation’s net income and cash flows, including cash available for debt service, would
correspondingly decrease. In the future, the Corporation may enter into interest rate swaps that involve the exchange of floating for fixed rate interest
payments in order to reduce interest rate volatility. However, the Corporation may decide to not maintain interest rate swaps with respect to some or all its
variable rate indebtedness, and any swaps the Corporation enters into may not fully mitigate its interest rate risk.
Risks Related to the Corporation’s Business
If the Corporation fails to retain existing customers or add new customers, or if its customers decrease their level of engagement with its products, the
Corporation’s revenue, financial results, and business may be significantly harmed.
The size of the Corporation’s active customer base, specifically of net depositing customers, and the level of engagement of such customers are critical
to its success. The financial performance of the Corporation has been and will continue to be significantly determined by its success in adding, retaining, and
engaging active customers of its products and services, in particular high-value, net-depositing customers (primarily recreational players). If people do not
perceive the Corporation’s products to be enjoyable, reliable, relevant and trustworthy, the Corporation may not be able to attract or retain customers or
otherwise maintain or increase the frequency and duration of their engagement. A number of other online gaming and interactive entertainment companies
that achieved early popularity have since seen their active customer bases or levels of engagement decline. The Corporation’s strategy is to increase
engagement and retention of customers, particular those it deems of higher value, but there is no guarantee that the Corporation will not experience an erosion
of its active customer base or engagement levels among such customers in the future. The Corporation’s customer engagement patterns have changed over
time, and customer engagement can be difficult to measure, particularly as customers continue to engage increasingly via mobile devices and as the
Corporation introduces new and different products and services. Any number of factors could potentially negatively affect customer retention, growth, and
engagement, including if:
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customers increasingly engage with the products or services of the Corporation’s competitors;
the Corporation fails to introduce, or delays the introduction of, new products or services (whether developed internally, or licensed or
otherwise obtained or developed in conjunction with third parties) that users find engaging or that work with a variety of operating systems or
networks, or if it introduces new products or services, including using technologies with which it has little or no prior development or operating
experience, or changes to its existing products or services, that are not favorably received by customers;
customers have difficulty installing, updating or otherwise accessing the Corporation’s products on desktops or mobile devices as a result of
actions by the Corporation or third parties that it relies on to distribute its products and deliver its services;
there are decreases in customer sentiment about the quality of the Corporation’s products or concerns related to privacy, safety, security or other
factors;
new industry standards are adopted or customers adopt new technologies where the Corporation’s products may be displaced in favor of other
products or services, may not be featured or otherwise available, or may otherwise be rendered obsolete and unmarketable;
there are adverse changes in the Corporation’s products that are mandated by legislation, regulatory authorities, or litigation, including
settlements;
the Corporation does not obtain applicable regulatory or other approvals or renewals of such approvals to offer, directly or indirectly, its
products in new or existing jurisdictions;
technical or other problems prevent the Corporation from delivering its products in a rapid and reliable manner or otherwise affect the customer
experience, such as security breaches or failure to prevent or limit spam or similar content;
the Corporation adopts policies or procedures related to areas such as customer data and information that are perceived negatively by its
customers or the general public;
the Corporation elects to focus its customer growth and engagement efforts more on longer-term initiatives, or if initiatives designed to attract
and retain customers and engagement are unsuccessful or discontinued, whether as a result of actions by the Corporation, third parties, or
otherwise;
the Corporation fails to price its products and services competitively or provide adequate customer service;
the Corporation or other companies in the industries in which it operates are the subject of adverse media reports or other negative publicity; or
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the Corporation fails to effectively anticipate or respond to customers’ continuously changing and dynamic needs, demands and preferences,
such as new poker variants or casino games, or innovative types of sports betting or betting related to new or popular sporting events, as well as
emerging technological trends, or the Corporation’s competitors more effectively anticipate or respond to the same.
If the Corporation is unable to maintain or increase its customer base or engagement, or effectively monetize its customer base’s use of its products
and offerings, its revenue and financial results may be adversely affected. Any decrease in customer retention, growth, or engagement, including player
liquidity, could render the products of the Corporation less attractive to customers, which is likely to have a material and adverse impact on its revenue,
business, financial condition, and results of operations. If the Corporation’s active customer growth rate slows, it becomes increasingly dependent on its
ability to maintain or increase levels of customer engagement and monetization in order to drive revenue growth, particularly with respect to high-value, net-
depositing customers (primarily recreational players).
The online gaming and interactive entertainment industries are intensely competitive and the Corporation’s potential inability to compete successfully
could adversely impact the Corporation.
There is intense competition among online gaming and interactive entertainment providers, and the online gaming and interactive entertainment
industries are characterized by dynamic customer demand and technological advances. There are a number of established, well-financed companies
producing online gaming and/or interactive entertainment products and services that compete with the Corporation’s products and services. Such competitors
may spend more money and time on developing and testing products and services, undertake more extensive marketing campaigns, adopt more aggressive
pricing or promotional policies or otherwise develop more commercially successful products or services than the Corporation, which could negatively impact
the Corporation’s business. Furthermore, new competitors, whether licensed or unlicensed, may enter the Corporation’s key product and/or geographic
markets. Moreover, there has also been considerable consolidation among the Corporation’s competitors in the gaming industry. Such consolidation could
result in the formation of larger competitors with increased financial resources and altered cost structures, which may enable them to offer more competitive
products, gain a larger market share of customers, expand product offerings and broaden their geographic scope of operations.
As a result of the foregoing, among other factors, the Corporation must continually introduce and successfully market new and innovative
technologies, products and product enhancements to remain competitive and effectively stimulate customer demand, acceptance and engagement. The process
of developing new products and systems is inherently complex and uncertain. Even if the Corporation’s new products attain market acceptance, those new
products could cannibalize the Corporation’s current products’ market share or share of its customers’ wallets in a manner that could negatively impact such
products’ ecosystem. Although the Corporation intends to continue investing resources in its R&D efforts, there can be no assurance that such investments
will lead to successful new technologies or timely new products or enhanced existing products, in each case with product life cycles long enough for the
product to be successful. Additionally, if the Corporation cannot efficiently adapt its processes and infrastructure to meet the needs of its product innovations,
its business could be negatively impacted. For example, although the Corporation has and continues to be a significant market leader in online poker, and is
seeing meaningful growth and revenue from its online casino, it is still in the relatively early stages of its entry into casino and sportsbook, where competition
is significant and formidable. The Corporation currently monetizes certain of these offerings in a limited fashion and may not be successful in its efforts to
generate consistently meaningful revenue from certain of these offerings in either the short or long terms.
The Stars Group’s online offerings are part of new and evolving industries, which presents significant uncertainty and business risks.
The online gaming and interactive entertainment industries are relatively new and continue to evolve. Whether these industries grow and whether The
Stars Group’s online business will ultimately succeed, will be affected by, among other things, developments in social networks, mobile platforms, legal and
regulatory developments (such as the passage of new laws or regulations or the extension of existing laws or regulations to online gaming and related
activities), taxation of gaming activities, data and information privacy and payment processing laws and regulations, and other factors that the Corporation is
unable to predict and which are beyond the Corporation’s control. Given the dynamic evolution of these industries, it can be difficult to plan strategically,
including as it relates to product launches in new or existing jurisdictions which may be delayed or denied, and it is possible that competitors will be more
successful than the Corporation at adapting to change and pursuing business opportunities. Additionally, as the online gaming industry advances, including
with respect to regulation in new and existing jurisdictions, the Corporation may become subject to additional compliance-related costs, including as it relates
to licensing and taxes. Consequently, the Corporation cannot provide assurance that its online and interactive offerings will grow at the rates expected, or be
successful in the long term. If The Stars Group’s products do not obtain popularity or maintain popularity, or if they fail to grow in a manner that meets its
expectations, or if it cannot offer its products and services in particular jurisdictions that may be material to its business, The Stars Group’s business, results of
operations and financial condition could be harmed.
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The Corporation may prioritize customer growth and engagement and the customer experience over short-term financial results.
The Corporation has made and may in the future make product and investment decisions that may not prioritize its short-term financial results if it
believes that the decisions are consistent with its mission and long-term goals to benefit the aggregate customer experience, improve its financial performance
and maximize shareholder value. For example, beginning in late-2015 and throughout 2016 and 2017, the Corporation implemented changes to, including
certain reductions in, its loyalty programs to ensure that the distribution of rebates, rewards and incentives is aligned with the Corporation’s goal of
incentivizing customers for loyalty and behavior that is positive to the overall customer experience and the particular product’s ecosystem, and introduced
other changes, such as adjustments to poker rake and other pricing. Among other things, the Corporation currently expects to continue implementing certain
changes to such programs, particularly as it relates to Stars Rewards. See also above under “Business of the Corporation” and the 2017 Annual MD&A under
the heading “Overview and Outlook”. The Corporation also may introduce changes to existing products, or introduce new products, that direct customers
away from products or services where it has a proven means of monetization and which may reduce engagement with its core product offerings, such as
through the introduction of online casino, sportsbook or new variants of online poker. The Corporation also may take steps that result in limiting distribution
of certain products and services, such as on mobile devices, in the short term in order to attempt to ensure the availability of such products and services to its
customers over the long term. These decisions may not produce the benefits that the Corporation expects, in which case its customer growth and engagement,
its relationships with third parties, and its business and results of operations could be harmed.
If the Corporation is not able to build, maintain and enhance its brands, or if events occur that damage its reputation and brands, its ability to expand its
customer base may be impaired, and its business and financial results may be harmed.
The Corporation believes that its brands, particularly PokerStars and related brands, have significantly contributed to the success of its business. The
Corporation also believes that building, maintaining and enhancing its brands, including its newer brands is critical to expanding its customer base and
generating revenue. Building, maintaining and enhancing the brands of the Corporation will depend largely on its ability to continue to successfully provide
enjoyable, reliable, trustworthy, and innovative products with adequate customer service. It will also depend on its ability to successfully maintain or advance
its internal marketing and branding functions and its ability to establish and develop new relationships and build on existing relationships with ambassadors
and service providers on which it relies to promote its products and services. The Corporation may introduce new products, programs, terms of service or
policies, including those related to loyalty programs, pricing and security, make decisions regarding regulation, user privacy, payments and other issues, and
continue to experience media, legislative and regulatory scrutiny as it relates to the Corporation, its directors, employees, contractors, vendors, joint venture
partners or any of the foregoing that were previously associated with the Corporation, or the online gaming industry in general, that customers do not like, all
of which may negatively affect its brands. The brands of the Corporation may also be negatively affected by the actions of customers, employees, contractors
or vendors that are deemed to be hostile or inappropriate to other customers, including through the use of certain software to gain an advantage over other
customers (see “Business of the Corporation—Technology Infrastructure and Research and Development”), or by the use of the products or services of the
Corporation or companies that provide similar products and services, for illicit, objectionable, or illegal ends. In addition, the Corporation cannot provide
assurance that its current or former directors, officers, employees, ambassadors or service providers will act in a manner that will promote the success of the
Corporation or its products and services. Maintaining and enhancing the brands of the Corporation may require it to make substantial investments and these
investments may not be successful. If the Corporation fails to successfully promote and maintain its brands or if it incurs excessive expenses in this effort, it
could have an adverse effect on the size, engagement, and loyalty of the Corporation’s customer base and result in decreased revenue, which could adversely
affect its business and financial results.
The Corporation’s customer growth, engagement, and monetization on mobile devices each depend upon effective operation with mobile operating
systems, networks, and standards that it does not control.
A growing portion of the Corporation’s revenue is generated from customers using the Corporation’s products or services on mobile devices. There is
no guarantee that popular mobile devices will start or continue to support or feature the products of the Corporation, or that mobile device users will continue
to use the products of the Corporation rather than competing products. As it relates to the Corporation’s mobile platforms, the Corporation is dependent on the
interoperability of such products with popular mobile operating systems, technologies, networks and standards that it does not control, such as the Android
and iOS operating systems, and any changes, bugs, technical or regulatory issues in such systems, the Corporation’s relationships with mobile partners,
manufacturers and carriers, or in their terms of service or policies that degrade the Corporation’s products’ functionality, reduce or eliminate its ability to
distribute its products, give preferential treatment to competitive products, limit its ability to deliver high quality products, or impose fees or other charges
related to its delivery of products, could adversely affect its product usage and monetization on mobile devices. If it is difficult or unfavorable for the
Corporation’s customers to access and use its products on their mobile devices, or if the customers of the Corporation choose not to access or use its products
on their mobile devices or use mobile products that do not offer access to its products, its customer growth and engagement could be harmed, which could
adversely affect its business, results of operations and financial condition.
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The Corporation’s financial results will fluctuate from quarter to quarter and are difficult to predict.
The Corporation’s quarterly financial results have fluctuated in the past and will fluctuate in the future. Additionally, The Stars Group has a limited
operating history with the current scale of its business, particularly with respect to its newer product offerings, such as online casino and sportsbook, which
makes it difficult to forecast its future results. For example, The Stars Group may not be able to accurately predict the anticipated margin variances on such
newer products. As a result, investors should not rely upon the Corporation’s past quarterly financial results as indicators of future performance. Investors
should take into account the risks and uncertainties frequently encountered by companies in rapidly evolving and highly competitive markets. The financial
results of the Corporation in any given quarter can be influenced by numerous factors, many of which it is unable to predict or are outside of its control,
including without limitation, the impact of seasonality and the Corporation’s gross win margin, as described above under “Business of the Corporation—
Seasonality and Other Factors Impacting the Business”, and the other risks and uncertainties set forth in this annual information form and the 2017 Annual
MD&A, including under the headings “Risk Factors and Uncertainties” hereunder and thereunder.
The Corporation’s quarterly financial results may also fluctuate based on whether it pays out any jackpots to its customers during the relevant quarter.
The Corporation does not participate in a network progressive jackpot program, and instead offers an equivalent system in which only its own customers
participate. This means that the Corporation does not make contributions to a central fund as the progressive jackpot builds up (because it is the only operator
in the program, this would serve no purpose), and that if a customer wins the progressive jackpot there is no central fund to cover the payout. Accordingly, the
cost of the progressive jackpot payout would flow directly to the income statement in the period in which it is won with a potentially significant adverse effect
on the Corporation’s financial condition and cash flows. Statistically, the likelihood of significant jackpot wins, either individually or in the aggregate, is
extremely low and the algorithms of the slots games are such that the number of high winners overall is low, but because the winning is underpinned by a
random mechanism, the Corporation cannot predict with absolute certainty when a jackpot will be won.
The Corporation is subject to foreign exchange and currency risks that could adversely affect its operations, and the Corporation’s ability to mitigate its
foreign exchange risk through hedging transactions may be limited.
For the year ended December 31, 2017, the Corporation derived approximately 80% of its revenues in currencies other than the Canadian or U.S.
dollar; however, a significant portion of the Corporation’s expenses are incurred in Canadian and U.S. dollars, Euro and Great Britain Pound and the primary
currency of customer game play is in U.S. dollars. Fluctuations in the exchange rate between the U.S. dollar, the Euro and other currencies may have a
material adverse effect on the Corporation’s business, financial condition and operating results. The Corporation’s consolidated financial results are
significantly affected by foreign currency exchange rate fluctuations. Foreign currency exchange rate exposure arises from current transactions and
anticipated transactions denominated in currencies other than the U.S. dollar and from the translation of foreign-currency-denominated balance sheet accounts
into U.S. dollar-denominated balance sheet accounts. Exchange rate fluctuations could materially adversely affect the Corporation’s operating results and cash
flows and the value of its foreign assets. If a foreign currency is devalued in a jurisdiction in which the Corporation accepts deposits in such currency, then the
Corporation’s customers may be unable or unwilling to deposit and spend the same or similar amounts that they may otherwise deposit or spend.
While the Corporation has certain natural expense hedges and has entered and may in the future enter into cross-currency swap agreements, forward
contracts and other derivative and hedging instruments intended to mitigate foreign currency exchange risk, there can be no assurance the Corporation will do
so or that any instruments that the Corporation enters into will successfully mitigate such risk. If the Corporation enters into foreign currency forward or other
hedging contracts, the Corporation would be subject to the risk that a counterparty to one or more of these contracts defaults on its performance under the
contracts. During an economic downturn, a counterparty’s financial condition may deteriorate rapidly and with little notice, and the Corporation may be
unable to take action to protect its exposure. In the event of a counterparty default, the Corporation could lose the benefit of its hedging contract, which may
harm its business and financial condition. In the event that one or more of the Corporation’s counterparties becomes insolvent or files for bankruptcy, the
Corporation’s ability to eventually recover any benefit lost as a result of that counterparty's default may be limited by the liquidity of the counterparty. The
Corporation expects that it will not be able to hedge all of its exposure to any particular foreign currency, and it may not hedge its exposure at all with respect
to certain foreign currencies. Changes in exchange rates and the Corporation’s limited ability or inability to successfully hedge exchange rate risk could have
an adverse impact on the Corporation’s liquidity and results of operations. For additional information regarding the Corporation’s hedging activity and foreign
exchange risk, as well as an analysis of certain constant currency measures, see the 2017 Annual MD&A.
The Corporation may have exposure to greater than anticipated tax liabilities.
The tax obligations of the Corporation are varied and include taxes on gaming income (VAT, gaming duty and, in some cases, corporate tax) and taxes
on profits and transactions of its group entities (corporate tax, VAT and withholding taxes).
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The Corporation’s tax obligations are based in part on its corporate operating structure and intercompany arrangements, including the manner in which it
develops, values, and uses its intellectual property and the valuations of its intercompany transactions, as well as its operations in online gaming. For instance,
much of the Corporation’s tax treatment is dependent, among other things, on the jurisdiction of its tax residence, including the tax residences of its
subsidiaries. The Corporation attempts to manage it business such that it and its subsidiaries are resident for tax purposes solely in certain jurisdictions, such
as their respective jurisdictions of formation, and that it does not unintentionally create a taxable permanent establishment or other taxable presence in any
other jurisdiction. The tax laws applicable to the Corporation’s business are subject to interpretation, and certain jurisdictions are seeking to introduce new, or
aggressively interpret existing, laws to tax online gaming operators on their activity with local customers in an effort to raise additional tax revenue from
companies such as the Corporation. The taxing authorities of the jurisdictions in which the Corporation operates or has customers may challenge its
methodologies for determining tax residence, the existence of a permanent establishment and/or the taxes payable, which could increase its worldwide
effective tax rate and harm its financial position and results of operations. The Corporation is subject to periodic review and audit by domestic and foreign tax
authorities. Tax authorities may disagree with certain positions the Corporation has taken and any adverse outcome of such a review or audit could have a
negative effect on its financial position and results of operations. In addition, the determination of the Corporation’s worldwide provision for income taxes
and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain.
Although the Corporation believes that its provision for income taxes and other tax liabilities is reasonable, the ultimate tax outcome may differ from the
amounts recorded in its financial statements and may materially affect its financial results in the period or periods for which such determination is made. For
example, the Corporation has previously incurred tax liabilities for past tax years as a result of the positions taken by tax authorities in certain jurisdictions,
including in certain European jurisdictions. Furthermore, the Corporation has included in the income tax expense for its 2017 fiscal year a tax provision of
$26.5 million relating to an ongoing transfer pricing dispute in Canada for one of its subsidiaries. The issue in dispute relates to the subsidiary’s operations for
its 2003 to 2007 fiscal years, prior to its acquisition by The Stars Group. The Corporation’s advice is that it has strong arguments to defend the adjustments
proposed by the Canadian tax authorities and the subsidiary intends to vigorously defend its position. However, as the subsidiary has to go through the
process of appealing the upcoming reassessments and it is uncertain what the final outcome will be, a tax provision has been recorded to cover the potential
tax adjustment and interest thereon. See the 2017 Annual Financial Statements and 2017 Annual MD&A for additional information. This could continue to
happen in the future in various jurisdictions where the Corporation offers or has offered its products and services.
Moreover, the application of indirect taxes, such as sales and use tax, VAT, provincial sales taxes, goods and services tax, business tax and gross
receipt tax, to the businesses of the Corporation and its subsidiaries is a complex and evolving issue. For example, as of January 1, 2015, the European Union
imposed an obligation on marketplaces to collect and remit VAT on the provision of electronically supplied services, and similar regimes have been
implemented in a number of other jurisdictions across the world. Gaming activities have typically been exempt from VAT where there is a local regulatory
framework; however, such activities potentially fall within the rules applying local VAT on electronically supplied services, both in the European Union and
elsewhere. Given the uncertainty surrounding the application of VAT to gaming activities under these constantly changing and developing rules, the
Corporation is complying with certain VAT collection and remittance procedures in certain European Union and other countries, and the VAT cost is deducted
from net gaming revenue. Significant judgment is required to evaluate applicable tax obligations and as a result amounts recorded are estimates and could
change. These changes may result in the Corporation paying VAT on a greater number of transactions, which could increase its worldwide effective tax rate
and harm its financial position and results of operations. Additionally, tax authorities may raise questions about the Corporation’s calculation, reporting and
collection of taxes and may ask it to remit additional taxes, as well as the proper calculation of such taxes. Where necessary the Corporation seeks external
advice on the application of new taxes and changes to existing law, and should any new taxes become applicable or if the taxes the Corporation pay are found
to be deficient, including as a result of differing interpretations of ambiguous laws, the Corporation’s business, financial condition and results of operations
could be harmed.
In addition, the Corporation’s future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower
statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of the Corporation’s deferred tax
assets and liabilities, by changes in tax laws, regulations, or accounting principles, by the introduction of new tax laws in jurisdictions where it operates or
derives revenue from customers, or as a result of taxes in new jurisdictions where it does not currently operate but may in the future as a result of licensure,
approval or otherwise.
In the event that the Corporation increases the percentage of its total revenues that are derived from operations in nationally or locally regulated
jurisdictions, it may result in an increase in operating costs (including increased gaming taxes such as gaming duty and VAT) as well as in the effective tax
rate of the Corporation and its subsidiaries, which could have adverse consequences on the Corporation’s business, results of operations, cash flows or
liquidity.
With respect to transfer pricing, The Stars Group and its subsidiaries transact with each other as part of their operations. The tax laws of many
countries where The Stars Group or its subsidiaries operate have detailed transfer pricing rules which require that all transactions with non-resident related
parties be priced using arm’s length pricing principles. The taxation authorities in these
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countries could disagree with the Corporation’s arm’s length related party transfer pricing policies. International transfer pricing is a subjective area of
taxation and generally involves a significant degree of judgment. If any of these taxation authorities were to successfully challenge the Corporation’s transfer
pricing policies, this could result in a higher worldwide effective tax rate and harm the financial position and results of operations of the Corporation.
Changes in tax laws or administrative policies related to tax could materially affect the Corporation’s financial position and results of operations.
The tax regimes the Corporation is subject to or operates under may be unsettled and may be subject to significant change. Changes in tax laws or
administrative policies related to tax could materially affect the Corporation’s financial position and results of operations. As noted above, many countries in
the European Union in which the Corporation offers its products and services to customers, as well as a number of other countries, have recently adopted or
are actively considering changes to existing tax laws as they relate to online gaming or are changing the manner in which they interpret such tax laws. Such
changes have resulted and could result in significant increases to the tax obligations of the Corporation in many countries where it does business or has
customers, and may include new or additional taxes (such as VAT, gaming duties and local corporate tax).
Since 2012, the Organization for Economic Cooperation and Development (“OECD”) has been working on its Base Erosion and Profit Sharing
(“BEPS”) project to address gaps and mismatches in tax rules that it believes facilitated the artificial shifting of profits across the world. The BEPS project
resulted in certain minimum standards being agreed to by many countries to counteract base erosion and profit shifting changing the taxation framework for
multinational groups (such as the Corporation). In 2017, a multilateral instrument was signed to efficiently implement these changes as relevant to
international double tax treaties. The BEPS project has changed the global approach and attitude for addressing tax avoidance, and while collective actions
are currently being taken, there is a risk that tax authorities may take additional unilateral actions as has already occurred in the United Kingdom (i.e.,
diverted profits tax) and other countries. In addition, the OECD, European Commission and certain other countries are considering whether further changes
are required to address specific issues in relation to the taxation of the digital economy/digital transactions. Any developments that arise in this area could
have a significant impact on the Corporation and its tax costs.
The European Commission has conducted investigations in multiple countries focusing on whether local country tax rulings or tax legislation provides
preferential tax treatment that violates European Union state aid rules and concluded that certain countries, including Ireland, have provided illegal state aid in
certain cases. These investigations may result in changes to the tax treatment of the Corporation’s foreign operations. Due to the large and expanding scale of
the Corporation’s international business activities, any changes in the taxation of such activities may increase its worldwide effective tax rate and harm its
financial position and results of operations.
Furthermore, certain jurisdictions in which the Corporation or its subsidiaries operate either tax or have proposed to tax players’ gaming winnings or
impose a withholding obligation on foreign online gaming operators with respect to gaming winnings, which could make the Corporation’s offerings less
attractive to players in those jurisdictions.
The U.S. government has recently enacted the most comprehensive tax reform in a number of years, but due to the Corporation’s profile and current
operations in the United States, the tax reform is not anticipated to have a material impact on the Corporation’s current tax position. However, there can be no
assurance that the Corporation’s profile and current operations in the United States will not change or that the United States will not enact further tax reform
or changes to current tax laws, which could have a material adverse impact on the Corporation’s current or future tax position and an adverse effect on the
Corporation’s results of operations, cash flows and financial condition.
The Corporation has significant international operations and plans to continue expanding its operations abroad, which may subject it to increased
business and economic risks that could affect its financial results.
The Corporation has significant international operations and plans to continue the international expansion of its business operations and products. The
products of the Corporation are available in numerous jurisdictions and nearly two dozen languages, and it operates from offices, data centers or transit points
of presence throughout the world. Nearly all the Corporation’s current operations are conducted from offices in foreign jurisdictions, particularly in the Isle of
Man, Malta, and in certain member states of the European Union, and it derives revenue from customers in various countries worldwide. As such, the
Corporation’s operations and revenues may be adversely affected by changes in foreign government policies and legislation or social, economic or political
instability and other factors which are not within the control of the Corporation, including, but not limited to, recessions in foreign economies, expropriation,
nationalization and limitation or restriction on repatriation of funds, assets or earnings, changes in consumer tastes and trends, renegotiation or nullification of
existing contracts or licenses, changes in online gaming policies, regulatory requirements or the personnel administering them, exchange controls, economic
sanctions, risk of terrorist activities, revolution, border disputes, implementation of tariffs and other trade and investment barriers and protectionist practices,
withdrawals from economic or political unions, such as “Brexit”, taxation policies, including royalty and tax increases (such as additional corporate tax, VAT
and gaming
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duties) and retroactive tax claims, volatility of financial markets and fluctuations in foreign exchange rates, difficulties in the protection of intellectual
property, evolving regulations regarding data and information privacy and payment processing, labor disputes and other risks arising out of foreign
governmental sovereignty over the areas in which the Corporation’s operations are conducted. If the Corporation’s operations or revenues are disrupted or
threatened for unexpected reasons, its business may be materially harmed.
The Corporation’s international activities may require protracted negotiations with host governments and regulators, national companies and third
parties. Foreign government regulations may require foreign product and service providers to, among other things, be located in or employ citizens or
residents of a particular jurisdiction and otherwise comply with numerous and extensive procedures and formalities. These procedures and formalities may
result in unexpected or lengthy delays in commencing important business activities, and, in some cases, failure to follow such formalities or obtain relevant
evidence may call into question the validity of the entity or the actions taken. Management of the Corporation is unable to predict the effect of additional
corporate and regulatory formalities which may be adopted in the future including whether any such laws or regulations would materially increase the
Corporation’s cost of doing business or affect its operations in any jurisdiction. In addition, the Corporation may in the future enter into agreements and
directly or indirectly conduct activities outside of the jurisdictions where it currently carries on business, which expansion may present challenges and risks
that the Corporation has not faced in the past, any of which could adversely affect the results of operations and/or financial condition of the Corporation.
Moreover, in the event of a dispute arising in connection with the Corporation’s operations with respect to a foreign jurisdiction where it conducts its
business or has customers, the Corporation may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign
persons to the jurisdiction of domestic courts or enforcing domestic judgments in such other jurisdictions. The Corporation may also be hindered or prevented
from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity.
Although the Corporation believes that management’s experience to date in numerous foreign jurisdictions may be of assistance in helping to reduce
these risks, the Corporation’s direct and indirect activities in foreign jurisdictions could be substantially affected by factors beyond the Corporation’s control,
any of which could have a material adverse effect on it.
Real or perceived inaccuracies in the Corporation’s customer metrics may harm its reputation and negatively affect its business.
The numbers for the Corporation’s key metrics, which include quarterly real-money active uniques, quarterly net yield and net deposits, as well as
certain other metrics, are calculated using internal company data based on the activity of customer accounts. While these numbers are based on what the
Corporation believes to be reasonable judgments and estimates of its customer base for the applicable period of measurement, there are certain challenges and
limitations in measuring the usage of its products and services across its customer base. Such challenges and limitations may also affect the Corporation’s
understanding of certain details of its business. In addition, the Corporation’s key metrics and related estimates may differ from estimates published by third
parties or from similarly-titled metrics of its competitors due to differences in methodology and access to information. The Corporation continually seeks to
improve its estimates of its active customer base, and such estimates may change due to improvements or changes in the Corporation’s methodology.
For example, the methodologies used to measure the Corporation’s customer metrics are based on significant internal judgments and estimates, and
may be susceptible to algorithm, calculation or other technical errors, including, without limitation, how certain metrics may be defined (and the assumptions
and considerations made and included in, or excluded from, such definitions). Moreover, the Corporation’s business intelligence tools may fail on a particular
data backup or upload, which could lead to certain customer activity not being properly recorded or accurately included, in the calculation of a particular key
metric. In addition, as it relates to certain of the Corporation’s product and service offerings, customers are required to provide certain information when
registering and establishing real-money accounts, which could lead to the creation of multiple accounts for the same customer (in nearly all instances such
account creation would violate the Corporation’s applicable terms and conditions of use) and customers could take advantage of certain customer acquisition
incentives to register and interact with the Corporation’s products and services, but not actually deposit or transfer funds into their real-money accounts with
the Corporation. Although the Corporation typically addresses and corrects any such failures, duplications and inaccuracies relatively quickly, its metrics are
still susceptible to the same and its estimations of such metrics may be lower or higher than the actual numbers.
The Corporation regularly reviews its processes for calculating and defining these metrics, and from time to time it may discover inaccuracies in its
metrics or make adjustments to improve their accuracy that may result in the recalculation or replacement of historical metrics or introduction of new
metrics. These changes may also include adjustments to underlying data, such as changes to historical revenue amounts as a result of certain accounting
reallocations made in later periods and adjustments to definitions in an effort to provide what management believes may be the most helpful and relevant data.
The Corporation also continuously seeks to improve its ability to identify irregularities and inaccuracies (and suspend any customer accounts that violate its
terms and conditions
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of use and limit or eliminate promotional incentives that are susceptible to abuse), and its key metrics or estimates of key metrics may change due to
improvements or changes in its methodology. Additionally, all the Corporation’s metrics are subject to software bugs, inconsistencies in the Corporation’s
systems and human error. Notwithstanding, the Corporation believes that any such irregularities, inaccuracies or adjustments are immaterial unless otherwise
stated.
If the public or investors do not perceive the Corporation’s customer metrics to accurately represent its customer base, or if it discovers material
inaccuracies in its customer metrics, the Corporation may be subject to certain liability and its reputation may be harmed, which could negatively affect its
business, results of operations and financial condition.
The Corporation’s sportsbook business may experience significant losses with respect to individual events or betting outcomes
The Corporation’s fixed-odds betting products involve betting where winnings are paid on the basis of the stake placed and the odds quoted, rather than
derived from a pool of stake money received from all customers. A bookmaker’s odds are determined with the objective of providing an average return to the
bookmaker over a large number of events and therefore, over the long term, the gross win percentage for the Corporation has remained fairly constant.
However, there can be a high level of variation in gross win percentage event-by-event and day-by-day. The Corporation has systems and controls in place
that seek to reduce the risk of daily losses occurring on a gross-win basis, but there can be no assurance that these will be effective in reducing their exposure,
and consequently the exposure of the Corporation to this risk in the future. As a result, in the short term, there is less certainty of generating a positive gross-
win, and the Corporation may experience (and it has from time to time experienced) significant losses with respect to individual events or betting outcomes,
in particular if large individual bets are placed on an individual event or betting outcome or series of events or betting outcomes. In circumstances where odds
compilers and risk managers are capable of human error, then even allowing for the fact that a number of sports betting products are subject to capped pay-
outs, significant volatility can occur. Also, there may be such a volume of trading at any particular period of time that even automated systems would not be
able to address and eradicate all risks. Any significant losses on a gross-win basis could have a material adverse effect on the Corporation and its cash flows
and therefore a material adverse effect on its business, financial condition and results of operations. In addition, if a jurisdiction where it holds or wishes to
apply for a license imposes a high turnover tax for betting (as opposed to a gross-win tax), this too would impact profitability, particularly with high value/low
margin bets, and likewise have a material adverse effect on the Corporation’s business.
The sports betting operations of the Corporation are subject to the seasonal variations dictated by the various sports calendars, which will have an effect
on its financial performance. For additional information, see “Business of the Corporation—Seasonality and Other Factors Impacting the Business”. A
significant proportion of the Corporation’s current sports betting revenue is generated from bets placed on European football, which has an off-season in the
summer that can cause a corresponding temporary decrease in its respective revenues. The Corporation’s ability to generate revenues is also affected by the
scheduling of major sporting events that do not occur annually, such as the FIFA World Cup and UEFA European Championships. In addition, the ability to
generate revenue will be dependent on the progression and results of certain teams within specific tournaments and the failure of such team to progress, or
adverse results of such teams, may have adverse consequences on the financial performance of the Corporation.
In online casino, operator losses are limited per stake to a maximum return. When looking at bets across a period of time, operator losses can
potentially be larger in the short term, although in practice, this does not happen quickly and thus mitigating action can be taken by the Corporation. Given the
high volume of the business and the statistical gross win margin embedded within all casino games, major operator losses are infrequent over long periods.
While the Corporation has implemented systems and controls to monitor and manage such risk, there can be no assurance that these systems and
controls will be effective in reducing the exposure to this risk. The effect of future fluctuations and single event losses could have a material adverse effect on
the cash flows and therefore a material adverse effect on the business, results of operations, financial condition and prospects of the Corporation.
The Corporation plans to continue to make acquisitions if opportunities arise in the future. Investigating, completing, implementing and integrating
acquisitions involve risks that could negatively affect the Corporation’s business, results of operations, cash flows or liquidity.
As part of its business strategy, the Corporation has made and intends to continue to make acquisitions if opportunities arise in the future to add
specialized employees and new or complementary companies, products, or technologies. In some cases, the costs of such acquisitions may be substantial,
including, without limitation, as a result of professional adviser fees and due diligence efforts; and there is no assurance that the time and resources expended
on pursuing a particular acquisition will result in a completed transaction, or that any completed transaction will ultimately be successful. Currently, the
Corporation anticipates that it may continue to make strategic acquisitions if opportunities arise in the future, some of which may be significant; however, the
Corporation may not be able to identify suitable acquisition or strategic investment opportunities, or may be unable to obtain any required financing, consent
from its lenders or holders of the Preferred Shares, as applicable, or regulatory approvals, and therefore may not be able to
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complete such acquisitions or strategic investments on favorable terms, if at all. The Corporation may decide to pursue acquisitions with which the
Corporation’s investors may not agree and the Corporation cannot assure investors that any acquisition or investment will be successful or otherwise provide
a favorable return on investment. In addition, acquisitions and the integration thereof require significant time and resources and place significant demands on
the Corporation’s management, as well as on its operational and financial infrastructure. In particular, acquisitions may expose the Corporation to operational
challenges and risks, including:
•
•
•
•
•
•
•
•
the ability to profitably manage acquired businesses or successfully integrate the acquired businesses’ operations, personnel, financial reporting,
accounting and internal controls, technologies and products and services into the Corporation’s business;
the expense of integrating acquired businesses, including significant administrative, operational, economic, geographic or cultural challenges in
managing and integrating the expanded or combined operations;
entry into markets or acquisition of products or technologies with which The Stars Group has limited or no prior experience;
increased indebtedness;
the ability to fund cash flow shortages that may occur if anticipated revenue is not realized or is delayed, whether by general economic or
market conditions, or unforeseen internal difficulties;
the availability of funding sufficient to meet increased capital needs;
diversion of management’s attention; and
the ability to retain or hire qualified personnel required for expanded operations.
If the Corporation does not successfully integrate future acquisitions, such as its previously announced acquisition of CrownBet and its agreement to
acquire an additional interest in CrownBet and for CrownBet to acquire William Hill Australia, it may not realize the expected benefits and its business,
liquidity and operating results may be materially adversely affected.
The Corporation may pay substantial amounts of cash or incur debt, including convertible debt, to pay for acquisitions, which could adversely affect
its liquidity and its ability to service its debt. The incurrence of indebtedness would also result in increased fixed obligations, increased interest expense, and
could also include covenants or other restrictions that would impede the Corporation’s ability to manage its operations. The Corporation may also issue equity
securities to pay for acquisitions and may grant a significant amount of equity-based incentive awards to retain the employees of acquired companies, which
could increase its expenses, adversely affect its financial results, and result in dilution to its shareholders. In addition, any acquisitions the Corporation
announces could be viewed negatively by customers or investors, which may adversely affect its business or the price of its Common Shares.
In addition, acquired companies may have liabilities that the Corporation failed, or was unable, to discover or sufficiently assess in the course of
performing due diligence investigations. The effectiveness of the Corporation’s due diligence review and its ability to evaluate the results of such due
diligence are dependent in part upon the accuracy and completeness of statements and disclosures made or actions taken by the companies it acquires or their
representatives, as well as the limited amount of time in which acquisitions are executed. In addition, the Corporation may fail to accurately forecast the
financial impact of an acquisition transaction, including tax and accounting charges, such as impairments of acquired assets. The Corporation cannot be sure
that the remedies available to it at law or under contract, or the indemnification granted to it by sellers of acquired companies, will be sufficient in amount,
scope or duration to fully or partially offset the possible liabilities associated with businesses or properties the Corporation assumes upon consummation of an
acquisition. The Corporation may learn additional information about its acquired businesses that could materially adversely affect it, such as unknown or
contingent liabilities, unprofitable products, and liabilities related to compliance with applicable laws. Acquisitions may also result in the Corporation’s
recording of significant additional expenses to its results of operations and recording of substantial finite-lived intangible assets on its balance sheet upon
closing. Any of these factors, individually or in the aggregate, could have a material adverse effect on the Corporation’s business, results of operations, cash
flows or liquidity. For a description of the Kentucky Proceeding (as defined below), see “Legal Proceedings and Regulatory Actions”.
The Corporation cannot assure investors that it will effectively manage its growth.
The growth and expansion of the Corporation’s business, headcount, products and services could create significant challenges for its management,
operational, and financial resources, including managing its relationships with customers, investors and other third parties. In the event of continued growth of
the Corporation’s operations or in the number of its third-party relationships, the Corporation may not have adequate resources, operationally, technologically
or otherwise, to support such growth. In addition, some members of management of the Corporation do not have significant experience managing a large,
public global business operation, so its management may not be able to manage such growth effectively. To effectively manage the Corporation’s growth, the
Corporation
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must continue to improve its operational, financial, and management processes and systems and to effectively expand, train, and manage its employee base.
As the Corporation’s organization continues to grow, and the Corporation is required to implement more complex organizational management structures, it
may find it increasingly difficult to maintain the benefits of its corporate culture and efficiencies, including its ability to quickly develop and launch new and
innovative products. This could negatively affect the Corporation’s business performance.
Failure to attract, retain and motivate key employees may adversely affect the Corporation’s ability to compete and the loss of the services of key
personnel could have a material adverse effect on its business.
The Corporation depends on the services of its executive officers as well as its key technical, operational, marketing and management personnel. The
loss of any of these key persons could have a material adverse effect on the Corporation’s business, results of operations and financial condition. The
Corporation’s success is also highly dependent on its continuing ability to identify, hire, train, motivate and retain highly qualified technical, operational,
marketing and management personnel. Competition for such personnel can be intense, and the Corporation cannot provide assurance that it will be able to
attract or retain such highly qualified personnel in the future. Equity-based awards comprise a key component of management compensation, and if the
Corporation’s Common Share price declines or is volatile, it may be difficult to retain such individuals. In addition, as the Corporation matures, the
incentives to attract, retain, and motivate employees provided by the Corporation’s equity-based awards or by future arrangements may not be as effective as
in the past, and if it issues significant equity to attract additional employees, the ownership of its existing shareholders may be further diluted. The
Corporation’s potential inability to attract and retain the necessary personnel may adversely affect its future growth and profitability. The Corporation’s
retention and recruiting may require significant increases in compensation expense, which would adversely affect the Corporation’s results of operation.
The leadership of the Corporation’s current executive officers has been a critical element of the Corporation’s success. The departure, death or
disability of any such officers or other extended or permanent loss of any of their services, or any negative market or industry perception with respect to any
of them or their loss, could have a material adverse effect on the Corporation’s business. Certain of the Corporation’s other senior management have made
significant contributions to its growth and success. The unexpected loss of services of one or more of these individuals could also adversely affect the
Corporation. The Corporation is not protected by key man or similar life insurance covering its executive officers or members of senior management.
Litigation costs and the outcome of litigation could have a material adverse effect on the Corporation’s business.
From time to time, The Stars Group may be subject to litigation claims through the ordinary course of its business operations or otherwise, regarding,
among other things, employment matters, tax matters, security of customer and employee personal information, contracts with third parties, marketing,
infringement of trademarks and other intellectual property rights, its current and former operations and the operations of the Stars Interactive Group or
CrownBet businesses prior to their respective acquisitions. Litigation to defend The Stars Group against claims by third parties, or to enforce any rights that
The Stars Group may have against third parties, may be necessary, which could result in substantial costs and diversion of The Stars Group’s resources,
causing a material adverse effect on its business, financial condition and results of operations. Given the nature of the Corporation’s business, it is, and may
from time to time in the future be, party to various, and at times numerous, legal, administrative and regulatory inquiries, investigations, proceedings and
claims that arise in the ordinary course of business, as well as potential class action lawsuits. Because the outcome of such legal matters is inherently
uncertain, if one or more of such legal matters were to be resolved against the Corporation for amounts in excess of management’s expectations or any
applicable insurance coverage or indemnification right, the Corporation’s results of operations and financial condition could be materially adversely
affected. Any litigation to which the Corporation is a party may result in an onerous or unfavorable judgment that may not be reversed upon appeal, or in
payments of substantial monetary damages or fines, the posting of bonds requiring significant collateral, letters of credit or similar instruments, or the
Corporation may decide to settle lawsuits on similarly unfavorable terms. Moreover, the Corporation cannot be sure that the remedies available to it at law or
under contract, or the indemnification granted to it by sellers of acquired companies, will be sufficient in amount, scope or duration to fully or partially offset
any such possible liabilities. Any of these factors, individually or in the aggregate, could have a material adverse effect on the Corporation’s business, results
of operations, cash flows or liquidity. For a description of certain currently pending legal and regulatory proceedings, including the Kentucky Proceeding and
certain class action lawsuits, see “Legal Proceedings and Regulatory Actions”.
If the Corporation’s goodwill or intangible assets become impaired, the Corporation may be required to record a significant charge to earnings.
The Corporation reviews its intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be
recoverable, such as a decline in stock price and market capitalization. The Corporation tests goodwill for impairment at least annually. If such goodwill or
intangible assets are deemed to be impaired, an impairment loss equal to the amount by which the carrying amount exceeds the fair value of the assets would
be recognized. The Corporation may be required to record a
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significant charge in its financial statements during the period in which any impairment of its goodwill or intangible assets is determined, which would
negatively affect its results of operations.
New products may be subject to complex revenue recognition standards, which could materially affect the Corporation’s financial results.
As the Corporation introduces new products and as transactions become increasingly complex, additional analysis and judgment is required to account
for and recognize revenues in accordance with applicable accounting standards. Transactions may include unique new product offerings, and applicable
accounting principles or regulatory product approval delays could further impact the timing of revenue recognition, which could adversely affect The Stars
Group’s financial results for any given period.
If the Corporation’s internal controls are ineffective, its operating results and market confidence in its reported financial information could be adversely
affected.
The Corporation’s internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the
possibility of human error, the circumvention or overriding of controls or fraud. Even effective internal controls can provide only reasonable assurance with
respect to the preparation and fair presentation of financial statements. If the Corporation fails to maintain the adequacy of its internal controls, including any
failure to implement required new or improved controls, or if it experiences difficulties in their implementation, its business and operating results and market
confidence in its reported financial information could be harmed and it could fail to meet its financial reporting obligations.
As at the fiscal year end December 31, 2016, the Corporation had identified material weaknesses in its internal control over financial reporting, which
led management to conclude that its internal control over financial reporting as of such date was not effective. The material weaknesses identified related to
controls over derivative valuation and hedge accounting, and foreign exchange rate information. For additional information, see the 2017 Annual MD&A
under the heading “Disclosure Controls and Procedures and Internal Control over Financial Reporting”. As of the date of this annual information form, the
Corporation has implemented certain measures, which successfully remediated these material weaknesses as at December 31, 2017, and enhanced the
Corporation’s internal control over financial reporting. Although these material weaknesses have been remediated, there can be no assurance that the
Corporation’s internal control over financial reporting will be sufficient to prevent these or other material weaknesses in the future.
The existence of any material weaknesses in the future may preclude management from concluding that the Corporation’s internal control over
financial reporting is effective and may further preclude the Corporation’s independent auditors from issuing an unqualified opinion that the Corporation’s
internal controls are effective. In addition, any material weaknesses could cause investors to lose confidence in the Corporation’s financial reporting and may
negatively affect the price of the Common Shares. The Corporation can make no assurances that it will be able to timely and cost effectively remediate any
internal control deficiencies. Moreover, effective internal controls are necessary to produce reliable financial reports. If the Corporation is unable to
satisfactorily remediate any or if it discovers other deficiencies in its internal control over financial reporting, then such deficiencies could lead to
misstatements in its financial statements or otherwise negatively impact its financial statements, business, results of operations, and reputation.
The Corporation’s business is vulnerable to changing economic conditions and to other factors that adversely affect the industries in which it operates.
The Corporation believes that demand for entertainment and leisure activities, including gaming, can be highly sensitive to changes in consumers’
disposable income, and thus can be affected by changes in the economy and consumer tastes, both of which are difficult to predict and beyond the control of
the Corporation. Unfavorable changes in general economic conditions, including recessions, economic slowdown, sustained high levels of unemployment,
and increasing fuel or transportation costs, may reduce customers’ disposable income or result in fewer individuals engaging in entertainment and leisure
activities, including online gaming. As a result, the Corporation cannot ensure that demand for its products or services will remain constant. Adverse
developments affecting economies throughout the world, including a general tightening of availability of credit, decreased liquidity in certain financial
markets, increased interest rates, foreign exchange fluctuations, increased energy costs, acts of war or terrorism, transportation disruptions, natural disasters,
declining consumer confidence, sustained high levels of unemployment or significant declines in stock markets, as well as concerns regarding epidemics and
the spread of contagious diseases, could lead to a further reduction in discretionary spending on leisure activities, such as gaming. Any significant or
prolonged decrease in consumer spending on entertainment or leisure activities could adversely affect the demand for the Corporation’s product offerings,
reducing its cash flows and revenues. If the Corporation experiences a significant unexpected decrease in demand for its products, it could incur losses.
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The Corporation may require additional capital to support its business growth, and this capital may not be available on acceptable terms, if at all.
The Corporation may require additional capital to support its business growth or to respond to business opportunities, challenges or unforeseen
circumstances. The Corporation’s ability to obtain additional capital, if and when required, will depend on its business plans, investor demand, its operating
performance, the condition of the capital markets, and other factors. If the Corporation raises additional funds through the issuance of equity, equity-linked or
debt securities, those securities may have rights, preferences, or privileges senior to the rights of the Corporation’s currently issued and outstanding equity,
and its existing shareholders may experience dilution. If the Corporation is unable to obtain additional capital when required, or is unable to obtain additional
capital on satisfactory terms, its ability to continue to support its business growth or to respond to business opportunities, challenges or unforeseen
circumstances could be adversely affected, and its business may be harmed.
The Corporation is subject to various laws relating to trade, export controls, and foreign corrupt practices, the violation of which could adversely affect its
operations, reputation, business, prospects, operating results and financial condition.
The Corporation must comply with all applicable international trade, export and import laws and regulations of Canada, the United States and other
countries, and it is subject to export controls and economic sanctions laws and embargoes imposed by the U.S. and Canadian governments. Changes in trade
sanctions laws may restrict the Corporation’s business practices, including cessation of business activities in sanctioned countries or with sanctioned entities,
and may result in modifications to the Corporation’s compliance programs. The Corporation is also subject to the CFPOA, the FCPA, the U.K. Bribery Act,
the IOM Bribery Act and other anti-bribery laws that generally prohibit the offering, promising, giving, agreeing to give, or authorizing others to give
anything of value, either directly or indirectly, to a government official in order to influence official action, or otherwise obtain or retain a business
advantage. Certain of such laws also require public companies to make and keep books and records that accurately and fairly reflect the transactions of the
company and to devise and maintain an adequate system of internal accounting controls.
The Corporation’s business is heavily regulated and therefore involves significant direct and indirect interaction with public officials, including
officials of various governments worldwide. The Corporation has implemented safeguards and policies to discourage practices by its directors, officers,
employees and agents that would violate applicable laws. See “Directors and Officers—Ethical Business Conduct” below. However, The Stars Group cannot
ensure that its compliance controls, policies, and procedures will in every instance protect the Corporation from acts committed by its directors, officers,
employees, agents, contractors or collaborators that would violate the laws or regulations of the jurisdictions in which the Corporation operates.
Violations of these laws and regulations could result in significant fines, criminal sanctions against the Corporation, its officers or its employees,
requirements to obtain export licenses, disgorgement of profits, cessation of business activities in sanctioned countries, implementation of new or enhanced
compliance programs, exclusion from government contracts or programs, prohibitions on the conduct of its business and its inability to market and sell its
products in one or more countries. Additionally, any such violations could materially damage the Corporation’s reputation, brand, international expansion
efforts, ability to attract and retain employees and customers, and the Corporation’s business, operating results and financial condition. For information
regarding a certain previously disclosed foreign payments matter and the Corporation’s review of the same, see “Legal Proceedings and Regulatory Actions”
below. In particular, as a result of this matter, the Corporation and one or more subsidiaries could be subject to fines, penalties, administrative sanctions,
convictions or settlements arising from civil proceedings or criminal charges. This could have a material adverse effect on the Corporation, including its
reputation and ability to conduct business, its holding of gaming regulatory licenses, the listing of its securities on an exchange, its financial position,
profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Corporation to estimate the time or resources that
will be needed for the investigation of this matter or its final resolution because, in part, the time and resources needed are dependent on the nature and extent
of the information requested by the authorities involved, and such time or resources could be substantial.
The Corporation’s insurance coverage may not be adequate to cover all possible losses it may suffer, and, in the future, its insurance costs may increase
significantly or it may be unable to obtain the same level of insurance coverage.
The Corporation may suffer damage to its property due to a casualty loss (such as fire, natural disasters and acts of war or terrorism) or other losses,
such as those related to labor, professional liability or certain actions or inactions by its management, directors or employees, that could severely disrupt its
business or subject it to claims by third parties who are injured or harmed. Although The Stars Group maintains insurance that it believes is adequate, that
insurance may be inadequate or unavailable to cover all the risks to which the Corporation’s business and assets may be exposed, including, without
limitation, risks related to certain litigation. Should an uninsured loss (including a loss that is less than the applicable deductible) or loss in excess of insured
limits occur, it could have a significant adverse impact on The Stars Group’s business, results of operations or financial condition.
The Stars Group generally renews its insurance policies on an annual basis. If the cost of coverage becomes too high or if The Stars Group believes
certain coverage becomes inapplicable, The Stars Group may need to reduce its policy limits or agree to certain
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exclusions from its coverage in order to reduce the premiums to an acceptable amount or to otherwise reduce its coverage for certain occurrences. On the
other hand, The Stars Group may determine that it either does not have certain coverage that would be prudent for its business and the risks associated with its
business and/or its current coverages are too low to adequately cover such risks. In either event, The Stars Group may incur additional or higher premiums
for such coverage than it had in prior years.
Among other factors, national security concerns, catastrophic events or any change in the current applicable statutory requirement that insurance
carriers offer coverage for certain acts of terrorism could also adversely affect available insurance coverage and result in, among other things, increased
premiums on available coverage (which may cause the Corporation to elect to reduce its policy limits or not renew its coverage) and additional exclusions
from coverage. As cyber incidents and threats continue to evolve, the Corporation may be required to expend additional, perhaps significant, resources to
continue to update, modify or enhance its protective measures or to investigate and remediate any vulnerability to cyber incidents. Although the Corporation
maintains and monitors its information technology systems and has insurance coverage for protecting against cyber security risks, such systems and insurance
coverage may not be sufficient to protect against or cover all the losses it may experience as a result of any cyber attacks.
The Corporation’s results of operations could be affected by natural events in the locations in which it operates or where its customers or suppliers
operate.
The Stars Group, its customers, and its suppliers have operations in locations subject to natural occurrences such as severe weather and other
geological events, including hurricanes, earthquakes, floods or tsunamis that could disrupt operations. Any serious disruption at any of The Stars Group’s
facilities or the facilities of its customers or suppliers due to a natural disaster could have a material adverse effect on The Stars Group’s revenues and
increase its costs and expenses. If there is a natural disaster or other serious disruption at any of The Stars Group’s facilities, it could impair its ability to
adequately supply its customers, cause a significant disruption to its operations, cause The Stars Group to incur significant costs to relocate or re-establish
these functions and negatively impact its operating results. While The Stars Group insures against certain risks, such insurance may not adequately
compensate The Stars Group for any losses incurred as a result of natural or other disasters. In addition, any natural disaster that results in a prolonged
disruption to the operations of The Stars Group’s customers or suppliers may adversely affect its business, results of operations or financial condition. With
respect to The Stars Group’s sportsbook business, cancellation or curtailment of significant sporting events, for example due to adverse weather, traffic or
transport disruption or civil disturbances, terrorist attacks or the outbreak of infectious diseases may adversely impact The Stars Group’s business, results of
operations or financial condition for the relevant period. In addition, the failure of certain sporting teams to qualify for sporting events may also adversely
impact The Stars Group’s business, results of operations or financial condition for the relevant period.
Risks Related to Regulation
The online gaming industry is heavily regulated and failure by the Corporation to obtain or maintain applicable licensure or approvals, or otherwise
comply with applicable requirements, could be disruptive to its business and could adversely affect its operations.
The Corporation and its officers, directors, major shareholders, key employees and business partners are generally subject to the laws and regulations
relating to online gaming of the jurisdictions to which the Corporation’s gaming business is subject as well as the general laws and regulations that apply to
all e-commerce businesses, such as those related to privacy and personal information, tax and consumer protection. These laws and regulations vary from one
jurisdiction to another and future legislative and regulatory action, court decisions or other governmental action may have a material impact on the operations
and financial results of the Corporation. In particular, some jurisdictions have introduced regulations attempting to restrict or prohibit online gaming, while
others have taken the position that online gaming should be licensed and regulated and have adopted or are in the process of considering legislation to enable
that to happen. Even where a jurisdiction purports to license and regulate online gaming, the licensing and regulatory regimes can vary considerably in terms
of their business-friendliness and at times may be intended to provide incumbent operators with advantages over incoming new licensees. As such, some
“liberalized” regulatory regimes are considerably more commercially attractive than others.
The regulatory regime imposed upon providers of gaming varies by jurisdiction. Typically, however, most regulatory regimes include the following
elements:
•
•
the opportunity to apply for one or more gaming licenses for one or more categories of products, whether as part of a general round of license
issuance (for example, Spain) or as and when the applicant chooses to apply;
a requirement for gaming license applicants to make detailed and extensive disclosures as to their beneficial ownership, their source of funds,
the probity and integrity of all persons associated with the applicant, the applicant’s management competence and structure and business plans,
the applicant’s proposed geographical territories of operation and the applicant’s ability to operate a gaming business in a socially responsible
manner in compliance with regulation;
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•
•
•
•
•
interviews and assessments by the relevant gaming authority, intended to inform a regulatory determination of the suitability of applicants for
gaming licenses;
ongoing reporting and disclosure obligations, both on a set periodic basis and on an ad hoc basis in response to material issues affecting the
business;
the testing and certification of software and systems, generally designed to confirm such things as the fairness of the gaming products offered
by the business, their genuine randomness and ability accurately to generate settlement instructions and recover from outages;
the need to account for applicable gaming duties and other taxes and levies, such as fees or contributions to bodies that organize the sports on
which bets are offered, as well as contributions to the prevention and treatment of problem gaming; and
social responsibility obligations.
Any license, permit, approval or determination of suitability may be revoked, suspended or conditioned at any time. The loss of a license or a
determination of unsuitability in one jurisdiction could trigger the loss of a license or affect the Corporation’s eligibility for a license in another jurisdiction.
The Corporation may be unable to obtain or maintain all necessary registrations, licenses, permits or approvals, and could incur fines or experience delays
related to the licensing process, which could adversely affect its operations. The determination of suitability process may be expensive and time-consuming.
The Corporation’s delay or failure to obtain licenses and approvals in any jurisdiction may prevent it from distributing its products and services, increasing its
customer base and/or generating revenues. A gaming regulatory body may refuse to issue or renew a license or registration if the Corporation, or one of its
directors, officers, employees, major shareholders or business partners: (i) is considered to be a detriment to the integrity or lawful conduct or management of
gaming, (ii) no longer meets a licensing or registration requirement, (iii) has breached or is in breach of a condition of licensure or registration or an
operational agreement with a regulatory authority, (iv) has made a material misrepresentation, omission or misstatement in an application for licensure or
registration or in reply to an enquiry by a person conducting an audit, investigation or inspection for a gaming regulatory authority, (v) has been refused a
similar license or registration in another jurisdiction, (vi) has held a similar license or registration in that province, state or another jurisdiction which has been
suspended, revoked or cancelled, or (vii) has been convicted of an offence, inside or outside of Canada or the United States that calls into question the
Corporation’s honesty or integrity or the honesty or integrity of any of its directors, officers, employees or associates. For additional information, see
“Business of the Corporation—Regulatory Environment”. Additionally, a gaming regulatory body may refuse to issue or renew a license or approval, or
restrict or condition a license or approval, based on the historic activities of the Corporation or its current or former directors, officers, employees, major
shareholders or business partners, which could adversely affect its operations or financial condition.
On June 23, 2016, a referendum was held to determine whether the United Kingdom will remain in the European Union. In light of the decision to
leave the European Union (commonly referred to as “Brexit”), in addition to the increase in the volatility of both the global currency and financial markets, it
may reduce the Corporation’s ability to operate on an unfettered basis in certain European markets that have tried to restrict competition in their domestic
market from online gaming companies based overseas.
Additionally, the Corporation’s products and services must be approved in most regulated jurisdictions in which they are offered; this process cannot
be assured or guaranteed. Obtaining these approvals is a time-consuming process that can be extremely costly. A developer and provider of online gaming
products may pursue corporate regulatory approval with regulators of a particular jurisdiction while it pursues technical regulatory approval for its products
and services by that same jurisdiction. It is possible that after incurring significant expenses and dedicating substantial time and effort towards such regulatory
approvals, the Corporation may not obtain either of them. If the Corporation fails to obtain the necessary certification, registration, license, approval or
determination of suitability in a given jurisdiction, it would likely be prohibited from distributing and providing its products and services in that particular
jurisdiction altogether. If the Corporation fails to seek, does not receive, or receives a suspension or revocation of a license in a particular jurisdiction for its
products and services (including any related technology and software) then it cannot offer the same in that jurisdiction and its licenses or approvals in other
jurisdictions may be impacted. Furthermore, some jurisdictions require license holders to obtain government approval before engaging in some transactions,
such as business combinations, reorganizations, stock offerings and repurchases. The Corporation may not be able to obtain all necessary registrations,
licenses, permits, approvals or findings of suitability in a timely manner, or at all. Delays in regulatory approvals or failure to obtain such approvals may also
serve as a barrier to entry to the market for the Corporation’s products and services. If the Corporation is unable to overcome the barriers to entry, it will
materially affect its results of operations and future prospects. To the extent new online gaming jurisdictions are established or expanded, the Corporation
cannot guarantee it will be successful in penetrating such new jurisdictions or expanding its business or customer base in line with the growth of existing
jurisdictions. As the Corporation directly or indirectly enters into new markets, it may encounter legal and regulatory challenges that are difficult or
impossible to foresee and which could result in an unforeseen adverse impact on planned revenues or costs associated with the new market opportunity. If the
Corporation is unable to effectively develop and operate directly or indirectly within these new markets or if its competitors are able to successfully penetrate
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geographic markets that it cannot access or where it faces other restrictions, then its business, operating results and financial condition could be impaired. The
Corporation’s failure to obtain or maintain the necessary regulatory approvals in jurisdictions, whether individually or collectively, would have a material
adverse effect on its business. See “Business of the Corporation – Regulatory Environment”.
To expand into new jurisdictions, the Corporation may need to be licensed, obtain approvals of its products and/or seek licensure of its officers,
directors, major shareholders, key employees or business partners. This is a time-consuming process that can be extremely costly. Any delays in obtaining or
difficulty in maintaining regulatory approvals needed for expansion within existing markets or into new jurisdictions can negatively affect the Corporation’s
opportunities for growth, including the growth of its customer base, or delay its ability to recognize revenue from its products and services in any such
jurisdictions.
Future legislative and regulatory action, and court decisions or other governmental action, may have a material impact on the operations and financial
results of the Corporation. There is a risk that governmental authorities may view the Corporation or its officers, directors, major shareholders, key employees
or business partners as having violated their local laws, despite the Corporation’s efforts to obtain all applicable licenses or approvals. Therefore, there is a
risk that civil and criminal proceedings, including class actions, could be initiated against the Corporation, its officers, directors, major shareholders, key
employees or business partners and others involved in the online gaming industry. Such potential proceedings could involve substantial litigation expense,
penalties, fines, seizure of assets, injunctions, payment blocking, Internet service provider blocking or other restrictions being imposed upon the Corporation
or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Corporation’s business,
revenues, operating results and financial condition as well as impact upon the Corporation’s reputation, even in instances where such proceedings are
concluded successfully in favor of the Corporation.
There can be no assurance that legally enforceable prohibiting legislation will not be proposed and passed in jurisdictions relevant or potentially
relevant to the Corporation’s business to prohibit, legislate or regulate various aspects of the Internet, e-commerce, payment processing, or the online gaming
and interactive entertainment industries (or that existing laws in those jurisdictions will not be interpreted negatively). Compliance with any such legislation
may have a material adverse effect on the Corporation’s business, financial condition and results of operations, either as a result of the Corporation’s
determining that a jurisdiction should be blocked, or because a local license or approval may be costly for the Corporation or business partners to obtain
and/or such licenses or approvals may contain other commercially undesirable conditions. See “Business of the Corporation—Regulatory Environment”,
including for additional information regarding the recently passed Financial Blocking Bill in Russia.
Public opinion can also exert a significant influence over the regulation of the online gaming industry. A negative shift in the public’s perception of
online gaming could affect future legislation or regulation in different jurisdictions. Among other things, such a shift could cause jurisdictions to abandon
proposals to legalize online gaming, thereby limiting the number of new jurisdictions into which the Corporation could expand. Negative public perception
could also lead to new restrictions on or to the prohibition of online gaming in jurisdictions in which the Corporation currently operates.
The Corporation may not be able to capitalize on the expansion of online gaming or other trends and changes in the online gaming industry, including
due to laws and regulations governing this industry.
The Corporation directly and indirectly participates in the new and evolving online gaming industry through its online (including mobile) and social
products. The Corporation intends to take advantage of the liberalization of online gaming, both within North America, Europe and elsewhere internationally;
however, expansion of online gaming involves significant risks and uncertainties, including legal, business and financial risks. The success of online gaming
and the Corporation’s products and services may be affected by future developments in social networks, mobile platforms, regulatory developments, payment
processing laws, data and information privacy laws and other factors that the Corporation is unable to predict and are beyond its control. Consequently, the
Corporation’s future operating results relating to its online gaming products are difficult to predict, and the Corporation cannot provide assurance that its
products and services will grow at expected rates or be successful in the long term.
Additionally, the Corporation’s ability to successfully pursue its online gaming strategy depends on the laws and regulations relating to wagering
through interactive channels. There is considerable debate over, and opposition to, online and interactive real-money gaming. There can be no assurance that
this opposition will not succeed in preventing the legalization of online gaming in jurisdictions where it is presently prohibited, prohibiting or limiting the
expansion of online gaming where it is currently permitted or causing the repeal of legalized online gaming in any jurisdiction. Any successful effort to curtail
the expansion of, or limit or prohibit, legalized online gaming could have an adverse effect on the Corporation’s results of operations, cash flows and financial
condition. Combatting such efforts to curtail expansion of, or limit or prohibit, legalized online gaming can be time-consuming and can be extremely costly.
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For example, there was uncertainty as to whether the U.S. Federal Wire Act prohibited U.S. states from conducting intrastate lottery transactions via
the Internet if the transmissions over the Internet during the transaction crossed state lines. In late 2011, the Office of Legal Counsel of the DOJ issued an
opinion to the effect that state lottery ticket sales over the Internet to in-state adults do not violate the U.S. Federal Wire Act. The opinion provided an impetus
for states to authorize forms of online lottery or gaming in order to generate additional revenue. However, to the extent states wish to pursue online gaming,
such states may be required or otherwise deem it advisable to enact enabling legislation or new regulations addressing the sale of lottery tickets or the offering
of other forms of gaming through online channels, such as the actions taken by Delaware, Nevada, New Jersey and Pennsylvania to authorize various forms
of online gaming.
Despite the 2011 DOJ opinion, there are still significant forces working to limit or prohibit online gaming in the United States. On February 4, 2015,
Representative Jason Chaffetz introduced the Restoration of America’s Wire Act (“RAWA”) in the U.S. House of Representatives and on June 24, 2015 and
September 21, 2016, Senator Lindsey Graham and Senator Tom Cotton, respectively, introduced similar legislation in the U.S. Senate. RAWA and its
counterparts in the Senate failed to pass Congress in the 114th Session of Congress and therefore the legislation expired. As of early March 2018, RAWA had
not been reintroduced in the current 115th Session of Congress. In January 2017, U.S. Attorney General Jeff Sessions also vowed to review the 2011 DOJ
opinion. As proposed, RAWA would revise the Federal Wire Act to ban most forms of online gambling, including sports betting, online poker, online casino
games, fantasy sports and other activities. The enactment of online gaming legislation that federalizes significant aspects of the regulation of online gaming
and/or limits the forms of online wagering that are permissible could have an adverse impact on the Corporation’s ability to pursue its interactive strategy in
the United States.
Further, as detailed above, the Supreme Court recently heard arguments in Murphy v. National Collegiate Athletic Association related to the
constitutionality of PASPA. There is a risk that the Supreme Court rules against the State of New Jersey and determines that PASPA is constitutional. Such a
result would impact the Corporation’s ability to expand its sports betting offering within the United States for the foreseeable future.
Internationally, laws relating to online gaming are evolving, particularly in Europe. To varying degrees, a number of European governments have taken
steps to change the regulation of online wagering through the implementation of new or revised licensing and taxation regimes, including the possible
imposition of sanctions on unlicensed providers. The Corporation cannot predict the timing, scope or terms of any such state, federal or foreign laws and
regulations, or the extent to which any such laws and regulations will facilitate or hinder its interactive strategy.
Moreover, new gaming laws or regulations, changes in existing gaming laws or regulations, new interpretations of existing gaming laws or regulations
or changes in the manner in which existing laws and regulations are enforced, may hinder or prevent the Corporation from continuing to operate in those
jurisdictions where it currently conducts business, including in jurisdictions where the Corporation’s products and services are available through its multi-
jurisdictional licenses, which would harm its operating results and financial condition. For example, in 2017 the Company ceased offering its real-money
online products to customers physically located in Australia, Colombia and Slovenia due to changes in the regulatory environment in those jurisdictions.
Additionally, if new or existing gaming laws or regulations instituting a legal regime for online gaming in jurisdictions where the Corporation does not
currently operate are implemented in a manner that could prevent the Corporation from taking advantage of such new or existing laws or regulations due to
historic actions of the Corporation or of its directors, officers, employees or other stakeholders, this could harm the Corporation’s business, results of
operations and financial condition.
If the Corporation fails to comply with any existing or future laws or requirements, regulators may take action against the Corporation, which could
ultimately include fines, the conditioning, suspension or revocation of approvals, registrations, permits or licenses, and other disciplinary action. If the
Corporation fails to adequately adjust to any such potential changes, its business, results of operations or financial condition could be harmed.
The Corporation’s business is subject to complex and evolving domestic and foreign laws and regulations regarding the Internet, privacy, data protection,
competition, consumer protection and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could
result in claims, changes to the Corporation’s business practices, monetary penalties, increased cost of operations, or declines in customer growth or
engagement, or otherwise harm its business.
In addition to regulations governing online gaming, the Corporation is subject to a variety of laws and regulations domestically and abroad that involve
the Internet, e-commerce, privacy, and protection of data and personal information, rights of publicity, acceptable content, intellectual property, advertising,
marketing, distribution, data and information security, electronic contracts and electronic communications, competition, protection of minors, consumer
protection, unfair commercial practices, product liability, taxation, economic or other trade prohibitions or sanctions, securities law compliance, and online
payment and payment processing services. The introduction of new products, expansion of the Corporation’s activities in certain jurisdictions, or other actions
that the Corporation may take may subject it to additional laws, regulations or other government scrutiny. For example, when the Corporation
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began offering sports betting in Great Britain, it became subject to certain financing arrangements intended to support industries from which it profits,
including the statutorily imposed Horserace Betting Levy, which is intended to support the British horse racing industry. In addition, foreign data and
information protection, privacy, competition and other laws and regulations can impose different obligations or be more restrictive than those in the United
States or Canada. For example, the Corporation handles, collects, stores, retrieves, transmits and uses confidential, personal information relating to its
customers and employees for various business purposes, including marketing and financial purposes, and credit card information for processing payments.
The Corporation may share this personal or confidential information with vendors or other third parties in connection with processing of transactions,
operating certain aspects of its business, combating fraud or for marketing purposes.
These laws, regulations and legislation, along with other applicable laws and regulations, which in some cases can be enforced by private parties or
government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these
laws and regulations, including pre-existing laws regulating communications and commerce in the context of the Internet and e-commerce, are often
uncertain, particularly in the new and rapidly evolving industries in which the Corporation operates, and may be interpreted and applied inconsistently from
jurisdiction to jurisdiction and inconsistently with its current policies and practices. Any regulatory or legislative action affecting the manner in which the
Corporation displays content or provides its products to its customers or obtains consent to various practices could adversely affect customer growth and
engagement, including by restricting or prohibiting the use of the Internet. In addition, foreign court judgments or regulatory actions could impact the
Corporation’s ability to transfer, process and/or receive information that is critical to its operations, including information relating to suppliers, partners or
customers. Such judgments or actions could affect the manner in which the Corporation provides its products or services and adversely affect its financial
results.
Proposed or new legislation and regulations relating to the above matters could also significantly affect the business of the Corporation. For example,
the European Commission has approved the GDPR, a single framework for data protection regulation in the European Union, which is due to come into force
on May 25, 2018. The GDPR will include operational requirements for companies that receive or process personal data of residents of the European Union
that are different and generally more stringent than those currently in place in the European Union, and that will include significant penalties for non-
compliance. Similarly, there are a number of legislative proposals in the United States, at both the federal and state level, that could impose new obligations in
areas affecting the Corporation’s business, such as liability for copyright infringement by third parties. In addition, some jurisdictions are considering or have
passed legislation implementing data and information protection requirements or requiring local storage and processing of data and information or similar
requirements that could increase the cost and complexity of delivering the Corporation’s services, and to the extent the Corporation is subject to data and/or
information protection laws and regulations of any jurisdiction that does not adopt the GDPR, the Corporation may experience increased costs and expenses
as a result of having to comply with multiple, and potentially conflicting, data and/or information protection laws and regulations.
Legislators and regulators also look beyond online gaming regulations specifically in order to implement restrictive measures on online gaming. In
certain jurisdictions, this has included restrictions on payment processing, internet blocking, account and identity verification requirements, and similar
measures. For example, in June 2010, Norway enacted a law prohibiting the remittance of monies from Norwegian bank accounts to gaming operators and in
November 2017, Russian President Putin signed a bill into law that would require certain banks and payment processors within Russia to block transactions
between Russian-based customers and off-shore online gaming operators. Such regulations, if not appropriately mitigated, could materially adversely affect
the Corporation’s business, results of operations or financial condition. For additional information regarding the bill, see “Business of the Corporation—
Regulatory Environment”.
In addition, such restrictive measures may impact the ability or desire of third-party suppliers, including, without limitation, payment processors, to
provide services to the Corporation globally or in certain jurisdictions. A supplier could require that as a condition of the Corporation’s continued use of its
products the Corporation restrict access from customers in certain jurisdictions. Such restrictions from third-party suppliers could affect the manner in which
the Corporation provides its products or services in certain jurisdictions and adversely affect its financial results due to the potential need to make a
determination to change suppliers, which may not be on as favorable terms, or comply with the supplier’s request to cease making our products and services
available in one or more jurisdictions.
The Corporation is also vulnerable to the ongoing development of intellectual property laws and/or political, legislative, regulatory developments that
may seek further liability to pay royalties or other types of levy to the organizers of sporting events or data right owners, which arise from the concept of the
so-called “right-to-bet”, where the organizers of sporting events and competitions and those claiming to have data rights in relation to such events seek to
obtain a share of the revenue gaming operators generate on such events and competitions. In all such cases, the level of any such levy, fee or royalty will be
outside the control of the Corporation. The Corporation cannot predict with any certainty what further payments may be required in the future and what other
additional resources may need to be made available to address the conditions on which fees, royalties or other levies may be imposed, as well as sports
integrity issues.
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These laws and regulations, as well as any changes to such laws and any related inquiries, investigations, or any other government actions, may be
costly to comply with and may delay or impede the development of new products, result in negative publicity, increase the Corporation’s operating costs,
require significant management time and attention, and subject the Corporation to remedies that may harm its business, including fines or demands or orders
that the Corporation modifies or ceases certain or all existing business practices, such as limiting its use of personal information to add value for customers, or
implement costly and burdensome compliance measures. Any such consequences could adversely affect the Corporation’s business, results of operations or
financial condition.
The Corporation has been subject to regulatory investigations and settlements and it expects to continue to be subject to such proceedings in the future,
which could cause it to incur substantial costs or require it to change its business practices in a manner materially adverse to its business.
From time to time, the Corporation receives formal and informal inquiries from government authorities and regulators, including securities authorities,
tax authorities and gaming regulators, regarding its compliance with laws and other matters. The Corporation expects to continue to be the subject of
investigations and audits in the future as it continues to grow and expand its operations. Violation of existing or future regulatory orders or consent decrees
could subject the Corporation to substantial monetary fines and other penalties that could negatively affect its financial condition and results of operations. In
addition, it is possible that future orders issued by, or inquiries or enforcement actions initiated by, government or regulatory authorities could cause the
Corporation to incur substantial costs, expose it to unanticipated civil and criminal liability or penalties, or require it to change its business practices in a
manner materially adverse to its business. See also “—The Corporation may have exposure to greater than anticipated tax liabilities” and “Legal Proceedings
and Regulatory Actions”.
The Stars Group’s shareholders are subject to extensive governmental regulation, and if a shareholder is found unsuitable by a gaming authority, that
shareholder may not be able to beneficially own certain of the Corporation’s securities either directly or indirectly.
In many jurisdictions, gaming laws can require any of the Corporation’s shareholders to file an application, be investigated, and qualify or have his,
her or its suitability determined by gaming authorities. Gaming authorities have very broad discretion in determining whether an applicant should be deemed
suitable. Subject to certain administrative proceeding requirements, the gaming regulators have the authority to deny any application or limit, condition,
restrict, revoke or suspend any license, registration, finding of suitability or approval, or fine any person licensed, registered or found suitable or approved, for
any cause deemed reasonable by the gaming authorities.
Furthermore, any person found unsuitable by a gaming authority may not hold directly or indirectly ownership of any voting security or the beneficial
or record ownership of any nonvoting security or any debt security of any public corporation which is registered with the relevant gaming authority beyond
the time prescribed by the relevant gaming authority. A violation of the foregoing may constitute a criminal offense. A finding of unsuitability by a particular
gaming authority impacts that person’s ability to associate or affiliate with gaming licensees in that particular jurisdiction and could impact the person’s
ability to associate or affiliate with gaming licensees in other jurisdictions.
Many jurisdictions also require any person who acquires beneficial ownership of more than a certain percentage of voting securities of a gaming
company and, in some jurisdictions, non-voting securities, sometimes 5%, to report the acquisition to gaming authorities, and gaming authorities may require
such holders to apply for qualification or a finding of suitability, subject to limited exceptions for “institutional investors” that hold a company’s voting
securities for investment purposes only. Some jurisdictions may also limit the number of gaming licenses with which a person may be associated.
The Corporation’s articles include certain provisions to ensure that the Corporation complies with applicable gaming regulations. These provisions
provide, among other things, that the Corporation shall have the right, subject to the conditions set out in the gaming provisions share terms, to redeem
Common Shares held by an unsuitable person. Such redemption rights may negatively affect the trading price of the Common Shares and may negatively
affect the liquidity of the Common Shares.
Risks Related to the Corporation’s Intellectual Property and Technology
The Stars Group’s intellectual property may be insufficient to properly safeguard its technology and brands.
The Corporation holds patents, trademarks and other intellectual property rights. The Corporation has also applied for patent protection in the United
States, Canada, Europe and other countries relating to certain existing and proposed processes, designs and methods and other product innovations. Patent
applications can, however, take many years to issue and the Corporation can provide no assurance that any of these patents will be granted at all, particularly
in light of a global shift towards not granting patents involving computer related inventions. If the Corporation is denied any or all of these patents, it may not
be able to successfully prevent its competitors from imitating its products and services or using some or all of the processes that are the subject of such patent
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applications. Such imitation may lead to increased competition within the finite market for the Corporation’s products and services. Even if pending patents
are granted to the Corporation, its intellectual property rights may not be sufficiently comprehensive to prevent its competitors from developing similar
competitive products and technologies or may be vulnerable to challenge due to it changing case law regarding the patentability of computer related
inventions. If the granted patents are challenged, protection may be lost. The Corporation’s success may also depend on its ability to obtain trademark
protection for the names or symbols under which it markets its products and to obtain copyright protection of its proprietary technologies and other game
innovations. The Corporation may not be able to build and maintain goodwill in its trademarks or obtain trademark protection. There can be no assurance that
any trademark, copyright or granted patent will provide competitive advantages for The Stars Group or that The Stars Group’s intellectual property will not be
successfully challenged or circumvented by competitors.
Source codes for The Stars Group’s technology may receive protection under international copyright laws. However, for many third parties who
intend to use The Stars Group source codes without The Stars Group’s consent, the presence of copyright protection in the source codes alone may not be
enough of a deterrent to prevent such use. As such, The Stars Group may need to initiate legal proceedings following such use to obtain orders to prevent
further use of the source code.
The Corporation also relies on trade secrets and proprietary know-how. Although the Corporation generally requires its employees and independent
contractors to enter into confidentiality and intellectual property assignment agreements, it cannot be assured that the obligations therein will be maintained
and honored. If these agreements are breached, it is unlikely that the remedies available to the Corporation will be sufficient to compensate it for the damages
suffered even if the Corporation promptly applies for injunctive relief. In spite of confidentiality agreements and other methods of protecting trade secrets, the
Corporation’s proprietary information could become known to or independently developed by competitors. If the Corporation fails to adequately protect its
intellectual property and confidential information, its business may be harmed and its liquidity and results of operations may be materially adversely
impacted.
The Corporation may be subject to claims of intellectual property infringement or invalidity and adverse outcomes of litigation could unfavorably affect
its operating results.
The Corporation monitors for infringement and misappropriation of intellectual property by, among other thing, using brand enforcement software that
searches the Internet for potential infringements upon the Corporation’s intellectual property rights, and the Corporation also has a standardized process for
enforcing its intellectual property rights in the event of a potential infringement. However, monitoring for such infringement and misappropriation can be
difficult and expensive, and the Corporation may not be able to detect infringement or misappropriation of its proprietary rights. Although the Corporation
intends to aggressively pursue anyone who is reasonably believed to be infringing upon its intellectual property rights and who poses a significant commercial
risk to the business, to protect and enforce its intellectual property rights, initiating and maintaining suits against such third parties will require substantial
financial resources. The Corporation may not have the financial resources to bring such suits, and, if it does bring such suits, it may not prevail. Regardless of
the Corporation’s success in any such actions, the expenses and management distraction involved may have a material adverse effect on its financial position.
A significant portion of the Corporation’s revenues is generated from products using certain intellectual property rights, and The Stars Group’s operating
results would be negatively impacted if it was unsuccessful in licensing certain of those rights and/or protecting those rights from infringement, including
losses of proprietary information from breaches of the Corporation’s cybersecurity efforts.
If the registration and enforcement policies regarding the Corporation’s intellectual property portfolios are inadequate to deter unauthorized use or
appropriation by third parties, the value of the Corporation’s brands and other intangible assets may be diminished and competitors may be able to more
effectively mimic its brands, products, services, and methods of operations. Such events could have an adverse effect on the Corporation’s business and
financial results. At the same time, the Corporation has to be mindful of how it will be perceived by its customers and potential customers if it deploys an
unduly strict enforcement policy; an overly aggressive position may deter its customers from supporting the brands and therefore damage not only the brands’
reputation in the market place but also negatively impact financial results.
Further, the Corporation’s competitors have been granted patents protecting various gaming products and services features, including systems,
methods and designs. If the Corporation’s products and services employ these processes, or other subject matter that is claimed under its competitors’ patents,
or if other companies obtain patents claiming subject matter that the Corporation uses, those companies may bring infringement actions against it. The
question of whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. In addition, because
patent applications can take many years to issue, there may be applications now pending of which the Corporation is unaware, which might later result in
granted patents that the Corporation’s products and services may infringe. There can be no assurance that the Corporation’s products, including those with
currently pending patent applications, will not be determined to have infringed upon an existing third-party patent. If any of the Corporation’s products and
services infringes a valid patent, the Corporation may be required to discontinue offering certain products or systems, pay damages, purchase a license to use
the intellectual property in question from its owner, or redesign the product in
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question to avoid infringement. A license may not be available or may require The Stars Group to pay substantial royalties, which could in turn force The
Stars Group to attempt to redesign the infringing product or to develop alternative technologies at a considerable expense. Additionally, the Corporation may
not be successful in any attempt to redesign the infringing product or to develop alternative technologies, which could force the Corporation to withdraw its
product or services from the market.
The Corporation may also infringe other intellectual property rights belonging to third parties, such as trademarks, copyrights and confidential
information. As with patent litigation, the infringement of trademarks, copyrights and confidential information involve complex legal and factual issues and
the Corporation’s products, branding or associated marketing materials may be found to have infringed existing third-party rights. When any third-party
infringement occurs, the Corporation may be required to stop using the infringing intellectual property rights, pay damages and, if it wishes to keep using the
third party intellectual property, purchase a license or otherwise redesign the product, branding or associated marketing materials to avoid further
infringement. Such a license may not be available or may require The Stars Group to pay substantial royalties.
It is also possible that the validity of any of The Stars Group’s intellectual property rights might be challenged or an attempt to reduce the
Corporation’s intellectual property rights or protections may be made either in standalone proceedings or as part of infringement claims. There can be no
assurance that The Stars Group’s intellectual property rights will withstand an invalidity claim and, if declared invalid, the protection afforded to the product,
branding or marketing material will be lost.
Moreover, the future interpretation of intellectual property law regarding the validity of intellectual property by governmental agencies or courts in
Canada, Europe, the United States or other jurisdictions in which The Stars Group has rights could negatively affect the validity or enforceability of the
Corporation’s current or future intellectual property. This could have multiple negative impacts including, without limitation, the marketability of, or
anticipated revenue from, certain of The Stars Group’s products. Additionally, due to the differences in foreign patent, trademark, trade dress, copyright and
other laws concerning proprietary rights, the Corporation’s intellectual property may not receive the same degree of protection in foreign countries as it would
in Canada, Europe or the United States. The Corporation’s failure to possess, obtain or maintain adequate protection of its intellectual property rights for any
reason in these jurisdictions could have a material adverse effect on its business, results of operations and financial condition.
Furthermore, infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate, and the
Corporation may not have the financial and human resources to defend itself against any infringement suits that may be brought against The Stars Group.
Litigation can also distract management from day-to-day operations of the business.
In addition, the Corporation’s business is dependent in part on the intellectual property of third parties. For example, the Corporation licenses
trademarks and other intellectual property from third parties for use in its gaming products. The future success of the Corporation may depend upon its ability
to obtain licenses to use new marks and its ability to retain or expand existing licenses for certain products. If the Corporation is unable to obtain new licenses
or renew or expand existing licenses, it may be required to discontinue or limit its use of such products that use the licensed marks and its financial condition,
operating results or prospects may be harmed.
Compromises of the Corporation’s systems, manipulation of its products or services, or unauthorized access to its confidential information or data, or its
customers’ personal information or data, could materially harm The Stars Group’s reputation and business.
The Stars Group assesses and monitors the security of its systems as well as the collection, storage and transmission of customer information on an
ongoing basis. See also “Business of the Corporation—Technology Infrastructure and Research and Development”. However, The Stars Group’s business is
prone to cyber-attacks. Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to
electronically circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining
information necessary to gain access. These third parties often seek unauthorized access to the Corporation’s confidential information or data or its customers’
or employees’ personal information or data, or to maliciously overwhelm the Corporation’s services, which could result in prolonged outages during which
customers would be unable to use the Corporation’s products or services. Any failure to prevent or mitigate security breaches and improper access to or
disclosure of the Corporation’s data or user information could result in the loss, corruption or misuse, including fraudulent manipulation of or “ransom”
demands with respect to, such data or information, which could harm the Corporation’s business and reputation and diminish its competitive position. In
addition, computer malware, viruses, denial-of-service, social engineering (predominantly spear phishing attacks) and general hacking and similar attacks by
third parties have become more prevalent in the Corporation’s industries. Although the Corporation has not experienced attacks that have resulted in a
material adverse effect on the Corporation, such as a materially prolonged service outage or the compromise of a material amount of company or personal
data, attacks have occurred on its systems in the past, most commonly distributed denial-of-service attacks, and will occur on its systems in the future. As a
result of the Corporation’s prominence in the industries in which it operates, particularly in online
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gaming, and large customer base who provide personal information to create real-money accounts, as well as the ever increasing sophistication of individual
and organized hacking attempts, which in recent years have resulted in massive breaches of data from other Internet-facing companies, including online
gaming companies, and customers’ tendencies to share password and email information across different websites, the Corporation believes that it is a
particularly attractive target for such breaches and attacks. Such attacks may cause, among other things, (i) interruptions to the products and services the
Corporation provides, which could lead to lost revenues, confidence and trust, (ii) compromises of confidential customer or employee information, (iii)
unauthorized access to proprietary or sensitive information, (iv) devaluation of the Corporation’s intellectual property, (v) increased expenditures on data and
information security and remediation costs, (vi) destruction or corruption of data, (vii) theft of financial assets, (viii) litigation, fines, liability, disciplinary
action or investigations by customers (for lost deposits, wagers, personal information, or otherwise) or applicable regulatory authorities, as applicable, (ix)
other regulatory scrutiny, (x) increased insurance premiums, (xi) reputational and competitive harm as a result of negative customer experiences, including as
a result of the foregoing, and (xii) a negative impact on the Corporation’s internal control over financial reporting. The Corporation’s efforts to protect its
products and services, and company and customer data and information may also be unsuccessful due to software bugs or other technical malfunctions,
employee, contractor or vendor error or malfeasance, government surveillance, break-ins or theft, third-party security breaches, or other factors or threats that
evolve, such as casualty loss. In addition, third parties may attempt to fraudulently induce employees or customers to, or the Corporation’s employees or
customers themselves may, disclose information in order to gain access to the Corporation’s data or its customers’ information and potentially use such data
or information improperly. Although the Corporation believes it and its internal information security group are adequately prepared and have developed
systems and processes that are designed to prevent or hinder cyber-attacks and protect its systems, data and customer information and to prevent outages, data
or information loss, fraud and to prevent or detect security breaches, including, without limitation, a disaster recovery strategy for server and equipment
failure and back office systems and the use of third parties for certain cyber security services, the Corporation cannot assure investors that such measures will
provide absolute security. Disruptions from unauthorized access to, fraudulent manipulation of, or tampering with the Corporation’s computer systems and
technological infrastructure, or those of third parties The Stars Group utilizes, in any such event could result in a wide range of negative outcomes, including
those outcomes listed above, each of which could have a material adverse effect on the Corporation’s business, operating results and financial condition.
The Corporation also provides limited information to certain third parties based on the scope of services provided to it. However, if these third parties
or developers fail to adopt or adhere to adequate data and information security practices, or in the event of a breach of their networks, the Corporation’s
customers’ information may be improperly accessed, used, or disclosed.
Any loss, disclosure or misappropriation of, or access to, customers’ or other proprietary information or other breach of The Stars Group’s information
security could result in legal claims or legal proceedings, including regulatory investigations and actions, or liability for failure to comply with privacy and
information security laws, including for failure to protect personal information or for misusing personal information, which could disrupt The Stars Group’s
operations, force it to modify its business practices, damage its reputation and expose it to claims from its customers, financial institutions, regulators,
payment card associations, employees and other persons, any of which could have an adverse effect on The Stars Group’s business, financial condition and
operations.
In addition, The Stars Group’s customers may attempt or commit fraud, or cheat or use impermissible methods in violation of the Corporation’s terms
and conditions of use, such as the use of artificial intelligence or bots with respect to online poker offerings, to create an artificial competitive advantage in
order to increase winnings. Acts of fraud or cheating may involve various tactics, possibly in collusion with employees or other customers of the Corporation.
Internal acts of cheating could also be conducted by employees through collusion with programmers and other personnel. See also “Business of the
Corporation—Technology Infrastructure and Research and Development”. Failure to discover such acts or schemes in a timely manner could result in losses
in The Stars Group’s operations. In addition, negative publicity related to such schemes could have an adverse effect on The Stars Group’s reputation,
potentially causing a material adverse effect on the Corporation’s business, financial condition, and results of operations.
The Corporation’s business is dependent on its ability to maintain and scale its technical infrastructure, and any significant disruption in its service,
including service interruptions of Internet and other technology service providers, could damage its reputation, result in a potential loss of customers and
engagement, and adversely affect its financial results.
The Corporation’s reputation and ability to attract, retain and serve its customers is dependent upon the reliable performance of its products and its
underlying technical infrastructure. The Corporation’s systems may not be adequately designed with the necessary reliability and redundancy to avoid
performance delays or outages that could be harmful to its business. If the products of the Corporation are unavailable when customers attempt to access
them, or if they do not load as quickly as expected, customers may not use such products as often in the future, or at all. If the Corporation’s customer base
and engagement continue to grow, and the amount and types of products and services continue to grow and evolve, the Corporation will need an increasing
amount of technical infrastructure, including network capacity and computing power, to continue to satisfy the needs of its customers. Such infrastructure
expansion may be complex, and unanticipated delays in the completion of these projects or availability of components may lead to increased project costs,
operational inefficiencies, or interruptions in the delivery or degradation of the quality of the Corporation’s
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products. In addition, there may be issues related to this infrastructure that are not identified during the testing phases of design and implementation, which
may only become evident after the Corporation has started to fully utilize the underlying equipment or software, that could further degrade the customer
experience or increase the Corporation’s costs. As such, it is possible that the Corporation may fail to continue to effectively scale and grow its technical
infrastructure to accommodate increased demands. In addition, the business of the Corporation may be subject to interruptions, delays, or failures resulting
from earthquakes, adverse weather conditions, other natural disasters, power loss, terrorism, cyber-attacks or other catastrophic events. If such an event were
to occur, customers may be subject to service disruptions or outages and the Corporation may not be able to recover its technical infrastructure and customer
information in a timely manner to restart or provide its products or services, which may adversely affect its financial results.
A substantial portion of the Corporation’s network infrastructure is provided by third parties, including Internet service providers and other
technology-based service providers. If Internet service providers experience service interruptions, including as a result of cyber-attacks, communications over
the Internet may be interrupted and impair the Corporation’s ability to carry on business. In addition, the Corporation’s ability to process e-commerce
transactions depends on bank processing and credit card systems. In order to prepare for system problems, the Corporation continuously seeks to strengthen
and enhance its current facilities and the capability of its system infrastructure and support. Nevertheless, there can be no assurance that the Internet
infrastructure or the Corporation’s own network systems will continue to be able to meet the demand placed on it by the continued growth of the Internet, the
overall online gaming and interactive entertainment industries and the Corporation’s customers. Any difficulties these providers face may adversely affect the
Corporation’s business, and the Corporation exercises little control over these providers, which increases its vulnerability to problems with the services they
provide. Any system failure as a result of reliance on third parties, such as network, software or hardware failure, which causes a delay or interruption in the
Corporation’s online services and products and e-commerce services, including its ability to handle existing or increased traffic, could have a material adverse
effect on the Corporation’s business, revenues, operating results and financial condition.
The Corporation may experience losses due to technical problems with its products, services or internal systems.
The Corporation’s products and internal systems rely on software, including software developed or maintained internally and/or by third parties, that is
highly technical and complex. In addition, the Corporation’s products and internal systems depend on the ability of such software to store, retrieve, process,
and manage immense amounts of data and information. The software on which the Corporation relies has contained, and may currently or in the future
contain, undetected errors, bugs, or vulnerabilities. Some errors may only be discovered after the code has been released for external or internal use. Errors or
other design defects within the software on which the Corporation relies may result in a negative experience for its customers, delay product introductions or
enhancements, result in targeting, measurement, or processing errors, such as incorrectly determining game outcomes or customer winnings, or compromise
its ability to protect the information of its customers and/or its intellectual property. Any errors, bugs, or defects discovered in the software on which the
Corporation relies could result in damage to its reputation, loss of customers, loss of revenue, liability for damages, impairment of its ability to offer its
products in the future, and/or delays in releases of its products or product enhancements, any of which could adversely affect its business and financial results.
Furthermore, the costs incurred in correcting any product or service defects or errors may be substantial and could adversely affect the Corporation’s
operating margins. There can be no assurance that the Corporation’s efforts to monitor, develop, modify and implement appropriate test and processes for the
Corporation’s products or services will be sufficient to permit it to avoid a rate of failure in its products or services that results in substantial delays,
significant repair or replacement costs or potential damage to its reputation, any of which could have a materially adverse effect on the Corporation’s
business, results of operations and financial condition.
The Corporation may also be subject to claims that its products or services are defective or that some function or malfunction of its products caused or
contributed to damages. The Corporation attempts to minimize this risk by incorporating provisions into its standard agreements and terms and conditions of
use that are designed to limit the Corporation’s exposure to potential claims of liability, in addition to maintaining applicable liability insurance policies.
However, there can be no assurance that all claims will be barred by the contractual provisions and terms and conditions of use limiting liability or that the
provisions will be enforceable. The Corporation may be liable for any unforeseen failures or damages regarding the use of its products or services. A
significant liability claim against the Corporation could have a materially adverse effect on its operating results and financial position.
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Risks Related to the Corporation’s Common Shares
The price and trading volume of the Common Shares has been and will likely continue to be volatile.
The market price of the Common Shares has been and will likely continue to be highly volatile and subject to wide fluctuations. In addition, the
trading volume of the Common Shares will likely continue to fluctuate and cause significant price variations to occur. Volatility in the market price of the
Common Shares may prevent a holder of Common Shares from being able to sell their shares. In addition to the factors discussed in this annual information
form, the market price for the Common Shares could fluctuate significantly for various reasons, many of which are beyond the Corporation’s control,
including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the Corporation’s operating and financial performance;
the Corporation’s quarterly or annual earnings and key operational, financial and customer measures and metrics or those of other companies in
the Corporation’s industries;
conditions that impact demand for the Corporation’s products and services;
the public’s reaction to the Corporation’s press releases, other public announcements and filings with securities authorities;
changes in earnings estimates, recommendations or expectations by securities analysts who track the Common Shares, or failure to meet such
estimates, recommendations or expectations;
market and industry perception of the Corporation’s success, or lack thereof, in pursuing its growth strategy;
additional Common Shares being sold into the market by the Corporation, its existing shareholders, or in connection with acquisitions,
including Common Shares sold by the Corporation’s employees to cover tax liabilities in connection with equity-based compensation vesting
events, or the anticipation of such sales;
investor sentiment with respect to the Corporation’s competitors, business partners and its industries in general;
changes in stock market valuations of companies in the industries in which the Corporation operates;
substantial “short” positions in the Corporation’s Common Shares and other hedging activities by investors from which they would benefit from
declines in the market price of its Common Shares;
inclusion, exclusion or removal of the Corporation’s Common Shares from any trading indices;
strategic actions by the Corporation or its competitors, such as significant products, services or features, technical innovations, strategic
partnerships, joint ventures, capital commitments, acquisitions or restructurings, or the announcement of any of the foregoing;
changes in government regulation, including the regulation of online gaming and additional or increased taxes or duties;
changes in accounting standards, policies, guidance, interpretations or principles;
announcements by the Corporation or estimates by third parties of actual or anticipated changes in the Corporation’s reported key metrics,
including the size of the Corporation’s customer base or customer activity, engagement or monetization;
lawsuits threatened or filed and regulatory investigations or actions threatened or taken against the Corporation;
changes and other developments in anticipated or new legislation and pending lawsuits or regulatory actions, including interim or final rulings
by tax, judicial or regulatory bodies;
arrival and departure of key personnel;
changes in the Corporation’s capital structure;
sale of Common Shares by the Corporation or by members of the management team or the Corporation’s Board of Directors (the “Board”);
changes in general market, economic and political conditions in domestic and foreign economies or financial markets, including fluctuation in
stock markets resulting from, among other things, trends in the economy as whole; and
other events or factors, including those resulting from war, natural disasters or incidents of terrorism, or responses to those events.
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The Common Shares are currently listed on both the NASDAQ (as defined below) and the TSX and volatility in the market prices of the Common
Shares may increase as a result thereof because trading is split between the two markets, resulting in less liquidity on both exchanges. In addition, different
liquidity levels, volume of trading, currencies and market conditions on the two exchanges may result in different prevailing trading prices.
In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on
the market price of securities issued by many companies, including companies in the gaming industry. The changes frequently appear to occur without regard
to the operating performance of the affected companies. Hence, the price of the Common Shares could fluctuate based upon factors that have little or nothing
to do with the Corporation, and these fluctuations could materially reduce the Common Share price.
The Corporation’s Common Shares rank junior to the Preferred Shares with respect to amounts payable in the event of a liquidation.
The Common Shares rank junior to the Preferred Shares with respect to amounts payable in the event of its liquidation, dissolution or winding-up. If
the Corporation voluntarily or involuntarily liquidates, dissolves or winds-up, no distribution of its assets may be made to holders of Common Shares until the
Corporation has paid to holders of the Preferred Shares a liquidation preference. For additional information regarding the Preferred Shares, see “Description
of Capital Structure—Preferred Shares” below.
Certain provisions of the Preferred Shares could delay or prevent an otherwise beneficial takeover attempt of The Stars Group and, therefore, the ability
of holders to exercise their rights associated with a potential fundamental change.
Certain provisions of the Preferred Shares could make it more difficult or more expensive for a third party to acquire the Corporation. For example, if
a fundamental change were to occur, holders of the Preferred Shares may have the right to convert their Preferred Shares, in whole or in part, at an increased
conversion rate and will also be entitled to receive a fundamental change make-whole amount. These features of the Preferred Shares could increase the cost
of acquiring the Corporation or otherwise discourage a third party from acquiring it. For additional information regarding the Preferred Shares, see
“Description of Capital Structure—Preferred Shares” below.
The Corporation’s advance notice bylaws may prevent attempts by its shareholders to replace or remove its current management.
Provisions in the Corporation’s bylaws may frustrate or prevent any attempts by the Corporation’s shareholders to replace or remove current
management by making it more difficult for shareholders to remove The Stars Group’s directors. These charter provisions could make the removal of
management more difficult. Furthermore, the existence of the foregoing provisions could limit the price that investors might be willing to pay in the future for
Common Shares. They could also deter potential acquisitions of the Corporation, thereby reducing the likelihood that shareholders could receive a premium
for Common Shares in an acquisition.
Future sales, the possibility of future sales, or “short” positions in a substantial amount of the Corporation’s Common Shares may depress the price of its
Common Shares.
Future sales, the possibility of future sales, or “short” positions in a substantial amount of the Corporation’s Common Shares in the public market
could adversely affect the prevailing market price of the Common Shares and could impair The Stars Group’s ability to raise capital through future sales of
equity securities. The Corporation cannot predict future sales, the possibility of future sales, or “short” positions, or the effect, if any, that any of the same may
have on the market price of its Common Shares. Sales of substantial amounts of Common Shares (including Common Shares issued in connection with an
acquisition), or the perception that such sales could occur, and substantial “short” positions may adversely affect prevailing market prices for Common Share.
The Corporation does not intend to pay cash dividends in the foreseeable future.
The Corporation has never declared or paid cash dividends and has no present plans to pay cash dividends to its shareholders and, for the foreseeable
future, intends to retain all of its earnings for use in its business. The declaration of any future dividends by the Corporation is within the discretion of the
Board and will depend on the Corporation’s earnings, financial condition and capital requirements, as well as any other factors deemed relevant by the Board.
Based on publicly available information as of the date hereof, certain shareholders, each individually and collectively, own a significant amount of the
Corporation’s shares on a fully diluted basis and may be able to exert influence over matters requiring shareholder approval.
As of early March 2018 and based on publicly available information, GSO Capital Partners LP (“GSO”), Caledonia (Private) Investments Pty Limited,
Tang Hao (through certain affiliated entities), and BlackRock Financial Management, Inc. (“BlackRock”) (including through their respective affiliated funds
or accounts managed or advised by them or their affiliates, as applicable), beneficially owned or had control over 15.4%, 13.6%, 12.2% and 9.1%,
respectively, of The Stars Group’s outstanding shares on a
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fully-diluted basis. As a result, each individually and collectively (in the case of GSO and BlackRock, following the conversion of its Preferred Shares into
Common Shares) may be able to exercise significant influence over any matter requiring shareholder approval in the future.
DIVIDENDS AND DISTRIBUTIONS
The Corporation has never declared or paid any dividend or any other distribution. The Corporation currently intends to retain any future earnings to
fund the development and growth of its business and does not currently anticipate paying any dividend or distribution in the foreseeable future. Any future
determination to pay dividends or distributions will be at the discretion of the Board and will depend upon many factors, including, without limitation, the
Corporation’s results of operations, capital requirements and other factors as the Board may deem relevant, as well as any restrictions under its articles or
applicable law.
As of March 12, 2018, The Stars Group’s authorized share capital consists of an unlimited number of Common Shares and an unlimited number of
Preferred Shares. As of the same date, the Corporation had a total of the following issued and outstanding equity securities:
DESCRIPTION OF CAPITAL STRUCTURE
Common Shares issued and outstanding
Common Shares issuable upon conversion of 1,138,978 Preferred Shares
Common Shares issuable upon exercise of options
Common Shares issuable upon exercise of warrants
Common Shares issuable upon settlement of other equity-based awards
Total Common Shares on a fully-diluted basis
As at March 12, 2018
148,270,626
58,763,272
6,496,451
4,000,000
739,543
218,269,892
For more information on The Stars Group’s issued and outstanding warrants, see the 2017 Annual MD&A and the 2017 Annual Financial Statements.
For more information on The Stars Group’s issued and outstanding stock options, equity-based awards (including restricted share units, performance share
units and deferred share units) and its stock option and equity incentive plans, see “Market for Securities—Issuances of Securities”, the 2017 Annual MD&A,
the 2017 Annual Financial Statements, and the Corporation’s management information circular for the most recent annual meeting of shareholders of the
Corporation, each of which is available on SEDAR at www.sedar.com and Edgar at www.sec.gov.
Common Shares
Each Common Share entitles its holder to notice of, and to one vote on, all matters submitted to The Stars Group’s shareholders for their consideration.
The holders of Common Shares are entitled to receive, after payment of the full dividend on any Preferred Shares, non-cumulative annual dividends if, as and
when declared by the Board. There are no fixed dates or time limits on payment of dividends on Common Shares of the Corporation. Holders of Common
Shares do not have any pre-emptive rights or other rights to subscribe for additional shares, or any conversion rights. In the event of liquidation, dissolution or
winding-up of the Corporation, the net assets of the Corporation available for distribution to its shareholders will be distributed ratably among the holders of
the Common Shares, subject to the rights, privileges, restrictions and conditions of the Corporation’s then issued and outstanding Preferred Shares.
Certain gaming provisions in the Corporation’s articles facilitate compliance with applicable gaming regulations (the “Gaming Provisions”). The
Gaming Provisions protect the Corporation from the consequences of having a shareholder whose ownership of Common Shares or whose failure to make an
application to seek licensure or suitability review from, or otherwise comply with the requirements of, a gaming regulatory authority (an “Unsuitable Person”)
may result in the loss, suspension or revocation (or similar action) of any license, permit, authorization, waiver or other gaming regulatory approval held by
the Corporation, or the denial of any license, permit, authorization, waiver or other gaming regulatory approval sought by the Corporation. The Gaming
Provisions provide the Corporation with a right to redeem all Common Shares held by an Unsuitable Person at a redemption price determined pursuant to a
written valuation and fairness opinion from an investment banking firm of nationally recognized standing in the United States. The Gaming Provisions
require individuals who plan, either on their own or as part of a group acting in concert, to acquire or dispose of 5% or more of Common Shares to provide
advance written notice to the Corporation prior to effecting such an acquisition or disposition. Notwithstanding the Gaming Provisions, the Corporation may
not be able to exercise its redemption rights in full or at all. Under the OBCA, a corporation may not make any payment to redeem shares if there are
reasonable grounds for believing that (a) the corporation is or, after the payment, would be unable to pay its liabilities as they become due, or (b) after the
payment, the realizable value of the corporation’s assets would be less than the aggregate of: (i) its liabilities, and (ii) the amount that would be required to
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pay the holders of shares that have a right to be paid, on a redemption or in a liquidation, ratably with or before the holders of the Common Shares being
purchased or redeemed, to the extent that amount has not been included in its liabilities. Furthermore, The Stars Group may become subject to contractual
restrictions on its ability to redeem its shares by, for example, entering into a secured credit facility subject to such restrictions.
The foregoing description of the terms of the Common Shares does not purport to be complete and is subject to and qualified in its entirety by
reference to the currently effective articles and general by-laws of the Corporation, each of which is available on SEDAR at www.sedar.com and Edgar at
www.sec.gov.
Preferred Shares
In connection with the Stars Interactive Group Acquisition, the Corporation issued $1.05 billion of Preferred Shares on August 1, 2014. The Preferred
Shares were issued at an offering price of CDN$1,000.00 per Preferred Share. Each Preferred Share is convertible at the holder’s option at any time in whole
or in part, initially into 41.67 Common Shares (the “Conversion Ratio”), based on an initial conversion price of CDN$24.00 per Common Share (the “Initial
Conversion Price”), subject to adjustments. The Preferred Shares rank senior to the Common Shares in receiving payment of their liquidation preference
(which is initially CDN$1,000.00 per Preferred Share, subject to adjustments to the Conversion Ratio) upon the liquidation, winding up or dissolution of the
Corporation or in any other distribution of substantially all of its assets (a “Liquidation”). The Preferred Shares are not entitled to receive dividends and have
no voting rights (or any related notice rights, including notice of shareholder meetings) except with respect to amendments to the terms of the Preferred
Shares or as otherwise required under applicable laws. The Conversion Ratio, representing the number of Common Shares that will be issued to a holder of
Preferred Shares for each Preferred Share upon exercise of the conversion right, will be adjusted each February 1 and August 1 by multiplying the Conversion
Ratio then in effect immediately prior to such adjustment by 1.03. Based on the Initial Conversion Price and Conversion Ratio, as adjusted through the date
hereof such that the current Conversion Ratio is equal to 51.5930, approximately 58,763,272 Common Shares would be issuable upon the conversion of all of
the Preferred Shares as of the date hereof.
As of August 1, 2017, The Stars Group may force a mandatory conversion of the Preferred Shares by giving notice to holders of Preferred Shares to
force conversion (in whole or in part under certain circumstances) but only if the following two conditions are satisfied: (i) the closing share price of the
Common Shares has been in excess of 175% of the Initial Conversion Price on any 20 trading days within a 30 consecutive day period, and (ii) except in
certain circumstances, the average daily volume on any 20 trading days within the 30 consecutive day period referred to above was at least 1.75 million
Common Shares. Any mandatory conversion will also be subject to specified regulatory and consent conditions.
The Preferred Shares also contain anti-dilution Conversion Ratio adjustments for certain dividends or distributions (cash, shares or otherwise), share
splits, share combinations, below market equity issuances or rights, options or warrant issuance, tender offer or exchange offer payments, and reorganization
events. In addition, upon a “fundamental change”, additional Common Shares may be issuable to holders of Preferred Shares as a premium. Fundamental
change events include:
•
•
•
•
a person or group (other than The Stars Group, its subsidiaries, GSO, BlackRock or any owner of 10% or more of the Common Shares as of
August 1, 2014) becoming the beneficial owner of more than 50% of voting power for the election of The Stars Group’s directors;
the consummation of a (i) recapitalization in which Common Shares are converted into or exchanged for other securities or assets; (ii) share
exchange or merger in which Common Shares convert into cash, securities, other property; or (iii) sale, lease or other transfer of all or
substantially all of The Stars Group’s assets to a third party (other than a subsidiary of The Stars Group);
the Common Shares being delisted from any of the TSX, New York Stock Exchange (“NYSE”), NASDAQ Stock Market (“NASDAQ”) or
LSE, if then listed on any such exchange; or
The Stars Group’s shareholders approving a Liquidation.
Under the terms of the Preferred Shares, for so long as each of GSO and BlackRock holds 50% or more of the Preferred Shares issued to it on
August 1, 2014, The Stars Group undertakes:
•
•
not to incur indebtedness unless (i) the ratio of Consolidated Net Debt to LTM EBITDA (as each term is defined in the Preferred Share terms)
would be 6.7 to 1 or less on a pro forma basis, or (ii) such indebtedness is Permitted Debt (as defined in the Preferred Share terms);
not to issue equity securities ranking equal or superior to the Preferred Shares;
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•
•
•
•
•
not to make acquisitions that (i) individually exceed $250 million, or (ii) from August 1, 2014, total $500 million or more (subject to specified
ordinary course of business and consent exceptions);
(i) not to require a mandatory conversion of Preferred Shares if such mandatory conversion would require a regulatory filing or waiver for any
holder of Preferred Shares in excess of that required for an institutional investor waiver in the State of New Jersey, and (ii) to notify GSO and
BlackRock in writing at least 60 days prior to any action that will require a regulatory filing or waiver for any holder of Preferred Shares in
excess of that required for an institutional investor waiver in New Jersey;
to cooperate with holders of Preferred Shares in connection with anti-trust or competition filings relating to their investment in The Stars Group
and/or conversion of Preferred Shares;
to maintain the listing of the Common Shares on the NASDAQ; and
to comply with The Stars Group’s continuous disclosure requirements and provisions of the Registration Rights Agreements.
If The Stars Group fails to comply with these undertakings, the Conversion Ratio may be increased between a range of 2% and 6% per annum,
depending on which undertaking is breached, for each year in which the breach occurs.
To create any additional class or series of preferred shares, the Corporation must, among other things, comply with the terms of the Preferred Shares
and amend its articles, and such amendment will be subject to shareholder approval.
The foregoing description of the terms of the Preferred Shares does not purport to be complete and is subject to and qualified in its entirety by
reference to the currently effective articles of the Corporation, which are available on SEDAR at www.sedar.com and Edgar at www.sec.gov.
MARKET FOR SECURITIES
Trading Price and Volume
On October 1, 2013, The Stars Group’s Common Shares began trading on the TSX. On September 22, 2014, The Stars Group was added to the
S&P/TSX Composite Index, and on June 8, 2015, the Common Shares began trading on NASDAQ. The Common Shares currently trade on the TSX and
NASDAQ under the symbols “TSGI” and “TSG”, respectively. As of the date of this annual information form, only the Common Shares are publicly traded.
The following table sets out the high and low prices and total trading volume of the Common Shares as reported by the TSX and NASDAQ for each
month of the year ended December 31, 2017.
Month
December 2017
November 2017
October 2017
September 2017
August 2017
July 2017
June 2017
May 2017
April 2017
March 2017
February 2017
January 2017
Issuances of Securities
Common Shares - TSX
Common Shares – NASDAQ
Price Range
(CDN$)
Price Range
(US$)
High
Low
Total Volume
High
Low
Total Volume
30.65
29.58
26.01
25.50
24.03
22.73
23.97
26.51
24.25
22.89
19.39
19.42
29.25
25.90
25.28
19.98
19.98
21.88
22.73
23.43
22.00
18.97
18.22
17.70
13,689,017
29,106,671
17,624,630
19,617,706
19,617,706
18,559,428
25,399,295
12,589,339
11,882,276
39,398,561
7,493,551
6,714,156
23.90
22.80
20.55
20.50
18.90
18.00
18.10
19.35
17.80
17.15
14.85
14.60
23.10
20.15
19.90
16.10
16.10
17.10
17.35
17.35
16.40
14.15
14.05
13.30
4,411,080
7,301,320
4,093,571
4,034,915
4,034,915
2,376,742
3,842,105
3,925,389
2,388,673
4,607,292
2,727,948
1,453,358
For information regarding options and warrants to purchase Common Shares and other equity-based securities (including restricted share units,
performance share units and deferred share units) that can be settled in Common Shares, and Common Shares issued or issuable upon the exercise of options
and warrants or settlement of other equity-based securities, see the notes to the 2017
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Annual Financial Statements. The Stars Group did not otherwise issue any class of securities of The Stars Group that is not listed or quoted on a marketplace
during the year ended December 31, 2017.
DIRECTORS AND OFFICERS
Directors, Executive Officers and Other Key Senior Officers
The following table sets forth, for each of the Corporation’s directors and executive officers and other key senior officers as of the date hereof, the
person’s name, place of residence, positions within the Corporation, principal occupation and, if a director, the day, month and year on which the person
became a director. Directors are elected at each annual shareholders meeting for a term that expires on the date of the Corporation’s next annual shareholders
meeting or until his or her successor is duly elected, unless prior thereto the director resigns or otherwise vacates office. As of the date of this annual
information form, all directors are “independent” under applicable securities laws and exchange rules.
Position in the Corporation
Principal Occupation
Director Since
Common Shares,
Directly or Indirectly,
Beneficially Owned(1)
Name of Directors and
Executive Officers
Divyesh (Dave) Gadhia
Burnaby, British Columbia,
Canada
Rafael (Rafi) Ashkenazi,
Onchan, Isle of Man
Brian Kyle
Toronto, Ontario, Canada
David Lazzarato,
Toronto, Ontario, Canada
Alfred F. Hurley, Jr.,
New York, New York, USA
Harlan Goodson
Sacramento, California, USA
Chairman of the Board(2)
Chief Executive Officer
Chief Financial Officer
Director and Chairman of the
Audit Committee(3)
Director and Chairman of the
Corporate Governance,
Nominating and
Compensation Committee(2)
Director(2)
Peter E. Murphy
Los Angeles, California, USA
Director(3)
Mary Turner
Beamsville, Ontario, Canada
Marlon D. Goldstein
Miami, Florida, USA
Jerry Bowskill
Onchan, Isle of Man
Robin Chhabra
London, England, UK
Guy Nigel Templer
Onchan, Isle of Man
Director(3)
Executive Vice-President,
Chief Legal Officer and
Secretary
Chief Technology Officer
Chief Corporate Development
Officer
Chief Operating Officer, Stars
Interactive Group
President of Atiga
Investments Inc. (investment
firm)
Chief Executive Officer of
The Stars Group Inc. and
Stars Interactive Group
Chief Financial Officer, The
Stars Group Inc.
Media and broadcast industry
consultant
Sole member of Alfred F.
Hurley, Jr. & Company, LLC
(consulting firm)
Attorney,
The Law Office of
Harlan W. Goodson
(law firm)
Founder and chairman of
Wentworth Capital
Management
(investment and venture
capital firm)
Corporate director
May 11, 2010 (Chairman
since June 28, 2016)
n/a
n/a
June 28, 2016
June 28, 2016
May 11, 2010
June 21, 2017
June 21, 2017
Executive Vice-President,
Chief Legal Officer and
Secretary, The Stars Group
Inc.
Chief Technology Officer,
The Stars Group Inc.
Chief Corporate Development
Officer, The Stars Group Inc.
Chief Operating Officer, Stars
Interactive Group
n/a
n/a
n/a
n/a
56,500
29,360
nil
4,000
2,182
7,690
nil
nil
18,100
nil
nil
nil
(1)
The information as to the number of Common Shares beneficially owned or over which control is exercised is provided to the best of the knowledge of
the Corporation based on publicly available information, as of March 14, 2018.
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(2) Member of the Corporate Governance, Nominating and Compensation Committee. Mr. Hurley serves as the Chairman of the Corporate Governance,
Nominating and Compensation Committee.
(3) Member of the Audit Committee. Mr. Lazzarato serves as the Chairman of the Audit Committee.
Divyesh (Dave) Gadhia, CPA, C.A., ICD.D
Mr. Divyesh (Dave) Gadhia, 55, is the Chairman of The Stars Group’s Board and is a member of the Corporate Governance, Nominating and
Compensation Committee. Mr. Gadhia is and has been the President of Atiga Investments Inc., an investment firm focused on consumer products, since 2010.
He served as the Chief Executive Officer and Executive Vice Chairman of Gateway Casinos & Entertainment Limited from 1992 until 2010, where he was
responsible for strategic initiatives, regulatory matters and governmental relations. He has served as a director of a number of other private and public
companies, as well as charities, including a director of the Canadian Gaming Association from 2005 to 2010, a director of Gateway Casinos & Entertainment
Limited from 1999 to 2007, and a director of Trian Equities from 1994 to 1999. In 2009, Mr. Gadhia was awarded the Canadian Gaming News Outstanding
Achievement Award and was previously awarded the Business in Vancouver’s Top 40 Under 40 Award. Mr. Gadhia is a Chartered Public Accountant, a
member of the Institute of Corporate Directors and holds a business degree from Simon Fraser University.
Rafael (Rafi) Ashkenazi
Mr. Rafael (Rafi) Ashkenazi, 43, currently serves as the Chief Executive Officer of The Stars Group and is responsible for devising and implementing
its business plan and strategies. Mr. Ashkenazi is also the Chief Executive Officer for The Stars Group’s primary operating business, Stars Interactive Group,
and is responsible for the performance and strategy of its offerings, including PokerStars and related brands. Mr. Ashkenazi, who initially joined Stars
Interactive Group in January 2013 as Chief Operating Officer, is an experienced gaming industry executive who previously served as Chief Operating Officer
of Playtech plc (LSE: PTEC), a global gaming software development company (“Playtech”), from January 2006 to January 2010 and then from September
2011 to January 2013, and as a member of the board of directors of Playtech from March 2006 to January 2010. From January 2010 to September 2011, Mr.
Ashkenazi served as Vice President of Business Operations of Playtech. He was appointed Senior Vice President of Strategy for The Stars Group in April
2015, Chief Executive Officer of Stars Interactive Group in November 2015, Interim Chief Executive Officer of The Stars Group in March 2016 and then
permanent Chief Executive Officer of The Stars Group in November 2016. Mr. Ashkenazi graduated with honors from Shenkar College in Israel where he
earned a B.A. in Industrial Engineering.
Brian Kyle
Mr. Brian Kyle, 53, joined The Stars Group in June 2017 and currently serves as its Chief Financial Officer. Mr. Kyle is accountable for all financial
matters across The Stars Group and plays a key leadership role in advancing the company’s strategic initiatives. He has more than 25 years of financial
management experience with leading multinational technology companies. Prior to joining The Stars Group, Mr. Kyle held a number of senior executive
financial roles, including as Chief Financial Officer at Pivot Technology Solutions Inc. (TSX: PTG), a leading information technology infrastructure and
services provider, from August 2016 to June 2017, Chief Financial Officer at D+H Corporation (TSX: DH), a global payments and lending technology
provider, from June 2009 to August 2014, and Teranet Inc., a provider of integrated land-based information systems and software services, from May 2002 to
May 2009. Following his role at D+H and prior to joining Pivot, Mr. Kyle was a partner and co-founder of ALSA Capital Ltd, a specialized asset
management firm, from August 2014 to August 2016. Mr. Kyle is a member of the Chartered Professional Accountants of Ontario, holds an MBA from
Queen’s University School of Business and has an Honorary Doctorate in Laws from Assumption University.
David Lazzarato, FCA, C.A., ICD.D
Mr. David Lazzarato, 62, is a current director and Chairman of the Audit Committee, and is a media and broadcast industry consultant who assists
companies in the areas of strategy development, mergers and acquisitions and financing. He has served as a member of the board of directors and chair of the
audit committee of Yellow Pages Limited (TSX: Y) since December 2012 and was Senior Vice President, Finance at Bell Canada in 2010 and 2011. From
2009 until 2013, Mr. Lazzarato served on the board of directors and was the chair of the audit committee of LED Roadway Lighting and from 2004 to 2013,
he was vice chair of the Trillium Health Centre Foundation. In 2008, Mr. Lazzarato was Chief Executive Officer of Craig Wireless Systems. Prior to joining
Craig Wireless Systems, Mr. Lazzarato served as Executive Vice President and Chief Financial Officer of Alliance Atlantis Communications Inc. and
Chairman of Motion Picture Distribution from 2005 to 2007. From 1999 to 2004, Mr. Lazzarato served as Executive Vice President and Chief Financial
Officer of Allstream Inc. (formerly, AT&T Canada Inc.) and was Chief Corporate Officer of MTS Allstream Inc. in 2004. Mr. Lazzarato is past Chair of the
McMaster University Board of Governors and of the Council of Chairs of Ontario Universities. Mr. Lazzarato earned a Bachelor of Commerce degree from
McMaster University and is a Chartered Accountant, having received the FCA designation from the Ontario Institute of Chartered Accountants in 2006. Mr.
Lazzarato received the ICD.D certification from the Institute of Corporate Directors in 2008 and has also completed the Senior Executive Program at the
Massachusetts Institute of Technology.
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Alfred F. Hurley, Jr.
Mr. Alfred F. Hurley, Jr., 63, is a current director and Chairman of the Corporate Governance, Nominating and Compensation Committee, and has
been a director of New Mountain Finance Corporation, a NYSE-listed business development company (“NMFC”), since 2010. He is the Chairman of
NMFC’s Nomination and Governance and Compensation Committees and a member of its Audit and Valuation Committees. Mr. Hurley has also been a
director of Merrill Corporation, which is a privately held company that provides outsourced solutions for complex, regulated and confidential business
information since 2013. He serves as Chairman of Merrill’s Compensation and Governance and Human Resources Committee and as a member of the Audit
Committee. He has also been the Fortress Voting Proxy to, a member of the Board of Managers, and a member of the Audit Committee of Ligado Networks
Corporation, a privately held company (“Ligado”), since December 2017. Ligado is a satellite communications company that is developing a satellite-
terrestrial network. Mr. Hurley is also the sole member of a consulting business, Alfred F. Hurley, Jr. & Company, LLC, which he started in 2014. He
previously was Vice Chairman of Emigrant Bank and Emigrant Bancorp (collectively, the “Bank”) from 2007 and 2009, respectively, to December 2012, and
was a consultant at the Bank during 2013. His responsibilities at the Bank included advising the Bank’s Chief Executive Officer on strategic planning,
acquisitions and divestitures, asset/liability management, on-line banking and new products. In addition, he was Chairman of the Bank’s Credit and Risk
Management Committee from November 2008 to January 2012 and the Bank’s acting Chief Risk Officer from January 2009 until January 2012. Before
joining the Bank, Mr. Hurley was the Chief Executive Officer of M. Safra & Co., a private money management firm, from 2004 to 2007. Prior to joining M.
Safra & Co., Mr. Hurley worked at Merrill Lynch (“ML”) from 1976 to 2004. His latest management positions prior to his departure included serving as
Senior Vice President of ML & Co. and Head of Global Private Equity Investing, Managing Director and Head of Japan Investment Banking and Capital
Markets, Managing Director and Co-Head of the Global Manufacturing and Services Group, and Managing Director and Head of the Global Automotive,
Aerospace, and Transportation Group. As part of his management duties, he was a member of the Corporate and Institutional Client Group (“CICG”)
Executive Committee which had global responsibility for ML’s equity, debt, investment banking and private equity businesses, a member of the Japan CICG
Executive Committee, and a member of the Global Investment Banking Management and Operating Group Committees. Mr. Hurley graduated from
Princeton University with an A.B. in History, cum laude.
Harlan Goodson
Mr. Harlan Goodson, 70, is a current director and member of the Corporate Governance, Nominating and Compensation Committee, and served as the
Director of California’s Division of Gambling Control from 1999 to 2003, during which he led the implementation of California’s Tribal-State Class III
gaming compacts. Prior to forming his own law practice, The Law Office of Harlan W. Goodson, in Sacramento, California, Mr. Goodson was with the
national law firm of Holland and Knight, LLP for four years where his practice concentrated on Gaming Law and Gaming Regulation and Governmental
Affairs. Mr. Goodson’s biography was published in the 2000 edition of Who’s Who in American Law and in 2002, his work gained him international
distinction when he was the recipient of the International Masters of Gaming Law inaugural Regulator of the Year award in 2001. Prior to being appointed to
the position of Director of California’s Division of Gambling Control, Mr. Goodson worked in the California State Senate as a legislative consultant for
Senator Bill Lockyer from 1994 to 1999. While serving as a consultant in the state legislature, Mr. Goodson drafted legislation in the areas of criminal law,
correctional law, juvenile law and insurance law. Since 1996, Mr. Goodson has been an adjunct law professor teaching classes on the legislative process and
statutory interpretation at John F. Kennedy University, School of Law. He has been a national speaker at conferences, symposia, law schools and before
governmental bodies on the subjects of gaming regulation, Tribal government gaming and Tribal-State relations. Mr. Goodson is a member of the California
State Bar, the International Masters of Gaming Law and the International Association of Gaming Advisors. In 2007, Mr. Goodson also served as a Judge Pro
Tempore for the Superior Court in Sacramento, California. Mr. Goodson has also been listed in America’s Best Lawyers annually since 2005 and was selected
by his peers as the Northern California 2012 Attorney of the Year for Gaming Law. Mr. Goodson graduated with a Bachelor of Arts from Golden Gate
University and a Juris Doctor from the John F. Kennedy School of Law.
Peter E. Murphy
Mr. Peter E. Murphy, 55, is a current director and member of the Audit Committee. Mr. Murphy is also the Founder and Chairman of Wentworth
Capital Management, LLC (“Wentworth”), a private investment and venture capital firm focused on media, technology, and branded consumer businesses.
Wentworth advises and invests in early and later stage growth businesses in digital media, television, and entertainment. Mr. Murphy currently serves on the
boards of directors of various public media and consumer-facing companies including Tribune Media Company (NYSE: TRCO), where he is Chairman of the
Audit Committee and serves on the Transaction and Nominating & Governance Committees, and Malibu Boats, Inc. (Nasdaq: MBUU), where he is Chairman
of the Compensation Committee and serves on the Nominating & Governance Committee. Mr. Murphy’s extensive board experience includes previously
serving as the Chairman of the Board of Revel Entertainment Group, LLC and board member of Fisher Communications, Inc. and Dial Global, Inc. (now
Westwood One, Inc.), where he served as the Chairman of a Special Committee for restructuring and on the Audit Committee. Mr. Murphy previously served
as President, Strategy & Development of Caesars Entertainment Corporation (“Caesars Entertainment”), one of the world’s largest gaming companies. During
his time at Caesars
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Entertainment he was responsible for corporate strategy and growth, mergers and acquisitions, corporate development and real estate development around the
world. Prior to joining Caesars Entertainment, Mr. Murphy was an operating partner at Apollo Global Management, LLC, focused on media and
entertainment. Mr. Murphy spent over 18 years at The Walt Disney Company (“Disney”) in senior executive roles, serving as Disney’s Senior Executive Vice
President, Chief Strategic Officer, Senior Advisor to the CEO, a member of Disney’s executive management committee and the Chief Financial Officer of
ABC, Inc. He was responsible for strategy, new business development, mergers and acquisitions, technology, brand management, research and development
and long-term planning for the growth of Disney’s global businesses. During his tenure, Disney grew from approximately $5 billion in revenue to over $35
billion. Mr. Murphy holds a bachelor’s degree from Dartmouth College where he graduated Phi Beta Kappa and Magna Cum Laude, and an MBA from the
University of Pennsylvania’s Wharton School of Business.
Mary Turner, FCPA, FCA, C. Dir
Ms. Mary Turner, 64, is a current director and member of the Audit Committee. Ms. Turner served as President and Chief Executive Officer and board
member of Canadian Tire Bank, a subsidiary of Canadian Tire Corporation (TSX: CTC), from 2012 until her retirement in 2016. She has over 25 years of
experience in financial services, payments, customer service, credit risk management, enterprise risk management, operations, finance and information
technology at Canadian Tire. Prior to joining Canadian Tire, Ms. Turner was a partner at Deloitte & Touche (now Deloitte LLP) in Toronto from 1985 to
1992. Throughout her career, Ms. Turner has been a member of several boards of directors, including Mackenzie Financial Corporation, a subsidiary of IGM
Financial Inc. (TSX: IGM), where she is a member of the Fund Oversight Committee. She also currently serves on the boards of directors of YMCA Canada,
where she is a member of its Governance Committee, Niagara College, where she chairs its New Member Search Committee and is a member of its Audit
Committee, Canadian Tire Jumpstart Charities, where she chairs its Audit Committee, and the 2021 Canada Games Host Society. Ms. Turner has an honors
B.Sc and is a graduate of the Chartered Director Program at McMaster University. She is a Chartered Accountant and received the FCA designation from the
Ontario Institute of Chartered Accountants in 2003.
Marlon D. Goldstein
Mr. Marlon Goldstein, 44, joined The Stars Group in January 2014 and serves as its Executive Vice-President, Chief Legal Officer and Secretary. Prior
to joining The Stars Group, Mr. Goldstein was a principal shareholder in the corporate and securities practice at the international law firm of Greenberg
Traurig P.A., where he practiced as a lawyer from 2002 until 2014 (since 2006 as a shareholder). Mr. Goldstein’s practice focused on corporate and securities
matters, including mergers and acquisitions, securities offerings, and financing transactions. Mr. Goldstein was also the co-chair of the firm’s Gaming
Practice, a multi-disciplinary team of attorneys representing owners, operators and developers of gaming facilities, manufacturers and suppliers of gaming
devices, investment banks and lenders in financing transactions, and Indian tribes in the development and financing of gaming facilities. Mr. Goldstein earned
a B.B.A. with a concentration in accounting from Emory University in Atlanta, Georgia in 1996 and a J.D. from the University of Florida, Levin College of
Law in Gainesville, Florida in 1999.
Jerry Bowskill
Dr. Jerry Bowskill, 52, joined The Stars Group in June 2017 and currently serves as its Chief Technology Officer. Dr. Bowskill is responsible for the
overall technology performance and strategy of the business. Immediately prior to joining The Stars Group, Dr. Bowskill was a technology consultant for
Partis Solutions, a global leader in the provision of corporate services to the interactive gaming industry from January 2017 to June 2017. Prior to that, Dr.
Bowskill was the Chief Technology Officer of TouchTunes Interactive Networks, the largest in-venue interactive music and entertainment platform, from
September 2015 to November 2016. From May 2012 to September 2015, Dr. Bowskill served in a variety of roles at Scientific Games, a leading developer of
technology-based products and services and associated content for worldwide gaming and lottery markets, including as its Chief Architect and as a founding
stakeholder and the Chief Technology Officer of SG Interactive, the Internet product division of Scientific Games. Prior to Scientific Games, Dr. Bowskill
was the Technology and Solutions Director at Playtech following its acquisition of Gaming Technology Solutions in 2009, where he was a co-founder and
served as the Director of Technology and Division Chief Executive Officer while the company created a leading open-platform based online gaming
development ecosystem. Dr. Bowskill began his professional career as a research scientist, holding several roles within British Telecom’s advanced
applications & technology research group. As a researcher, he authored over 40 academic publications and was a research associate, investigating wearable
and contextual computing, at the Massachusetts Institute of Technology’s “Media Lab”. Dr. Bowskill has a BSc (Honours) degree in Microelectronics and
Information Processing and a Ph.D in image processing, each from the University of Brighton in the United Kingdom.
Robin Chhabra
Mr. Robin Chhabra, 47, joined The Stars Group in September 2017 and currently serves as its Chief Corporate Development Officer, where he is
responsible for leading and overseeing The Stars Group’s corporate development function. Mr. Chhabra is an experienced online gaming executive, who
most recently served as Group Director of Strategy and Corporate Development for
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William Hill since May 2010, and as Director of Corporate Development for Inspired Gaming Group plc (later merged with Inspired Entertainment, Inc.
(Nasdaq: INSE)) from 2006 to 2009. Prior to that, Mr. Chhabra spent 12 years in various executive roles at major financial, consultancy and auditing firms,
including Evolution Securities (later acquired by Investec plc (LSE: INVP)), Dresdner Kleinwort Wasserstein Securities LLC (now part of Commerzbank),
Andersen Business Consulting and PricewaterhouseCoopers. Mr. Chhabra earned a BSc (Econ.) degree from London School of Economics and Political
Science in 1993.
Guy Nigel Templer
Mr. Guy Nigel Templer, 49, has been Chief Operating Officer of Stars Interactive Group since December 21, 2016. Guy joined Stars Interactive Group
in 2011 and held various senior positions within Stars Interactive Group, being appointed Chief Strategy Officer in March 2016 prior to his appointment as
COO. Prior to working with Stars Interactive Group, Mr. Templer served as Chief Operating Officer and Board Director of NetPlay TV plc from April 23,
2010 to March 31, 2011. Mr. Templer served as Commercial Director of Two Way Media Limited since 2003 and Managing Director of its subsidiary Two
Way Gaming Limited (since 2008). He has over ten years of experience in the gaming industry. Prior to working with Two Way, he ran an internet company
after starting his career in management consultancy in the public sector. Mr. Templer joined PokerStars in 2011 as Director of Business Development and has
directed key initiatives including PokerStars’ re-entry into the U.S. market; the launches of the Casino and Sportsbook verticals; and the local licensing of the
company's brands across Europe. The regulatory work has established the company as the leading advocate for online poker regulation and the most-licensed
online gaming operator in the world. He has an MBA from Cranfield School of Management, an MSc from Bath University and a degree in Psychology from
Bristol University.
Appointment of Observer to the Board
As previously disclosed, in January 2018 the Corporation entered into an agreement (the “Nominee Agreement”) with Mr. Tang Hao and his affiliated
entity Discovery Key Investments Limited, which based on publicly available information collectively hold approximately 17.9% of the outstanding Common
Shares of the Corporation, pursuant to which Mr. Tang appointed Mr. Melvin Zhang as his nominee to be an observer to the Board. Mr. Zhang will serve as an
observer to the Board until such time as he and Mr. Tang have received certain licenses and approvals from certain of the Corporation’s gaming regulatory
authorities, at which point Mr. Zhang will serve on the Board as a director.
Pursuant to the Nominee Agreement, Mr. Tang will continue to hold the right to nominate a director to the Board, subject to certain conditions, until
the earlier of the day following the 2020 annual general meeting of the Corporation’s shareholders and the date on which his direct and indirect ownership of
the Corporation’s issued and outstanding Common Shares falls below 10 percent (on a non-diluted basis). The Nominee Agreement also provides for certain
standstill restrictions that will remain in effect until January 1, 2019, and provides as well that Mr. Tang will not acquire greater than 20% of the outstanding
Common Shares prior to the 2020 annual general meeting of shareholders other than by way of a negotiated transaction approved by Board or by way of
formal takeover bid for all of the outstanding Common Shares.
Mr. Yan Min “Melvin” Zhang, 62, is a current observer to the Board. Mr. Zhang has over 30 years of management experience across a range of
industries, including commercial development and investment, and is currently an Executive Director of International Entertainment Corp. (HKG: 1009), a
Hong Kong-based real estate developer with interests in hotel and entertainment properties across Asia, since May 2017. Mr. Zhang also served as the Chief
Operations Officer of Goldenway Capital Management Hong Kong Ltd., a Hong Kong-based capital management firm and a member of Goldenway
Investments Holdings Limited, from June 2016 to May 2017. Prior to that, Mr. Zhang served as the General Manager of Lloyd’s Register Industrial Technical
Services Shanghai Co., an engineering and technology professional services company, from 2011 to 2016. From 2002 to 2010, Mr. Zhang was the Country
Manager and Investment Director of China at Saudi Basic Industries Corporation, a global petrochemical company. Mr. Zhang served as the General
Manager of Amylum Asia Ltd. from 1995 to 2002, and oversaw business development and operations in the United States and China at Safer Industrial
Group from 1989 to 1995. Mr. Zhang has a bachelor degree in Foreign Language & International Trade from Zhongshan University in Guangzhou, China,
and a masters degree in Marketing & Business Administration from Oklahoma State University.
Interests in Common Shares
The Corporation’s current directors, executive officers and other key senior officers own, or have the right to exercise direction or control over, a total
of 117,832 Common Shares, representing approximately 0.08% of the total issued and outstanding Common Shares as of the date of this annual information
form. Additionally, as of the date of this annual information form, a total of 836,500 options, of which 677,500 are currently exercisable, and 401,855 other
equity-based awards, the settlement of which is subject to conditions, have been granted to the Corporation’s directors, executive officers and other key senior
officers to purchase or settle in an equal amount of Common Shares under the Corporation’s stock option and/or equity incentive plan. With respect to any
performance share units included in the foregoing amount of other equity-based awards, the number of performance share units is calculated based on the
target performance level for each metric being met, which would result in 100% of the granted performance share units vesting during the relevant
periods. See the 2017 Annual Financial Statements and the Corporation’s management information circular for the
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most recent annual meeting of shareholders of the Corporation, each of which is available on SEDAR at www.sedar.com and Edgar at www.sec.gov, for
additional information about performance share units.
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
Except as disclosed below and to the knowledge of the Corporation, none of the directors or executive officers of the Corporation is, or within
ten years before the date hereof, has been:
(a)
a director, chief executive officer or chief financial officer of any company (including the Corporation) that
(i)
(ii)
was subject to a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any exemption
under securities legislation, that was in effect for a period of more than 30 consecutive days issued while the proposed director was acting in the
capacity as director, chief executive officer or chief financial officer, or
was subject to a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any exemption
under securities legislation that was in effect for a period of more than 30 consecutive days issued after the proposed director ceased to be a
director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the
capacity as director, chief executive officer or chief financial officer;
a director or executive officer of any company (including the Corporation) that, while that person was acting in that capacity, or within a year of that
person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or
instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or
has become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings,
arrangement or compromises with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the proposed director.
(b)
(c)
Notwithstanding the foregoing, Mr. Murphy was a director of Revel Entertainment Group, LLC during its filing for Chapter 11 reorganization under
applicable U.S. bankruptcy laws in June 2014 until its sale in April 2015.
To the knowledge of the Corporation, none of the directors or executive officers of the Corporation have been subject to:
(a)
(b)
any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement
agreement with a securities regulatory authority; or
any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an
investment decision.
Notwithstanding the foregoing, see below under “Legal Proceedings and Regulatory Actions”.
Conflicts of Interest
The directors and officers of the Corporation are required by law to act honestly and in good faith with a view to the best interest of the Corporation
and to disclose any interests which they may have in any transaction, project or opportunity of the Corporation. However, the Corporation’s directors and
officers may serve on the boards and/or as officers of other companies that may compete in the same industries as the Corporation, giving rise to potential
conflicts of interest, including, without limitation, with respect to negotiating terms of and consummating certain transactions in which such companies and
the Corporation may participate. Conflicts of interest that arise at a meeting of the Board must be disclosed at such meeting, and the conflicted director must
recuse himself or herself from the meeting and abstain from participating and voting for or against the approval of any transaction, project or opportunity in
which such director has an interest. The remaining directors will determine whether or not the Corporation will participate in any such transaction, project or
opportunity. Subject to such disclosure and recusal and any limitations in the Corporation’s organizational documents, a transaction would not be void or
voidable because it was made between the Corporation and one or more of its directors or officers who have a conflict of interest or by reason of such director
or officer being present at the meeting at which such transaction, project or opportunity was approved.
To the best of the Corporation’s knowledge and other than as disclosed in this annual information form, as of the date hereof there is no known
existing or potential material conflict of interest among the Corporation or a subsidiary of the Corporation and the current directors, officers or other members
of management of the Corporation or a subsidiary of the Corporation as a result of their respective outside business interests.
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The directors and officers of the Corporation are aware of the existence of laws governing accountability of directors and officers for usurping
corporate opportunities and requiring disclosures by directors or officers of conflicts of interest, and the Corporation will rely upon such laws in respect of
any conflict of interest or breach of duty.
For additional information, see also “Interest of Management and Others in Material Transactions” below.
Ethical Business Conduct
The Corporation has adopted the Code of Conduct for its directors, officers and employees. The Corporation is committed to operating in accordance
with the highest ethical standards and conducting business in an honest and transparent manner that is in compliance with applicable law, the Code of
Conduct and applicable internal policies. The Code of Conduct constitutes written standards that are designed to deter wrongdoing and promote, among other
things: (i) honest and ethical conduct, including the handling of actual or apparent conflicts of interest between personal and professional relationships, (ii)
avoidance of conflicts of interest, including disclosure to the Corporation of any material transaction or relationship that reasonably could be expected to give
rise to a conflict of interest, (iii) safeguarding of the Corporation’s confidential information and integrity and protection of business information, (iv)
maintaining a healthy and safe work environment that is free of discrimination and harassment, (v) protection of employee privacy and personal information,
(vi) dealing responsibly with persons outside the Corporation, including compliance with anti-corruption laws and lobbying legislation, (vii) compliance with
other applicable governmental laws, rules and regulations, (viii) the prompt reporting to a supervisor, director or officer (or if appropriate, to the appropriate
authorities) of violations of the Code of Conduct, and (ix) accountability and responsibility by all directors, officers and employees for adherence to the Code
of Conduct.
The Corporation monitors compliance with the Code of Conduct and recommends disclosures as and when appropriate and required in accordance
therewith. In addition, the Corporation reviews the Code of Conduct with a view of complying with all applicable rules and regulations, receiving reports
from management with respect to compliance with the Code of Conduct when necessary and appropriate, and satisfying itself that management has
established a system to disclose the Code of Conduct (and any amendments thereto) to the extent required. The Corporation monitors compliance with the
Code of Conduct by, among other things, reserving the right to audit such compliance and through the Corporation’s existing “whistleblower” policy, which
provides a procedure for the submission of information by persons relating to, among other things, possible violations of the Code of Conduct. In addition to
the Code of Conduct, the Corporation has adopted a number of other policies and practices related to appropriate business conduct, including, without
limitation, an Anti-Bribery Policy and Anti-Fraud Policy for all employees, directors and officers of the Corporation.
On April 28, 2017, the Corporation amended its Code of Conduct. The substantive amendments made to the Code of Conduct: (i) clarify that it is The
Stars Group’s policy to operate in compliance with all laws including anti-corruption laws, and that compliance with laws always take precedence over
customs or social requirements, (ii) more explicitly caution employees, officers and directors that there are special legal and ethical considerations that apply
to the provision of gifts, benefits and entertainment to public officials, (iii) provide that gifts shall not be made to public officials without express
authorization from the Corporation’s legal department and that such legal department shall be consulted prior to hiring family members of current or former
public officials, (iv) caution that certain jurisdictions strictly prohibit gaming companies and their employees from engaging in political activities, and (v)
provide that reports of violations or possible violations of the Code of Conduct can be made anonymously through the Corporation’s whistleblower hotline.
The Code of Conduct, as amended, is available on SEDAR at www.sedar.com, EDGAR at www.sec.gov and the Corporation’s website at
www.starsgroup.com.
Moreover, The Stars Group has a formal compliance committee (the “Compliance Committee”) comprised of current and/or former independent
directors and external advisors, including formal law enforcement and regulatory professionals. The Compliance Committee is charged with overseeing all
aspects of compliance with gaming regulatory and other corporate compliance matters. The Compliance Committee strives to ensure the good character,
honesty and integrity of The Stars Group, its subsidiaries and employees, and that it conducts its business affairs in an honest, moral and ethical fashion and in
compliance with applicable laws, rules, regulations and other conditions imposed by applicable gaming and related regulatory authorities. The Compliance
Committee also strives to protect The Stars Group’s reputation and prevent it from taking any action that could jeopardize its existing licenses and approvals
or its ability to obtain any additional licenses or approvals. The members of the Compliance Committee are listed on the Corporation’s website at
www.starsgroup.com.
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Audit Committee
Audit Committee Charter
The current Audit Committee Charter was adopted on February 2, 2018. The full text of the charter is attached hereto as Schedule A. The disclosure
provided under this section of this annual information form is qualified in its entirety by reference to the full text of the charter.
Purpose
The Audit Committee is established to fulfil applicable public company obligations respecting audit committees and to assist the Board in discharging
its oversight responsibilities with respect to financial reporting to ensure the transparency and integrity of the Corporation’s published financial information.
The Audit Committee’s responsibilities include overseeing: (i) the integrity of the Corporation’s financial statements and financial reporting process,
including the audit process and the Corporation’s internal controls over financial reporting, disclosure controls and procedures, and compliance with other
related legal and regulatory requirements, (ii) the qualifications, independence, retention, compensation and work of the Corporation’s external auditors,
(iii) the work of the Corporation’s financial management, internal auditors and external auditors, (iv) enterprise risk management, privacy and data and
information security, and to monitor the same, and (v) the auditing, accounting and financial reporting process generally. The Audit Committee is also
responsible for pre-approving all non-audit services to be provided by the Corporation’s independent external auditor, procedures for the receipt, retention and
treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters and the confidential anonymous
submission by employees of the Corporation and its subsidiaries of concerns regarding questionable accounting or auditing matters and for any additional
matters delegated to the Audit Committee by the Board.
The Audit Committee has the right, for the purposes of performing its duties, to maintain direct communication with the Corporation’s external auditor
and the Board, to inspect all books and records of the Corporation and its subsidiaries, to seek any information it requires from any employee of the
Corporation and its subsidiaries or the chairperson or other designated member of the Compliance Committee, and to retain independent outside counsel or
other advisors.
The Audit Committee is required to be comprised of a minimum of three directors, each of whom must be “independent”, “financially literate” (within
the meaning of the applicable Canadian securities laws) and otherwise qualified within the meaning of applicable securities law and the rules of any
applicable stock exchange. At least one member of the Audit Committee must be financially sophisticated (within the meaning of the applicable NASDAQ
Rules) and at least one member must qualify as an “audit committee financial expert” (within the meaning of the applicable rules of the U.S. Securities and
Exchange Commission). A member who is an “audit committee financial expert” is presumed to qualify as “financially sophisticated”. The Audit Committee
meets regularly and as often as it deems necessary to perform the duties and discharge its responsibilities in a timely manner, but is required to meet at least
four times a year. The Audit Committee also conducts a self-evaluation at least annually to determine whether it and its members are functioning effectively,
and reports its conclusion to the Board.
Composition
The Audit Committee is currently composed of Messrs. Lazzarato and Murphy and Ms. Turner, each of whom is “independent” and “financially
literate”. Mr. Lazzarato is the “audit committee financial expert” and is “financially sophisticated”.
Relevant Education and Experience
Each member of the Corporation’s Audit Committee has an understanding of the generally accepted accounting principles applicable to the
Corporation, i.e., International Financial Reporting Standards (as issued by the International Accounting Standards Board), and has the ability to read and
understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and
complexity of the issues that can reasonably be expected to be raised by the Corporation’s financial statements. All three members of the Corporation’s Audit
Committee serve or have served on a number of other boards of directors and have acquired financial education and/or experience that would result in them
being qualified as set forth above.
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Name of Director
David Lazzarato
Peter E. Murphy
Relevant Financial Education and Experience
•See biography above
•Chair of Yellow Pages Limited’s audit committee
•Former chair of LED Roadway Lighting’s audit committee
•Former Chief Financial Officer of Allstream Inc. (formerly,
AT&T Canada Inc.) and Alliance Atlantis Communications
Inc.
•Chartered Accountant and FCA
•See biography above
•Founder and Chairman of a private investment and venture
capital firm
•Current audit committee chairman of an NYSE-listed company
and former audit committee member of a public company
•MBA
Other Current Public Company Directorships
• Yellow Pages Limited (TSX: Y)
• Tribune Media Company (NYSE:
TRCO)
•Malibu Boats, Inc. (Nasdaq: MBUU)
Mary Turner
•See biography above
•Former President and CEO of a subsidiary of Canadian Tire
None
Corporation (TSX: CTC)
•Former partner at Deloitte & Touche (now Deloitte LLP)
•Chartered Accountant and FCA
Pre-approval Policies and Procedures
The Audit Committee has established a practice of pre-approving all audit, audit-related, non-audit, tax and certain other services provided by the
external auditor, in each case in compliance with applicable rules and guidance on the qualification and independence of external auditors. This practice is
also set forth in a pre-approval policy adopted by the Audit Committee. In accordance with the Audit Committee’s pre-approval practice and policy, before
the Corporation or any of its subsidiaries engages the external auditor to render a service, the engagement must be either (i) specifically approved by the
Audit Committee, or (ii) entered into pursuant to the pre-approval policy. This is intended to ensure, among other things, that the provision of such services
does not impair the external auditor’s independence. The Audit Committee has delegated to its Chairman, Mr. Lazzarato, the authority, between regularly
scheduled meetings of the Audit Committee, to pre-approve such services to the extent they were not previously presented at a meeting of the Audit
Committee. All such pre-approvals by the Chairman of the Audit Committee are reported by him at the next meeting of the Audit Committee following the
pre-approval. The Audit Committee may not delegate to management the Audit Committee’s responsibilities to pre-approve services performed by the
external auditor.
External Auditor Service Fees
The Corporation’s current independent external auditor is Deloitte LLP, London, United Kingdom (“Deloitte”).
The aggregate fees billed by Deloitte and all its affiliates for the fiscal years ended December 31, 2017 and 2016, respectively, were as follows:
Description
Audit Fees(a)
Audit – Related Fees(b)
Tax Fees and Tax Compliance and Advisory Services(c)
All Other Fees(d)
2017
$4,908,000
$149,000
$358,000
$15,000
2016
$2,894,000
$377,000
$229,000
$835,000
(a)
“Audit Fees” means the aggregate fees billed by the Corporation’s independent external auditor for audit services related to the annual financial
statements of the Corporation and its consolidated subsidiaries, and for services provided in connection with statutory and regulatory filings or similar
engagements. In addition, audit fees include the aggregate fees billed by the Corporation’s independent external auditor for review services related to
the interim financial statements of the Corporation and its consolidated subsidiaries, as well as the cost of translation of various continuous disclosure
documents of the Corporation.
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(b)
(c)
(d)
“Audit-Related Fees” means the aggregate fees billed for assurance and related services by the Corporation’s independent external auditor that are
reasonably related to the performance of the audit or review of the Corporation’s financial statements and are not reported as “Audit Fees”, including,
without limitation, other attest services not required by statute or regulation.
“Tax Fees” and “Tax Compliance and Advisory Services” means the aggregate fees billed for professional services rendered by the Corporation’s
external auditor for tax compliance, tax advice, tax planning and assistance with various other tax related questions.
“All Other Fees” means the aggregate fees billed in the applicable fiscal year for products and services provided by the Corporation’s independent
external auditor other than the services reported under clauses (a), (b) and (c), above.
Corporate Governance, Nominating and Compensation Committee
The Board established the Corporate Governance, Nominating and Compensation Committee to assist the Board in overseeing corporate governance
and nominations matters and to take the principal role in establishing the Corporation’s executive compensation plans and policies. In addition to the
corporate governance and nominations duties of the Corporate Governance, Nominating and Compensation Committee, the committee is responsible for,
among other things, assisting the Board in discharging its oversight responsibilities relating to the compensation and retention of key senior management
employees with the skills and expertise needed to enable the Corporation to achieve its goals and strategies at a fair and competitive compensation, including
appropriate performance incentives. For more information on the Corporation’s Corporate Governance, Nominating and Compensation Committee, please see
the Corporation’s management information circular for the most recent annual meeting of shareholders of the Corporation, which is available on SEDAR at
www.sedar.com and Edgar at www.sec.gov.
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
Other than as set forth herein, the Corporation is currently not, and was not during the year ended December 31, 2017, a party to any material legal
proceedings, and its property and assets are not currently, and were not during the same period, the subject of material legal proceedings. The Corporation is
not aware of any other material legal proceedings, individually or in the aggregate, outstanding, threatened or pending as of the date hereof by or against the
Corporation. Notwithstanding the foregoing, given the nature of its business, the Corporation is, and may from time to time in the future be, party to various,
and at times numerous, legal, administrative and regulatory inquiries, investigations, proceedings and claims that arise in the ordinary course of business,
including, without limitation, various tax audits by domestic and foreign tax authorities, and gaming regulatory reviews and inquiries. The outcome of
litigation, legal proceedings and regulatory actions is inherently uncertain. See “Risk Factors and Uncertainties”.
In addition, and except as set forth herein, the Corporation is not currently, and was not during the year ended December 31, 2017, subject to:
(i) penalties or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority; (ii) any other
penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment
decision; or (iii) settlement agreements entered into before a court relating to Canadian securities legislation or with a Canadian securities regulatory
authority.
In the normal course of business, to facilitate transactions of services and products, the Corporation has agreed to indemnify certain parties with respect to
certain matters. The Corporation has agreed to hold certain parties harmless against losses arising from a breach of representations or covenants, or out of
intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made
and the amount of the claim. In addition, the Corporation is a party to certain indemnification agreements with its current and certain former officers and
directors, and certain employees, and its constituting documents contain similar indemnification obligations. It is not possible to determine the maximum potential
amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each
particular agreement.
Kentucky Proceeding
Prior to the Stars Interactive Group Acquisition, the Commonwealth of Kentucky, ex. rel. J. Michael Brown, Secretary of the Justice and Public Safety
Cabinet, filed a legal proceeding against Oldford Group and certain affiliates thereof (the “Oldford Parties”) and various other defendants (the “Kentucky
Proceeding”), pursuant to which the Commonwealth sought to recover alleged gambling losses on behalf of Kentucky residents who played real-money poker
on the PokerStars website during the period between October 12, 2006 and April 15, 2011. On August 12, 2015, the trial court in the Kentucky Proceeding
entered a default judgment against the Oldford Parties following certain alleged discovery failures, including by certain former owners of Oldford Group, and
partial summary judgment on liability in favor of the Commonwealth. On December 23, 2015, the trial court entered an order for damages in the amount of
approximately $290 million, which the trial court trebled to approximately $870 million. The Stars Group believes the action is frivolous and will vigorously
dispute the liability. The Stars Group, through certain subsidiaries, has filed a notice of appeal to the Kentucky Court of Appeals and posted a $100 million
supersedeas bond to stay enforcement of the order for damages during the
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pendency of the appeals process, which The Stars Group continues to pursue. The posting of the bond required the delivery of cash collateral in the amount
of $40 million and letters of credit in the aggregate amount of $30 million. To the extent the Oldford Parties may be ultimately obligated to pay any amounts
pursuant to a final adjudication following exhaustion of all appeals and other legal options, The Stars Group intends to seek recovery against the former
owners of Oldford Group.
In late-January 2016, pursuant to and in accordance with the procedures set forth in the merger agreement governing the Stars Interactive Group
Acquisition, a subsidiary of The Stars Group submitted a notice of claim to the sellers’ representative and escrow agent seeking indemnification for losses and
potential losses caused by breaches under the merger agreement and requesting, among other things, that the escrow agent retain the then-remaining balance of
the escrow fund established under the merger agreement in an aggregate amount equal to approximately $300 million. All such claims have since been settled,
with the exception of the claim relating to the Kentucky Proceeding, and the Corporation received approximately $5.77 million from the escrow fund for such
claims. The escrow fund was reduced accordingly and continues to be held by the escrow agent. The remaining disputed claim and release of the outstanding
escrow funds will be resolved in accordance with the provisions of the merger and escrow agreements related to the Stars Interactive Group Acquisition, and there
can be no assurance that such claim will result in any amounts in the escrow fund being remitted to the Corporation or that any of the Corporation’s estimates of
potential losses will reimbursed by the sellers or otherwise.
AMF Investigation and Related Matters
As announced on December 11, 2014, the Autorité des marchés financiers, the securities regulatory authority in the Province of Quebec (the “AMF”),
is investigating trading activities in The Stars Group’s securities surrounding its announcement of the Stars Interactive Group Acquisition (the “2014 AMF
Investigation”). Related to the 2014 AMF Investigation, on March 23, 2016, the AMF charged Mr. David Baazov, along with a former financial advisor to
The Stars Group and a former employee of The Stars Group, with various violations of Quebec securities laws, including insider trading, insider tipping and
market manipulation. The AMF has not made any allegation of wrongdoing by The Stars Group or any of its subsidiaries or other directors or officers in these
charges.
On March 23, 2016, the Board also became aware of a decision of the Tribunal administratif des marchés financiers (formerly known as the Bureau de
décision et de révision) (the “TMF”), the administrative tribunal in Quebec that hears certain AMF applications, which disclosed additional AMF
investigations into the alleged conduct of Mr. Baazov and 12 individuals which are beyond the scope of the charges and of the internal investigation referred
to in The Stars Group’s March 23, 2016 and prior press releases and public disclosure. None of these individuals targeted by the TMF decision are currently
employees, officers or directors of The Stars Group.
Also in connection with the AMF investigation and related matters, in October 2017 the Corporation became aware of an AMF search of certain third-
party premises that occurred in September 2017. To the Corporation’s knowledge, the AMF is now also investigating whether Mr. David Baazov and certain
third parties entered into a nominee agreement in January 2007 that provided for such third parties to be the beneficial owners of a substantial portion of the
Corporation’s common shares that Mr. Baazov previously disclosed he personally owned and whether certain other third parties were trading the
Corporation’s securities during a period between 2010 and 2012 for the benefit of Mr. Baazov. The affidavit supporting the September 2017 search asserts
that Mr. Baazov, the third parties to the alleged nominee agreement, and the Corporation committed certain offenses under the Securities Act (Quebec) by not
disclosing the existence of such agreement. Prior to learning of the September 2017 search, none of the Corporation’s current executive officers or directors
were aware of the existence of the alleged nominee agreement and a copy of such agreement, if it exists, has not been provided to the Corporation. The Board,
with its outside counsel, continues to closely monitor developments of the AMF investigation and related matters.
The Stars Group continues to cooperate with the AMF as it has done since 2014, which is consistent with the Corporation’s practice.
Foreign Payments Matter
During its internal investigation with respect to the AMF matters described above, the Board became aware in 2016 of certain information which led it
to undertake a review of whether the Corporation or any of its subsidiaries or personnel had made improper payments, directly or through external
consultants, to governmental officials in certain jurisdictions outside of Canada and the United States. The information which came to light as a result of the
investigation into the AMF matters related to some of the Corporation’s historic business activities that primarily occurred prior to the Stars Interactive Group
Acquisition.
The Board, with the involvement of external counsel, is continuing to review these matters. This review includes reviewing historic and current
operations, reviewing the Corporation’s use of external consultants in foreign markets, and revising internal policies and procedures. As previously disclosed,
as a result of this review, the Corporation voluntarily contacted the Royal Canadian Mounted Police (“RCMP”) in Canada and the Department of Justice and
Securities Exchange Commission in the United States in 2016. These authorities are investigating these matters and the Corporation continues to cooperate
with the same, including, without
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limitation, by cooperating with the RCMP regarding matters related to the search warrant previously executed at the Corporation’s former Pointe-Claire,
Quebec office, responding to information requests, and voluntarily providing records and information. As a result of this continuing review, additional
information could become known in the future.
Class Actions
U.S. Class Action
On August 31, 2016, the lead plaintiffs in Carmack v. Amaya Inc., et. al. (Case No. 1:16-cv-01884-JHR-JS) filed an amended class action complaint
(the “Amended Complaint”) in the United States District Court, District of New Jersey (the “U.S. Class Action”) (three putative class actions were filed in the
Southern District of New York, but the respective plaintiffs subsequently filed requests for voluntary dismissal, leaving the U.S. Class Action as the
remaining class action against the Corporation in the United States). The Amended Complaint names as defendants the Corporation, the Corporation’s former
Chief Executive Officer, Mr. Baazov, the Corporation’s former Chief Financial Officer, Daniel Sebag, and two directors, Divyesh (Dave) Gadhia and Harlan
Goodson, and alleges a class period beginning on May 26, 2015 and ending on March 22, 2016 (the day prior to the announcement of the filing of charges
brought by the AMF against Mr. Baazov).
The Amended Complaint generally alleges that the defendants violated certain U.S. securities laws by misrepresenting or failing to disclose that Mr.
Baazov allegedly was engaged in an insider trading scheme as charged by the AMF. The U.S. Class Action seeks damages stemming from losses that the
plaintiffs and the alleged class claim to have suffered as a result of the foregoing.
The Corporation believes that the U.S. Class Action is without merit and intends to vigorously defend itself against it; however, there can be no
assurance that the Corporation will be successful in its defense.
Quebec Class Action
On July 22, 2016, a re-amended motion for authorization of a class action and for authorization to bring an action pursuant to Quebec securities law
(the “Re-Amended Lemelin Class Action”), Lemelin and Derome v. Amaya Inc. et al. (Case No. 500-06-000785), was filed in the Superior Court of Quebec,
Province of Quebec, Canada, District of Montreal, naming the Corporation, Mr. Baazov, Mr. Sebag, certain of the Corporation’s current directors, Mr. Gadhia
and Mr. Goodson, and a former director, General Wesley K. Clark, as defendants. The Re-Amended Lemelin Class Action was filed by two individual
shareholders on behalf of themselves and a class of persons, composed of a sub-class of primary market purchasers and a sub-class of secondary market
purchasers, who purchased the Corporation’s securities between March 31, 2014 and March 22, 2016 (the day before the announcement of the filing of
charges brought by the AMF against Mr. Baazov). The plaintiffs generally allege that throughout the class period the defendants violated certain Canadian
securities laws by misrepresenting or failing to disclose (or acquiescing in the same), among other things, that Mr. Baazov allegedly was engaged in an
insider-trading scheme as charged by the AMF. The plaintiffs also allege that the Corporation did not properly disclose that it had inadequate or ineffective
internal controls and that one or more of its directors and Mr. Baazov were in breach of its Code of Business Conduct.
The Re-Amended Lemelin Class Action seeks damages stemming from losses the plaintiffs claim to have suffered as a result of the foregoing. The
Corporation believes that the Re-Amended Lemelin Class Action is without merit and intends to vigorously defend itself against it; however, there can be no
assurance that the Corporation will be successful in its defense.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
To the Corporation’s knowledge and other than as set forth herein, there are no material interests, direct or indirect, of directors, executive officers, any
shareholder who beneficially owns, directly or indirectly, more than 10% of any class or series of voting securities of the Corporation, or any associate or
affiliate of such persons, in any transaction within the last three most recently completed fiscal years or in any proposed transaction which has materially
affected or would reasonably be expected to materially affect the Corporation. See also “Directors and Officers – Conflicts of Interest” above.
The transfer agent and registrar for the Common Shares in Canada is Computershare Investor Services Inc. at its offices in Montréal, Québec and
Toronto, Ontario and in the United States is Computershare Trust Company, N.A. at its offices in Canton,
TRANSFER AGENT AND REGISTRAR
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Massachusetts, Jersey City, New Jersey and Louisville, Kentucky. The transfer agent and registrar for the Preferred Shares is Computershare Trust Company
of Canada Inc. at its offices in Montréal, Québec and Toronto, Ontario.
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MATERIAL CONTRACTS
The following is a list of the Corporation’s material contracts required to be listed under applicable Canadian securities laws that the Corporation or
the subsidiaries of the Corporation have entered into since January 1, 2017 or prior thereto but which are still in effect:
•
•
•
•
the registration rights agreements, dated August 1, 2014, entered into among the Corporation and each of GSO Capital Partners L.P and
BlackRock Financial Management, Inc. and their respective affiliated funds managed or advised by them in connection with the Stars
Interactive Group Acquisition;
the first lien credit agreement, dated August 1, 2014, entered into among the Corporation, Amaya Holdings Coöperatieve U.A., Amaya
Holdings B.V., Amaya (US) Co-Borrower, LLC, Deutsche Bank AG New York Branch, Deutsche Bank Securities Inc., Barclays Bank PLC and
Macquarie Capital (USA) Inc. in connection with the debt financing component of the Stars Interactive Group Acquisition, as amended on
August 12, 2015 and March 3, 2017;
the second lien credit agreement, dated August 1, 2014, entered into among the Corporation, Amaya Holdings Coöperatieve U.A., Amaya
Holdings B.V., Amaya (US) Co-Borrower, LLC, Barclays Bank PLC, Deutsche Bank Securities Inc. and Macquarie Capital (USA) Inc. in
connection with the debt financing component of the Stars Interactive Group Acquisition, as amended on August 12, 2015; and
the deed and scheme of merger agreement, dated June 12, 2014, entered into among the Corporation, Amaya Holdings B.V., Titan IOM
Mergerco Ltd., Oldford Group Limited and each of the selling securityholders of Oldford Group Limited, in connection with the Stars
Interactive Group Acquisition.
Copies of these agreements may be inspected at the Corporation’s headquarters located at 200 Bay Street, South Tower, Suite 3205, Toronto, Ontario,
M5J 2J3, Canada during normal business hours and on SEDAR at www.sedar.com and Edgar at www.sec.gov.
INTEREST OF EXPERTS
The Corporation’s independent external auditor for the years ended December 31, 2017 and 2016 was Deloitte. Deloitte reports that for the years
ended December 31, 2017 and 2016 and throughout the period covered by the financial statements of the Corporation on which they reported, they were
independent with respect to the Corporation within the applicable rules and regulations adopted by the SEC and the Public Company Accounting Oversight
Board (United States) (PCAOB).
ADDITIONAL INFORMATION
Additional information relating to The Stars Group and its business including, without limitation, the 2017 Annual Financial Statements, 2017 Annual
MD&A and other filings that The Stars Group has made and may make in the future with applicable securities authorities, may be found on SEDAR at
www.sedar.com, Edgar at www.sec.gov and on The Stars Group’s website at www.starsgroup.com. Additional information, including directors’ and officers’
remuneration and indebtedness, principal holders of The Stars Group securities and securities authorized for issuance under equity compensation plans, is
contained in the Corporation’s management information circular for the most recent annual meeting of shareholders of the Corporation. Additional financial
information is provided in the 2017 Annual Financial Statements and the 2017 Annual MD&A.
In addition to press releases, securities filings and public conference calls and webcasts, The Stars Group intends to use its investor relations page on
its website as a means of disclosing material information to its investors and others and for complying with its disclosure obligations under applicable
securities laws. Accordingly, investors and others should monitor the website in addition to following The Stars Group’s press releases, securities filings and
public conference calls and webcasts. This list may be updated from time to time.
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SCHEDULE A
THE STARS GROUP INC.
AUDIT COMMITTEE CHARTER
PURPOSE
1.
2.
3.
4.
The Audit Committee (the “Committee”) is a standing committee appointed by the board of directors (the “Board”) of The Stars Group Inc. (the
“Company”). The Committee is established to fulfill applicable public company obligations respecting audit committees and to assist the Board in
fulfilling its oversight responsibilities with respect to financial reporting including responsibility to, among other things as may be delegated by the
Board from time to time, oversee:
(a)
(b)
(c)
(d)
(e)
the integrity of the Company’s financial statements and financial reporting process, including the audit process and the Company’s
internal controls over financial reporting, disclosure controls and procedures, and compliance with other related legal and regulatory
requirements;
the qualifications and independence of the external auditors;
the work of the Company’s financial management, internal auditors and external auditors;
enterprise risk management, privacy and data security and to monitor the same; and
the auditing, accounting and financial reporting process generally.
In addition, the Committee shall prepare, if required, an audit committee report for inclusion in the Company’s annual management information
circular, in accordance with applicable rules and regulations.
The function of the Committee is oversight. It is not the duty or responsibility of the Committee or its members to: (a) plan or conduct audits; (b)
determine that the Company’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles;
or (c) conduct other types of auditing or accounting reviews or similar procedures or investigations. The Committee, its Chair and its audit
committee financial expert are members of the Board, appointed to the Committee to provide broad oversight of the financial, risk and control
related activities of the Company, and are specifically not accountable or responsible for the day-to-day operation or performance of such
activities.
Management is responsible for the preparation, presentation and integrity of the Company’s financial statements. Management is also responsible
for maintaining appropriate accounting and financial reporting principles and policies and systems of risk assessment and internal controls and
procedures designed to provide reasonable assurance that assets are safeguarded and transactions are properly authorized, recorded and reported
and to assure the effectiveness and efficiency of operations, the reliability of financial reporting and compliance with accounting standards and
applicable laws and regulations. Management is also responsible for monitoring and reporting on the adequacy and effectiveness of the system of
internal controls over financial reporting and disclosure controls and procedures. The external auditors are responsible for planning and carrying
out an audit of the Company’s annual financial statements in accordance with generally accepted auditing standards to provide reasonable
assurance that, among other things, such financial statements are in accordance with generally accepted accounting principles.
PROCEDURES OF THE COMMITTEE
1.
2.
Number of Members – The members of the Committee shall be appointed by the Board. The Committee will be composed of not less than three (3)
Board members.
Independence – The Committee shall be constituted at all times of “independent directors” who either meet or exceed the independence
requirements of the NASDAQ Stock Market LLC (“NASDAQ”) and who are “independent” within the meaning of National Instrument 58-101 –
Disclosure of Corporate Governance Practices (“NI 58-101”). The Board will consider all relevant facts and circumstances in making a
determination of independence for each director and, as appropriate, impose independence requirements more stringent than those provided for by
NASDAQ and/or NI 58-101 to the extent required by Canadian or U.S. securities laws, including rules and policies promulgated by the Securities
and Exchange Commission (“SEC”) and the Toronto Stock Exchange (“TSX”). In particular, each member shall be “independent” in
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3.
4.
5.
6.
7.
8.
9.
accordance with National Instrument 52-110 – Audit Committees (“NI 52-110”) and Rule 10A-3(b) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”).
Financial Literacy and Other -Related Experience – Each member shall be able to read and understand fundamental financial statements, in
accordance with NASDAQ audit committee requirements, and shall otherwise be “financially literate” within the meaning of other applicable
requirements or guidelines for audit committee service under securities laws or the rules of any applicable stock exchange, including NI 52-110. At
least one member will have past employment experience in finance or accounting, requisite professional certification in accounting, or other
comparable experience or background, including a current or past position as a principal financial officer or other senior officer with financial
oversight responsibilities and will otherwise qualify as an “audit committee financial expert” as defined by applicable rules of the SEC. Further,
each member should have reasonably sufficient experience in such other economic, financial, investment or business matters as the Board may
deem appropriate.
Appointment and Replacement of Committee Members – Any member of the Committee may be removed or replaced at any time by the Board and
shall automatically cease to be a member of the Committee upon ceasing to be a director. The Board shall fill any vacancy if the membership of
the Committee is less than three directors. Whenever there is a vacancy on the Committee, the remaining members may exercise all its power as
long as a quorum remains in office. Subject to the foregoing, the members of the Committee shall be appointed by the Board annually and each
member of the Committee shall remain on the Committee until the next annual meeting of shareholders after his or her appointment or until his or
her successor shall be duly appointed and qualified.
Committee Chair – Unless a Committee Chair is designated by the full Board, the members of the Committee may designate a Chair by majority
vote of the full Committee. The Committee Chair shall be responsible for leadership of the Committee assignments and reporting to the Board. If
the Committee Chair is not present at any meeting of the Committee, one of the other members of the Committee who is present shall be chosen by
the Committee to preside at the meeting. The Committee will report through the Committee Chair to the Board following meetings of the
Committee on matters considered by the Committee, its activities and compliance with this Charter.
Conflicts of Interest – If a Committee member faces a potential or actual conflict of interest relating to a matter before the Committee, other than
matters relating to the compensation of directors, that member shall be responsible for alerting the Committee Chair. If the Committee Chair faces a
potential or actual conflict of interest, the Committee Chair shall advise the Chair of the Board. If the Committee Chair, or the Chair of the Board,
as the case may be, concurs that a potential or actual conflict of interest exists, the member faced with such conflict shall disclose to the Committee
the member’s interest and shall not participate in consideration of the matter and shall not vote on the matter.
Meetings – The Committee shall meet regularly and as often as it deems necessary to perform the duties and discharge its responsibilities described
herein in a timely manner, but not less than four (4) times a year and any time the Company proposes to issue a press release with its quarterly or
annual earnings information or any other material financial information of the Company. The Committee Chair will approve the agenda for such
meetings and any member may suggest items for consideration. Briefing materials will be provided to the Committee as far in advance of meetings
as practicable. The Committee shall maintain written minutes of its meetings, which will be filed with the meeting minutes of the Board.
Separate Executive Meetings – The Committee shall meet periodically, but no less than quarterly, with the Chief Financial Officer, the head of the
internal audit function and the external auditors in separate executive sessions to discuss any matters that the Committee or any of these groups
believes should be discussed privately and such persons shall have access to the Committee to bring forward matters requiring its
attention. However, the Committee shall also meet periodically without management present.
Reliance – Absent actual knowledge to the contrary (which shall be promptly reported to the Board), each member of the Committee shall be
entitled to rely on: (a) the integrity of those persons or organizations within and outside the Company from which it receives information; (b) the
accuracy of the financial and other information provided to the Committee by such persons or organizations; and (c) representations made by
management and the external auditors as to any permissible non-audit services provided by the external auditors to the Company and its
subsidiaries.
10.
Self-Evaluation – The Committee shall conduct a self-evaluation at least annually to determine whether it and its members are functioning
effectively, and report its conclusion to the Board.
- A2 -
AUDIT RESPONSIBILITIES OF THE COMMITTEE
Selection and Oversight of the External Auditors
1.
2.
3.
4.
5.
6.
The external auditors are ultimately accountable to the Committee and the Board as the representatives of the shareholders of the Company and
shall report directly to the Committee and the Committee shall so instruct the external auditors. The Committee shall evaluate the performance of
the external auditors and make recommendations to the Board on the reappointment or appointment of the external auditors of the Company to be
proposed in the Company’s management information circular for shareholder approval and shall have authority to terminate the external auditors. If
a change in external auditors is proposed, the Committee shall review the reasons for the change and any other significant issues related to the
change, including the response of the incumbent auditors, and enquire on the qualifications of the proposed auditors before making its
recommendation to the Board.
The Committee shall be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public
accounting firm engaged (including resolution of disagreements between management and the external auditor regarding financial reporting) for
the purposes of preparing or issuing an audit report or performing other audit, review or attest services of the Company, and each such registered
public accounting firm must report directly to the Committee.
The Committee will approve policies and procedures for the pre-approval of services to be rendered by the external auditors, which policies and
procedures shall include reasonable detail with respect to the services covered. All permissible non-audit services to be provided to the Company
or any of its affiliates by the external auditors or any of their affiliates that are not covered by pre-approval policies and procedures approved by the
Committee shall be subject to pre-approval by the Committee. The Committee shall have the sole discretion regarding the prohibition of the
external auditor providing certain non-audit services to the Company and its affiliates. The Committee shall also review and approve disclosures
with respect to permissible non-audit services.
The Committee shall review the independence of the external auditors and shall make recommendations to the Board on appropriate actions to be
taken that the Committee deems necessary to protect and enhance the independence of the external auditors. In connection with such review, the
Committee shall:
(a)
(b)
(c)
(d)
(e)
actively engage in a dialogue with the external auditors about all relationships or services that may impact the objectivity and
independence of the external auditors;
require that the external auditors submit to it on a periodic basis, and at least annually, a formal written statement delineating all
relationships between the Company and its subsidiaries, on the one hand, and the external auditors and their affiliates on the other hand
and to the extent there are relationships, monitor and investigate them;
ensure the rotation of the lead (and concurring) audit partner having primary responsibility for the audit and the audit partner responsible
for reviewing the audit as required by applicable law;
consider whether there should be a regular rotation of the external audit firm itself; and
consider the auditor independence standards promulgated by applicable auditing regulatory and professional bodies.
The Committee shall establish and monitor clear policies for the hiring by the Company of employees or former employees of the external auditors.
The Committee shall require the external auditors to provide to the Committee, and the Committee shall review and discuss with the external
auditors, all reports which the external auditors are required to provide to the Committee or the Board under rules, policies or practices of
professional or regulatory bodies applicable to the external auditors, and any other reports which the Committee may require. Such reports shall
include:
(a)
a description of the external auditors’ internal quality-control procedures, any material issues raised by the most recent internal quality-
control review, or peer review, or Public Company Accounting Oversight Board (PCAOB) review, of the external auditors, or by any
inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent
audits carried out by the external auditors and any steps taken to deal with any such issues; and
- A3 -
(b)
a report describing: (i) the proposed audit scope, approach and independence of all critical accounting policies and practices to be used in
the annual audit; (ii) all alternative treatments of financial information within generally accepted accounting principles related to material
items that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the
treatment preferred by the external auditors; and (iii) other material written communication between the external auditors and
management, such as any management letter or schedule of unadjusted differences.
7.
The Committee shall (i) annually review the experience and qualifications of the independent audit team and review the performance of the
independent auditors, including assessing their professional skepticism, effectiveness and quality of service, and (ii) every five (5) years perform a
comprehensive review of the performance of the independent auditors over multiple years to provide further insight on the audit firm, its
independence and application of professional standards.
Appointment and Oversight of Internal Auditors
8.
9.
10.
11.
The appointment, terms of engagement, compensation, replacement or dismissal of the internal auditors shall be subject to prior review and
approval by the Committee. When the internal audit function is performed by employees of the Company, the Committee may delegate
responsibility for approving the employment, term of employment, compensation and termination of employees engaged in such function (other
than with respect to the head of the Company’s internal audit function).
The Committee shall obtain from the internal auditors, and shall review, summaries of the significant reports to management prepared by the
internal auditors, or the actual reports if requested by the Committee, and management’s responses to such reports.
The Committee shall, as it deems necessary or appropriate, communicate with the internal auditors with respect to their reports and
recommendations, the extent to which prior recommendations have been implemented and any other matters that the internal auditor brings to the
attention of the Committee. The head of the internal audit function shall have unrestricted access to the Committee.
The Committee shall, annually or more frequently as it deems necessary or appropriate, evaluate the internal auditors, including their activities,
organizational structure, independence, objectivity, qualifications and effectiveness.
Oversight and Monitoring of Audits
12.
13.
14.
15.
The Committee shall review with the external auditors, the internal auditors and management the audit function generally, the objectives, staffing,
locations, coordination (reduction of redundant efforts) and effective use of audit resources, reliance upon management and internal audit and
general audit approach and scope of proposed audits of the financial statements of the Company and its subsidiaries, the overall audit plans, the
responsibilities of management, the internal auditors and the external auditors, the audit procedures to be used and the timing and estimated budgets
and staffing of the audits.
The Committee shall meet periodically with the internal auditors to discuss the progress of their activities, any significant findings stemming from
internal audits, any changes required in the planned scope of their audit plan and any difficulties or disputes that arise with management in the
course of their audits, including any restrictions on the scope of their work or access to required information, and the adequacy of management’s
responses in correcting audit-related deficiencies.
The Committee shall review with management the results of internal and external audits.
The Committee shall provide an open avenue of communication between the external auditors, the internal auditors, the Board and management
and take such other reasonable steps as it may deem necessary to satisfy itself that the audit was conducted in a manner consistent with all
applicable legal requirements and auditing standards of applicable professional or regulatory bodies.
Oversight and Review of Accounting Principles and Practices
16.
The Committee shall, as it deems necessary or appropriate, oversee, review and discuss with management, the external auditors and the internal
auditors (together and separately as it deems necessary), among other items and matters:
- A4 -
(a)
(b)
(c)
(d)
(e)
the quality, appropriateness and acceptability of the Company’s accounting principles, practices and policies used in its financial
reporting, its consistency from period to period, changes in the Company’s accounting principles or practices and the application of
particular accounting principles and disclosure practices by management to new or unusual transactions or events;
all significant financial reporting issues, estimations and judgments made in connection with the preparation of the financial statements,
including the effects of alternative methods within generally accepted accounting principles on the financial statements and any “second
opinions” sought by management from an independent auditor with respect to the accounting treatment of a particular item;
any material change to the Company’s auditing and accounting principles and practices as recommended by management, the external
auditors or the internal auditors or which may result from proposed changes to applicable generally accepted accounting principles;
the extent to which any changes or improvements in accounting or financial practices, as approved by the Committee, have been
implemented; and
the effect of regulatory and accounting initiatives on the Company’s financial statements and other financial disclosures.
17.
The Committee will review and resolve disagreements between management and the external auditors regarding financial reporting or the
application of any accounting principles or practices.
Oversight and Monitoring of Internal Controls Over Financial Reporting
18.
The Committee shall, as it deems necessary or appropriate, exercise oversight of, review and discuss with management, the external auditors and
the internal auditors (together and separately, as it deems necessary):
(a)
(b)
(c)
(d)
(e)
(f)
the adequacy and effectiveness of the Company’s internal controls over financial reporting and disclosure controls and procedures
designed to ensure compliance with applicable laws and regulations;
any significant deficiencies or material weaknesses in internal controls over financial reporting or disclosure controls and procedures;
the risk of management’s ability to override the Company’s internal controls;
any fraud, of any amount or type, that involves management or other employees who have a significant role in the internal controls over
financial reporting;
the adequacy of the Company’s internal controls and any related significant findings and recommendations of the external auditor and
internal auditors together with management’s responses thereto; and
management’s compliance with the Company’s processes, procedures and internal controls.
19.
The Committee shall establish procedures for: (a) the receipt, retention, and treatment of complaints received by the Company regarding
accounting, internal accounting controls, or auditing matters; and (b) the confidential, anonymous submission by employees of the Company of
concerns regarding questionable accounting or auditing matters.
Oversight and Monitoring of the Company’s Financial Reporting and Disclosures
20.
The Committee shall:
(a)
review with the external auditors and management and recommend to the Board for approval the audited financial statements and the
notes and management’s discussion and analysis accompanying such financial statements, the Company’s annual report and any
financial information of the Company contained in any registration statement, prospectus, information circular or any other disclosure
document or regulatory filing of the Company;
- A5 -
(b)
(c)
review with the external auditors and management each set of interim financial statements and the notes and Managements’ Discussion
and Analysis accompanying such financial statements and any other disclosure documents or regulatory filings of the Company
containing or accompanying financial information of the Company; and
review the disclosure regarding the Committee required to be included in any publicly filed or available document by applicable
securities laws or regulations or stock exchange rules or requirements.
Such reviews shall be conducted prior to the release of any summary of the financial results or the filing of such reports with applicable regulators.
21.
22.
23.
24.
Prior to their distribution or public disclosure, the Committee shall discuss earnings press releases, as well as financial information and earnings
guidance, it being understood that such discussions may, in the discretion of the Committee, be done generally (i.e., by discussing the types of
information to be disclosed and the type of presentation to be made) and that the Committee need not discuss in advance each earnings release or
each instance in which the Company gives earning guidance.
The Committee shall oversee compliance with the requirements of the SEC and other applicable securities laws or rules for disclosure of auditors’
services, engagements and independence of external auditors and audit committee member qualifications and activities.
The Committee shall receive and review the financial statements and other financial information of material subsidiaries of the Company and any
auditor recommendations concerning such subsidiaries.
The Committee shall meet with management to review the process and systems in place for ensuring the reliability of public disclosure documents
that contain audited and unaudited financial information and their effectiveness.
Oversight of Finance Matters
25.
The Committee shall:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
review periodically the capital structure of the Company, and, when necessary, recommend to the Board transactions or alterations to the
Company’s capital structure;
review and make recommendations to the Board concerning the financial structure, condition and strategy of the Company and its
subsidiaries, including with respect to annual budgets, long-term financial plans, corporate borrowings, investments, capital
expenditures, long-term commitments and the issuance and/or repurchase of securities;
review and discuss with management, and ultimately approve and oversee, as applicable, the Company’s investment and asset allocation
policies and guidelines, as well as the Company’s compliance with any such investment and asset allocation policies and guidelines,
including past and expected future performance, both in the context of financial returns (i.e., capital appreciation or preservation) and
risk mitigation;
periodically review matters pertaining to the Company’s material policies and practices respecting cash management and material
financing strategies or policies or proposed financing arrangements and objectives of the Company;
periodically review the Company’s major financial risk exposures (including foreign exchange and interest rate) and management’s
initiatives to control such exposures, including the use of financial derivatives and hedging activities;
review and approve special transactions or expenditures as specifically delegated by the Board to a committee thereof or to one or more
Company directors, officers or other employees;
review and discuss with management all material off-balance sheet transactions, arrangements, obligations (including contingent
obligations), leases and other relationships of the Company with unconsolidated entities, other persons, or related parties (subject to
subsection 33 below), that may have a material current or future effect on financial condition, changes in financial condition, results of
operations, liquidity, capital resources, capital reserves, or significant components of revenues or expenses;
- A6 -
(h)
(i)
(j)
review and discuss with management any equity investments, acquisitions and divestitures that may have a material current or future
effect on financial condition, changes in financial condition, results of operations, liquidity, capital resources, capital reserves, or
significant components of revenues or expenses;
review and discuss policies, procedures and practices with respect to risk identification, assessment and management, including
appropriate guidelines and policies to govern the process, as well as the Company’s major enterprise risk exposures and the steps
management has undertaken to control them;
review and discuss with management the Company’s effective tax rate, adequacy of tax reserves, tax payments and reporting of any
pending tax audits or assessments, and material tax policies and tax planning initiatives; and
(k)
review the Company’s pension or similar retirement arrangements, management and obligations, as applicable.
Risk Oversight, Privacy and Data Security
26.
The Committee shall annually (or as more frequently as the Committee deems necessary or appropriate):
(a)
(b)
(c)
review and discuss with management and as the Committee deems necessary or appropriate, the chairperson or other designated member
of the Company’s Compliance Committee or such other similar committee, if any (including Board recommendations, as necessary), and
monitor the adequacy and effectiveness of: (i) management’s program, including policies and guidelines, to identify, assess, manage, and
monitor major enterprise risks of the Company, including financial, operational, privacy, security, business continuity, legal and
regulatory, and reputational risks, as well as those risks that would threaten the Company’s business, current or potential future licenses,
future performance, solvency or liquidity; (ii) management’s risk management decisions, practices and activities; (iii) reports from
management and others, including without limitation, internal audit and the Compliance Committee, regarding compliance with item (i)
above; and (iv) the adequacy and appropriateness of management’s response to, including the implementation thereof, the matters and
findings, if any, in the reports referenced in item (iii) above; and
review and discuss with management (including Board recommendations, as necessary) the Company’s privacy and data security risk
exposures, including, but not limited to: (i) the potential impact of those exposures on the Company’s business, operations and
reputation; (ii) the steps management has taken to monitor and mitigate such exposures; (iii) the Company’s information governance
policies and programs; and (iv) major legislative and regulatory developments that could materially impact the Company’s privacy and
data security risk exposure; and
review and discuss with management (including Board recommendations, as necessary) the adequacy of the Company’s insurance
coverage.
Committee Reporting
27.
If required by applicable laws or regulations or stock exchange requirements, the Committee shall prepare, review and approve a report to
shareholders and others (the “Report”). In the Report, the Committee shall state, among other things, whether it has:
(a)
(b)
(c)
reviewed and discussed the audited financial statements with management, the external auditors and the internal auditors;
received from the external auditors all reports and disclosures required under legal, listing and regulatory requirements and this Charter
and have discussed such reports with the external auditors, including reports with respect to the independence of the external auditors;
and
based on the reviews and discussions referred to in clauses (a) and (b) above, recommended to the Board that the audited financial
statements be included in the Company’s annual report.
28.
The Committee shall otherwise report regularly to the Board regarding the execution of the Committee’s duties, responsibilities and activities, as
well as any issues encountered and related recommendations and recommend to the Board that the audited financial statements be included in the
Company’s applicable annual report.
- A7 -
29.
The Committee shall also report to the Board annually regarding the oversight and receipt of certifications from applicable management confirming
compliance with certain applicable laws, regulations or rules and certain Company policies and practices, in each case as the Committee deems
necessary or appropriate.
Additional Authority and Responsibilities
30.
31.
32.
33.
The Committee shall have the authority to engage independent counsel and other advisers, hire and terminate special legal, accounting, financial or
other consultants to advise the Committee at the Company’s expense, in each case, as it determines necessary or appropriate to carry out its duties
and without consulting with, or obtaining prior approval from, any officer of the Company or the Board. The Committee may ask members of
management, including, without limitation, the applicable member of management responsible for enterprise risk management, or others,
including, without limitation, Company employees or the chairperson or other designated member of the Company’s Compliance Committee or
any other committee, to attend meetings or provide information as necessary. The Committee shall also have the authority to ask the Company’s
independent auditors to attend meetings or provide information as necessary, and the Company’s independent auditors will have direct access to the
Committee at their own initiative.
The Committee shall provide for appropriate funding for payment: of (a) compensation to any registered public accounting firm engaged for the
purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company; (b) compensation to any
advisers engaged or employed by the Committee under subsection 30 above; and (c) ordinary administrative expenses of the Committee that are
necessary or appropriate in carrying out its duties.
The Committee shall review and/or approve any other matter specifically delegated to the Committee by the Board and undertake on behalf of the
Board such other activities as may be necessary or desirable to assist the Board in fulfilling its oversight responsibilities with respect to financial
reporting and perform such other functions as assigned by law or the Company’s constating documents.
The Committee shall review and approve in advance any proposed related-party transactions and required disclosures of such in accordance with
applicable securities laws and regulations and consistent with any related-party transaction policy of the Company, to the extent such policy exists,
and report to the Board on any approved transactions.
THIS CHARTER
The Committee shall review and reassess annually the adequacy of this Charter as required by applicable laws or by the applicable rules of NASDAQ, the
TSX or the SEC. This Charter shall be posted on the Company’s website.
DATED February 2, 2018
- A8 -
Exhibit 99.2
AUDITED ANNUAL FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 2017
March 14, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Earnings
Consolidated Statements of Comprehensive Income
Consolidated Statements of Financial Position
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of business
2. Summary of significant accounting policies
3. Recent accounting pronouncements
4. Change in accounting estimate
5. Segmental information
6. Expenses classified by nature
7. Gain (loss) from investments
8. Income taxes
9. Earnings per share
10. Goodwill and intangible assets
11. Property and equipment
12. Investments in associates
13. Investments
14. Accounts receivable
15. Cash and cash equivalents, restricted cash advances and collateral
16. Prepaid expenses and deposits
17. Assets held for sale
18. Credit facility
19. Long-term debt
20. Capital management
21. Derivatives
22. Commitments
23. Other payables
24. Provisions
25. Customer deposits
26. Share capital
27. Reserves
28. Fair value
29. Statement of cash flows
30. Contingent liabilities
31. Financial instruments
32. Related party transactions
33. Subsequent events
2
6
6
7
8
10
11
12
12
12
27
29
30
32
33
34
36
36
38
39
40
41
42
42
42
43
43
45
45
48
48
48
49
50
51
55
59
59
60
63
63
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Phone: +44 (0)20 7936 3000
Fax: +44 (0)20 7583 1198
www.deloitte.co.uk
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of The Stars Group Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of The Stars Group Inc. and subsidiaries (the “Company”), which comprise the
consolidated statements of financial position as at December 31, 2017 and December 31, 2016, the consolidated statements of earnings, consolidated
statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and
the related notes, including a summary of significant accounting policies and other explanatory information (collectively referred to as the “financial
statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2017 and December
31, 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued
by the International Accounting Standards Board.
Report on Internal Control over Financial Reporting
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2018 expressed an unqualified opinion on the
Company’s internal control over financial reporting.
Basis for Opinion
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally
accepted auditing standards and the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free from material misstatement, whether due to fraud or error. Those standards also require that we comply with ethical
requirements.
2
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Further, we are required to be
independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and to fulfill our
other ethical responsibilities in accordance with these requirements.
An audit includes performing procedures to assess the risks of material misstatement of the financial statements, whether due to fraud or error, and
performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the
appropriateness of accounting policies and principles used and the reasonableness of accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a reasonable basis for our audit opinion.
/s/ Deloitte LLP
Deloitte LLP
London, United Kingdom
March 14, 2018
We have served as the Company's auditor since 2015.
3
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Phone: +44 (0)20 7936 3000
Fax: +44 (0)20 7583 1198
www.deloitte.co.uk
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of The Stars Group Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Stars Group Inc. and subsidiaries (the “Company”) as of December 31, 2017, based on
criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB) and Canadian
generally accepted auditing standards, the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report
dated March 14, 2018, expressed an unmodified/unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board.
4
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ Deloitte LLP
Deloitte LLP
London, United Kingdom
March 14, 2018
5
CONSOLIDATED STATEMENTS OF EARNINGS
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars
Revenues
Expenses
Selling
General and administrative
Financial
Gaming duty
Acquisition-related costs
Total expenses
Gain (loss) from investments
Net (loss) earnings from associates
Gain on settlement of deferred consideration
Net earnings before income taxes
Income taxes
Net earnings
Net earnings (loss) attributable to
Shareholders of The Stars Group Inc.
Non-controlling interest
Net earnings
Basic earnings per Common Share
Diluted earnings per Common Share
* See notes 5 and 6 for further details on reclassifications.
See accompanying notes.
Note
5
5,6
7
12
24
8
Year Ended December 31,
2017
$000’s
(except per share amounts)
2016
$000’s
(except per share
amounts)
(As reclassified*)
1,312,315
1,155,247
192,709
571,258
163,039
130,771
—
1,057,777
34,524
(2,569)
—
286,493
27,208
259,285
259,231
54
259,285
1.77
1.27
$
$
162,785
585,123
138,299
113,102
199
999,508
(19,278)
623
2,466
139,550
4,000
135,550
136,144
(594)
135,550
0.96
0.70
9
9
$
$
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
U.S. dollars
Net earnings
Items that are or may be reclassified to net earnings
Available-for-sale investments – gain (loss) in fair value *
Available-for-sale investments – reclassified to net earnings
Foreign operations – unrealized foreign currency
translation differences
Cash flow hedges – effective portion of changes in fair value †
Cash flow hedges – reclassified to net earnings †
Other comprehensive (loss) income
Total comprehensive income
Total comprehensive income (loss) attributable to
Shareholders of The Stars Group Inc.
Non-controlling interest
Total comprehensive income
Note
27
27
27
27
27
Year Ended December 31,
2017
$000’s
2016
$000’s
259,285
135,550
32,474
(37,090)
(189,012)
(151,311)
160,069
(184,870)
74,415
74,361
54
74,415
(2,095)
4,394
22,969
50,865
(42,263)
33,870
169,420
170,014
(594)
169,420
* Net of income tax recovery of $160,380 for the year ended December 31, 2017 (December 31, 2016 – net of income tax expense of $146,000)
† Net of income tax of $nil for the year ended December 31, 2017 (December 31, 2016 - $nil)
See accompanying notes.
7
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
U.S. dollars
ASSETS
Current assets
Cash and cash equivalents - operational
Cash and cash equivalents - customer deposits
Total cash and cash equivalents
Restricted cash advances and collateral
Current investments
Current investments - customer deposits
Total current investments
Accounts receivable
Inventories
Prepaid expenses and deposits
Assets held for sale
Income tax receivable
Derivatives
Total current assets
Non-current assets
Restricted cash advances and collateral
Prepaid expenses and deposits
Investments in associates
Long-term accounts receivable
Long-term investments
Promissory note
Property and equipment
Investment tax credits receivable
Income tax receivable
Deferred income taxes
Derivatives
Goodwill and intangible assets
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities
Other payables
Provisions
Customer deposits
Income tax payable
Current maturity of long-term debt
Derivatives
Total current liabilities
Non-current liabilities
Long-term debt
Provisions
Derivatives
Income tax payable
Deferred income taxes
Total non-current liabilities
Total liabilities
EQUITY
Share capital
Reserves
Retained earnings
Equity attributable to the Shareholders of The Stars Group Inc.
Non-controlling interest
Total equity
Total liabilities and equity
Note
2017
$000’s
2016
$000’s
As at December 31,
15
25
15
25
13
14
16
17
21
15
16
12
13
11
8
21
10
23
24
25
19
21
19
24
21
8
26
27
8
283,225
227,098
510,323
7,862
—
122,668
122,668
100,409
302
29,393
—
16,540
2,037
789,534
45,834
16,514
—
11,818
6,981
—
44,837
3,056
14,061
5,141
—
4,477,350
4,625,592
5,415,126
151,473
42,714
17,590
349,766
35,941
4,990
—
602,474
2,353,579
3,093
111,762
24,277
16,510
2,509,221
3,111,695
1,884,219
(142,340)
561,519
2,303,398
33
2,303,431
5,415,126
129,459
138,225
267,684
5,767
59,977
228,510
288,487
81,557
515
22,567
6,972
16,838
—
690,387
45,728
20,798
—
9,458
6,921
4,827
40,800
1,892
—
1,054
52,038
4,588,572
4,772,088
5,462,475
135,777
56,588
212,780
366,735
23,616
47,750
4,922
848,168
2,380,829
8,942
5,594
—
17,214
2,412,579
3,260,747
1,862,789
35,847
302,288
2,200,924
804
2,201,728
5,462,475
See accompanying notes.
Approved and authorized for issue on behalf of the Board on March 14, 2018.
(Signed) “Divyesh (Dave) Gadhia”, Director
Divyesh (Dave) Gadhia, Chairman of the Board
(Signed) “David Lazzarato”, Director
David Lazzarato, Chairman of the Audit Committee
9
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the years ended December 31, 2017 and 2016.
U.S. dollars
Balance – January 1, 2016
Net earnings (loss)
Other comprehensive income
Total comprehensive income (loss)
Issue of Common Shares in
relation to exercised warrants
Issue of Common Shares in relation
to exercised employee stock options
Stock-based compensation
Balance – December 31, 2016
Net earnings
Other comprehensive loss
Total comprehensive (loss) income
Issue of Common Shares in relation
to Equity awards
Share cancellation
Stock-based compensation
Deferred tax on stock-based compensation
Acquisition of non-controlling interest
Balance – December 31, 2017
See accompanying notes.
Common
Shares
number
Share Capital
Convertible
Preferred
Shares
number
Common
Shares
amount
$000’s
Reserves
(note 27)
$000’s
Retained
Earnings
$000’s
Convertible
Preferred
Shares
amount
$000’s
Note
133,426,193
—
—
—
1,139,249
—
—
—
887,015
—
—
—
684,385
—
—
—
280,964
—
33,870
33,870
166,144
136,144
—
136,144
Equity
attributable
to the
Shareholders
of The Stars
Group Inc.
$000's
2,018,508
136,144
33,870
170,014
26,27
11,266,575
—
290,174
—
(288,982)
—
1,192
—
—
684,385
—
—
—
—
—
—
—
—
684,385
(294)
10,289
35,847
—
(184,870)
(184,870)
(5,258)
493
10,622
359
467
(142,340)
—
—
302,288
259,231
—
259,231
—
—
—
—
—
561,519
921
10,289
2,200,924
259,231
(184,870)
74,361
16,665
—
10,622
359
467
2,303,398
26,27
27
408,359
—
145,101,127
—
—
—
—
—
1,139,249
—
—
—
1,215
—
1,178,404
—
—
—
26,27
2,923,184
26,27
27
(76,437)
—
—
—
147,947,874
—
—
—
—
—
1,139,249
21,923
(493)
—
—
—
1,199,834
10
Non-
controlling
interest
$000’s
Total
equity
$000’s
1,398
(594)
—
(594)
2,019,906
135,550
33,870
169,420
—
—
—
804
54
—
54
1,192
921
10,289
2,201,728
259,285
(184,870)
74,415
—
—
—
—
(825)
33
16,665
—
10,622
359
(358)
2,303,431
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars
Operating activities
Net earnings
Dormant accounts recognized as income
Stock-based compensation
Interest accretion
Interest expense
Income tax expense recognized in net earnings
Depreciation of property and equipment
Amortization of intangible assets
Amortization of deferred development costs
Unrealized gain on foreign exchange
Unrealized (gain) loss on investments
(Reversal of) Impairment of assets held for sale, associates and intangible assets
Net loss (earnings) from associates
Gain on settlement of deferred consideration
Realized (gain) loss on current investments, promissory note and other
Income taxes paid
Changes in non-cash operating elements of working capital
Customer deposit liability movement
Other
Net cash inflows from operating activities
Financing activities
Issuance of common shares in relation to exercised warrants
Issuance of common shares in relation to exercised employee stock options
Settlement of brokerage margin account
Payment of deferred consideration
Repayment of long-term debt
Transaction costs on repricing of long-term debt
Interest paid
Gain on settlement of derivative
Net cash outflows from financing activities
Investing activities
Additions in deferred development costs
Purchase of property and equipment
Acquired intangible assets
Sale (purchase) of investments
Cash movement (into) from restricted cash advances and collateral
Settlement of minimum revenue guarantee
Settlement of promissory note
Net sale of investments utilizing customer deposits
Acquisition of further interests in subsidiary
Investment in associate
Proceeds on disposal of interest in associate classified as held for sale
Net cash inflows from investing activities
Increase in cash and cash equivalents
Cash and cash equivalents – beginning of period
Unrealized foreign exchange difference on cash and cash equivalents
Cash and cash equivalents - end of period
See accompanying notes.
11
Year Ended December 31,
2017
$000’s
2016
$000’s
Note
259,285
1,596
10,622
40,373
116,469
27,208
8,925
127,986
10,275
(10,324)
(170)
(6,799)
2,569
(44)
(50,038)
(9,357)
(3,801)
(30,924)
749
494,600
—
16,665
(7,602)
(197,510)
(139,913)
(4,719)
(124,627)
13,904
(443,802)
(23,212)
(10,997)
(1,893)
88,760
(1,298)
(9,311)
8,084
117,106
(6,516)
(2,000)
16,127
174,850
225,648
267,684
16,991
510,323
135,550
(9,160)
10,289
36,433
130,848
4,000
8,181
125,760
5,942
(17,571)
6,703
16,931
(623)
(2,466)
2,906
(1,699)
(32,019)
(70,992)
923
349,936
1,192
921
—
(200,000)
(46,353)
—
(131,346)
—
(375,586)
(20,961)
(6,806)
(7,669)
(5,722)
66,969
(16,070)
—
22,679
(3,549)
—
—
28,871
3,221
274,359
(9,896)
267,684
29
29
29
29
29
7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
NATURE OF BUSINESS
The Stars Group Inc. (“The Stars Group” or the “Corporation”), is a leading provider of technology-based products and services in the global gaming and
interactive entertainment industries. As at December 31, 2017, The Stars Group had two major lines of operations within its gaming business, real-money
online poker (“Poker”) and real-money online casino and sportsbook (“Casino & Sportsbook”). As it relates to these two business lines, online revenues
include revenues generated through the Corporation’s real-money online, mobile and desktop client platforms.
Through Stars Interactive Holdings (IOM) Limited and its subsidiaries and affiliates (collectively, “Stars Interactive Group”), The Stars Group’s gaming
business operates globally and conducts its principal activities from its headquarters in the Isle of Man. Through its Stars Interactive Group division, the
Corporation ultimately owns and operates gaming and related interactive entertainment businesses, which it offers under several owned brands including,
among others, PokerStars, PokerStars Casino, BetStars, Full Tilt, and the PokerStars Players No Limit Hold’em Championship, European Poker Tour,
PokerStars Caribbean Adventure, Latin American Poker Tour, Asia Pacific Poker Tour, PokerStars Festival, and PokerStars MEGASTACK live poker tour
and event brands.
The Stars Group was incorporated on January 30, 2004 under the Companies Act (Quebec) and continued under the Business Corporations Act (Ontario) on
August 1, 2017. The registered head office is located at 200 Bay Street, South Tower, Suite 3205, Toronto, Ontario, Canada, M5J 2J3 and its common shares
(“Common Shares”) are listed on the Toronto Stock Exchange (the “TSX”) under the symbol “TSGI”, and the Nasdaq Global Select Market (“Nasdaq”)
under the symbol “TSG”.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Corporation’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued
by the International Accounting Standards Board (“IASB”).
The consolidated financial statements of the Corporation have been prepared on the historical cost basis, except derivative financial instruments and financial
instruments at fair value through profit or loss which are each measured at fair value.
Unless otherwise indicated, all references to a specific “note” refer to these notes to the Corporation’s consolidated financial statements.
Going Concern
The Board of Directors of the Corporation (the “Board”) have, at the time of approving the consolidated financial statements, a reasonable expectation that
the Corporation has adequate resources to continue in operational existence for the foreseeable future. As such, the Corporation continues to adopt the going
concern basis of accounting in preparing the consolidated financial statements.
Principles of Consolidation
A subsidiary is an entity controlled by the Corporation. As such, the Corporation is exposed, or has rights, to variable returns from its involvement with such
entity and has the ability to affect those returns through its current ability to direct such entity’s relevant activities (i.e., control over the entity).
The existence and effect of substantive voting rights that the Corporation potentially has the practical ability to exercise (i.e., substantive rights) are
considered when assessing whether the Corporation controls another entity.
The Corporation’s consolidated financial statements include the accounts of the Corporation and its subsidiaries. Upon consolidation, all inter-entity
transactions and balances have been eliminated.
Non-controlling interests in subsidiaries are identified separately from the Corporation’s equity therein. Those non-controlling interests that are present
ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially be measured at fair value or at the non-
controlling interests’ proportionate share of the fair value of the subsidiary’s identifiable net assets. The choice of measurement is made on an acquisition-by-
acquisition basis. Other non-controlling interests are initially measured at fair value. Subsequent to acquisition, the carrying amount of non-controlling
interests is the amount of those interests at
12
initial recognition plus the non-controlling interests’ share of subsequent changes in equity. “Total comprehensive income” is attributed to non-controlling
interests even if this results in the non-controlling interests having a deficit balance.
Upon the loss of control of a subsidiary, the Corporation’s profit or loss on disposal is calculated as the difference between (i) the fair value of the
consideration received and of any investment retained in the former subsidiary and (ii) the previous carrying amount of the assets (including any goodwill)
and liabilities of the subsidiary and any non-controlling interests.
Revenue Recognition
Gaming revenue
Revenue from the gaming business consists primarily of Poker and Casino & Sportsbook revenue and is recognized when it is probable that the economic
benefits will flow to the Corporation and the amount of revenue can be reliably measured. Revenue is recognized in the accounting periods in which the
transactions occurred after deduction of certain offsets, such as promotional bonuses and rewards granted to customers through the Stars Rewards cross
vertical loyalty program, and is measured at the fair value of the consideration received or receivable.
Poker revenue represents primarily the commission charged at the conclusion of each poker hand in cash games (i.e., rake) and entry fees for participation in
poker tournaments, and is net of certain promotional expenses. In poker tournaments, entry fee revenue is recognized when the tournament has concluded.
Revenues are presented gross of gaming duties, which are presented within expenses.
Casino revenue represents primarily the difference between the amounts of bets placed by the customer less amounts won (i.e., net house win) and is net of
certain promotional expenses. Casino revenues are presented gross of gaming duties, which are presented within expenses.
Sportsbook revenue represents primarily bets placed less payouts to customers and is net of certain promotional expenses. Open betting positions are carried
at fair value and gains and losses arising on these positions are recognized in revenue. Sportsbook revenues are presented gross of gaming duties, which are
presented within expenses.
The gaming business operates loyalty programs for its customers that award customer rewards based on a number of factors, including volume of play, player
impact on the overall ecosystem, whether the player is a net withdrawing versus net depositing player, and product and game selection. The value of customer
rewards is estimated with reference to the redemption value of the applicable reward through the Corporation’s product offerings, including in an online store
operated by the Corporation and accessible through such product offerings, and the probability of use of such rewards by customers. In accordance with
International Financial Reporting Interpretations Committee 13, Customer loyalty programmes, the fair value attributed to the awarded customer reward is
deferred as a liability and recognized as either a customer deposit or offset against the cost of merchandise bought in the online store upon redemption of the
reward.
Revenue from conversion margins
Revenue from conversion margins is the revenue earned on the processing of real-money deposits and cash outs in specified currencies. Revenue from
customer cross currency deposits and withdrawals is recognized when the transaction is complete. Revenue is recognized with reference to the underlying
arrangement and agreement with the players.
Income from player funds
A portion of customer deposits is held as current investments. Any realized income on these current investments is recognized as income.
Other income
Play-money gaming revenue
Customers can participate in online poker tournaments and social casino games using play-money, or virtual currency. Customers can purchase additional
play-money chips online to participate in the poker tournaments and social casino games. The revenue is recognized when the customer has purchased such
chips as all risks and rewards have been transferred to the customer. Once a customer has purchased such chips they are non-refundable and non-cancellable.
13
Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other
leases are classified as operating leases. The Stars Group considers all its leases to be operating leases.
The group as lessor
Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and
arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term.
The group as lessee
Rents payable under operating leases are recognized as an expense on a straight-line basis over the term of the relevant lease except where another more
systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under
operating leases are recognized as an expense in the period in which they are incurred.
In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of any such
incentive is recognized as a reduction of rental expense on a straight-line basis over the lease term, except where another systematic basis is more
representative of the time pattern in which economic benefits from the leased asset are consumed.
Translation of Foreign Operations and Foreign Currency Transactions
Functional and presentation currency
IFRS requires entities to consider primary and secondary indicators when determining functional currency. Primary indicators are closely linked to the
primary economic environment in which the entity operates and are given more weight. Secondary indicators provide supporting evidence to determine an
entity’s functional currency. Once the functional currency of an entity is determined, it should be used consistently, unless significant changes in economic
factors, events and conditions indicate that the functional currency has changed.
A change in functional currency is accounted for prospectively from the date of the change by translating all items into the new functional currency using the
exchange rate at the date of the change.
Based on an analysis of the primary and secondary indicators, the functional currency of each of the Corporation and its subsidiaries have been determined.
The Corporation’s consolidated financial statements are presented in U.S. dollars.
Transactions and balances
Foreign currency transactions are translated into the applicable functional currency using the exchange rates prevailing on the dates of the transactions or
valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-
end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized within expenses.
Group companies
The results and financial position of the Corporation’s subsidiaries that have a functional currency different from the Corporation’s presentation currency are
translated into the presentation currency as follows:
(i)
(ii)
(iii)
assets and liabilities for each statement of financial position presented are translated at the closing exchange rate on the date of that statement of
financial position;
income and expenses for each statement of net earnings (loss) and statement of other comprehensive income are translated at the rates of
exchange prevailing on the dates of the transactions; and
all resulting exchange rate differences are recognized in other comprehensive income (loss) and are transferred to net earnings (loss) as part of
gain (loss) on sale of subsidiaries.
14
The following foreign currencies are referred to herein:
Currency Symbol
USD, USD $, $
CDN, CDN $
EUR, €
GBP
Business Combination
Currency Description
United States Dollar
Canadian Dollar
European Euro
Great Britain Pound Sterling
Business combinations are accounted for using the acquisition method. Under this method, the identifiable assets acquired and liabilities assumed, including
contingent liabilities, are recognized, regardless of whether they have been previously recognized in the acquiree’s financial statements prior to the
acquisition. On initial recognition, the assets and liabilities of the acquired entity are included in the consolidated statements of financial position at their
respective fair values. Goodwill is recorded based on the excess of the fair value of the consideration transferred over the fair value of the Corporation’s
interest in the acquiree’s net identifiable assets on the date of the acquisition. Any excess of the identifiable net assets over the consideration transferred is
immediately recognized in the consolidated statements of earnings.
The consideration transferred by the Corporation to acquire control of an entity is calculated as the sum of the acquisition-date fair values of the assets
transferred, liabilities incurred and equity interests issued by the Corporation, including the fair value of all the assets and liabilities resulting from a deferred
payment arrangement. Acquisition-related costs are expensed as incurred.
Operating Segments
For the year ended December 31, 2017, the Corporation had one reportable and operating segment, gaming, which for the purposes of the financial statements
is further divided into the Poker and Casino & Sportsbook product lines. All products are played on one gaming platform using one wallet.
The Stars Group’s gaming business, which it operates primarily through its two business lines, Poker and Casino & Sportsbook, was acquired through the
Corporation’s acquisition of Stars Interactive Group on August 1, 2014 (the “Stars Interactive Group Acquisition”). The Corporation’s segments are organized
around the markets they serve and are reported in a manner consistent with the internal reporting provided to the Corporation’s key management. An
operating segment is a component of the Corporation that engages in business activities from which it may earn revenues and incur expenses, including
revenues and expenses relating to transactions with other components of the Corporation.
The Corporation presents separate information on an operating segment when any of the following criteria are met:
reported revenue of the segment is 10% or more of the consolidated revenue; or
the absolute amount of reported profit or loss of the segment is 10% or more of consolidated profit or loss; or
assets of the segment are 10% or more of consolidated assets.
(i)
(ii)
(iii)
Financial Instruments
Financial assets
Financial assets are initially recognized at fair value and are classified as one of the following: “fair value through profit or loss”; “available-for-sale”; or
“loans and receivables”. The classification depends on the purpose for which the financial instruments were acquired and their respective characteristics.
Except in very limited circumstances, the classification may not be changed subsequent to initial recognition.
Fair value through profit or loss
Financial assets at fair value through profit or loss are financial assets held-for-trading and derivatives. A financial asset is classified in this category if
acquired principally for the purpose of selling in the short-term or as otherwise determined by management to be in this category. Financial assets classified at
fair value through profit or loss are measured at fair value with the realized and unrealized changes in fair value recognized each reporting period in the
consolidated statements of earnings. The Corporation has current investments and derivatives classified as fair value through profit or loss.
15
Available-for-sale
Available-for-sale assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. Such
assets are included in other non-current financial assets unless management intends to dispose of them within 12 months of the date of the consolidated
statements of financial position. Financial assets classified as available-for-sale are carried at fair value with changes in fair value recorded in the consolidated
statements of comprehensive income. Interest on available-for-sale assets is calculated using the effective interest rate method and is recognized in the
consolidated statements of earnings. When a decline in fair value is determined to be significant and prolonged, the cumulative loss included in accumulated
other comprehensive income (loss) is removed as such and then recognized in the consolidated statements of earnings. Gains and losses realized on the
disposal of available-for-sale assets are recognized in the consolidated statements of earnings. The Corporation has current and non-current investments
classified as available-for-sale.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments but which are not quoted in an active market. All such assets
with maturities equal to or less than 12 months from the date of the consolidated statements of financial position are classified as current assets, while those
with maturities greater than 12 months from such date are classified as non-current assets. Financial instruments classified as loans and receivables are
initially recorded at fair value and subsequently measured at amortized cost using the effective interest method. Cash, restricted cash, accounts receivable and
promissory notes are classified as loans and receivables.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, bank deposits and other short-term highly liquid investments with maturities of three months or less, which
are generally used by the Corporation to meet short-term liquidity requirements.
Impairment
At the end of each reporting period, the Corporation assesses whether a financial asset or a group of financial assets, other than those classified as fair value
through profit or loss, is impaired. If there is objective evidence that impairment exists, the loss is recognized in the consolidated statements of earnings. The
impairment loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset
previously recognized in the consolidated statements of earnings.
Financial liabilities
Financial liabilities are classified as either financial liabilities “at fair value through profit or loss” or “other financial liabilities”.
At fair value through profit or loss
Financial liabilities are classified as “at fair value through profit or loss” when the financial liability is designated as such.
A financial liability is designated as “at fair value through profit or loss” upon initial recognition if:
•
•
such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or
the financial liability is managed and its performance is evaluated on a fair value basis.
Financial liabilities “at fair value through profit or loss”, such as certain derivatives, are stated at fair value, with any gains or losses arising on remeasurement
recognized in the consolidated statements of earnings.
Other financial liabilities
Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently
measured at amortized cost using the effective interest method.
The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability (or a shorter
period where appropriate) to the net carrying amount on initial recognition.
16
Debt modification
From time to time, the Corporation pursues amendments to its credit agreements based on prevailing market conditions. Such amendments, when completed,
are considered by the Corporation to be debt modifications. The accounting treatment of a debt modification depends on whether the modified terms are
substantially different than the previous terms. Terms of an amended debt agreement are considered to be substantially different when the discounted present
value of the cash flows under the new terms discounted using the original effective interest rate, is at least ten percent different from the discounted present
value of the remaining cash flows of the original debt. If the modification is not substantially different, it will be considered as a modification with any costs
or fees incurred adjusting the carrying amount of the liability and amortized over the remaining term of the liability. If the modification is substantially
different then the transaction is accounted for as an extinguishment of the old debt instrument with an adjustment to the carrying amount of the liability being
recorded in the consolidated statements of earnings immediately.
Transaction costs
Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial liabilities (other than financial assets and financial
liabilities that are classified as through profit or loss) are added to or deducted from, as applicable, the fair value of the financial instrument on initial
recognition. These costs are expensed to financial expenses on the consolidated statements of earnings over the term of the related financial asset or financial
liability using the effective interest method. When a debt facility is retired by the Corporation, any remaining balance of related debt transaction costs is
expensed to financial expenses on the consolidated statements of earnings in the period that the debt facility is retired. Transaction costs related to financial
instruments at fair value through profit or loss are expensed when incurred.
Compound financial instruments
Debt and equity instruments issued by the Corporation and its subsidiaries are classified as either financial liabilities or as equity in accordance with the
substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. The Corporation has issued, and in the future
may issue, compound financial instruments comprising both financial liability and equity components. The financial liability component is initially
recognized at the fair value of a similar liability. The proceeds are then allocated between the financial liability and the equity components using the residual
method. Any directly attributable transaction costs are allocated to the financial liability and equity components in proportion to their initial carrying
amounts. The financial liability component of a compound financial instrument is subsequently re-measured at amortized cost using the effective interest
method. The equity components are not re-measured subsequent to their initial recognition.
Embedded derivatives
Derivatives may be embedded in other financial and non-financial instruments (i.e., the host instrument). Embedded derivatives are treated as separate
derivatives when their economic characteristics and risks are not closely related to those of the host instrument, the terms of the embedded derivative are the
same as those of a stand-alone derivative and the combined instrument (i.e., the embedded derivative plus the host instrument) is not held-for-trading or
designated at fair value. These embedded derivatives are measured at fair value with subsequent changes recognized in the consolidated statements of
earnings.
Derivatives
The Corporation uses derivative instruments for risk management purposes. The Corporation does not use derivative instruments for speculative trading
purposes. All derivatives are recorded at fair value on the consolidated statements of financial position. The resulting gain or loss is immediately recognized
in the consolidated statements of earnings unless the derivative is designated and effective as a hedging instrument, in which event the timing of the
recognition in the consolidated statements of earnings depends on the nature of the hedge relationship.
Derivatives are measured at fair value using pricing and valuation models whenever possible, including market-based inputs to models, broker or dealer
quotations or alternative pricing sources. To qualify for hedge accounting, the relationship between the hedged item and the hedging instrument must meet
several strict conditions on documentation, probability of occurrence, hedge effectiveness and reliability of measurement. If these conditions are not met,
then the relationship does not qualify for hedge accounting treatment and both the hedged item and the hedging instrument are reported independently, as if
there was no hedging relationship.
Cash flow hedges
The Corporation uses derivatives for cash flow hedges. The effective portion of the change in fair value of the hedging instrument is recorded in other
comprehensive income and accumulated under the heading derivative reserve, while the ineffective portion is
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recognized immediately in the consolidated statements of earnings. Gains and losses on cash flow hedges accumulated in other comprehensive income are
reclassified to the consolidated statements of earnings in the same period the hedged item affects the consolidated statements of earnings. If the forecast
transaction is no longer expected to occur, the hedge no longer meets the criteria for hedge accounting, the hedging instrument expires or is sold, terminated
or exercised, or the designation is revoked, the hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to occur, then
the amount accumulated in equity is reclassified to the consolidated statements of earnings.
Net investment hedges
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging item relating to the effective
portion of the hedge is recognized in other comprehensive income and accumulated under the heading cumulative translation adjustments reserve. The gain or
loss relating to the ineffective portion is recognized immediately in the consolidated statements of earnings. Gains and losses accumulated in other
comprehensive income are reclassified to the consolidated statements of earnings when the foreign operation is partially disposed of or sold.
Determination of fair value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
applicable measurement date. When measuring the fair value of an asset or a liability, the Corporation uses market observable data to the extent possible. If
the fair value of an asset or a liability is not directly observable, it is estimated by the Corporation using valuation techniques that maximize the use of
relevant observable inputs and minimize the use of unobservable inputs (e.g., by the use of the market comparable approach that reflects recent transaction
prices for similar items, discounted cash flow analysis, or option pricing models refined to reflect the Corporation’s specific circumstances). Inputs used are
consistent with the characteristics of the asset or liability that market participants would take into account.
For the Corporation’s financial instruments which are recognized in the consolidated statements of financial position at fair value, the fair value
measurements are categorized based on the lowest level input that is significant to the fair value measurement in its entirety and the degree to which the
inputs are observable. The significance levels are classified as follows in the fair value hierarchy:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; and
Level 3 – Inputs for the asset or liability that are not based on observable market data.
Transfers between levels of the fair value hierarchy are recognized by the Corporation at the end of the reporting period during which the transfer occurred.
Prepaid Expenses and Deposits
Prepaid expenses and deposits consist of amounts paid in advance or deposits made for which the Corporation will receive goods or services.
Property and Equipment
Property and equipment which have finite lives are recorded at cost less accumulated depreciation and impairment losses. Depreciation is expensed from the
month the particular asset is available for use, over the estimated useful life of such asset at the following rates, which in each case are intended to reduce the
carrying value of the asset to the estimated residual value:
Furniture and fixtures
Computer equipment
Building
Straight-line
Straight-line
Straight-line
5 years
5 years
25 years
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Intangible Assets
Intangible assets which have finite lives are recorded at cost less accumulated amortization and impairment losses. Amortization is expensed from the month
the particular asset is available for use, over the estimated useful life of such asset at the following rates, which in each case are intended to reduce the
carrying value of the asset to the estimated residual value:
Software technology
Software technology (Defensive
intangible asset)
Customer relationships
Brands
Straight-line
Straight-line
Straight-line
N/A
5 years
2 years
15 years
Indefinite useful life
The amortization method, useful life and residual values are assessed annually and the assets are tested for impairment, whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Upon retirement or disposal, the cost of the asset disposed of and the related accumulated amortization are removed from the consolidated statement of
financial position and any gain or loss is reflected in the consolidated statements of earnings. Expenditures for repairs and maintenance are expensed
as incurred.
The Corporation determined that its owned brands have indefinite useful lives as they have no foreseeable limit to the period over which such assets are
expected to contribute to the Corporation’s cash flows. In addition, the Corporation expects to continue to support its brands with ongoing marketing efforts.
The Corporation tests its owned brands for impairment at least annually, or more frequently if circumstances such as significant declines in expected sales, net
earnings or cash flows indicate that the cash-generating units (“CGUs”) to which such brands relate might be impaired.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in a business acquisition. After initial
recognition, goodwill is measured at cost less any accumulated impairment losses.
Goodwill is tested for impairment at least annually, or more frequently if circumstances such as significant declines in expected sales, net earnings or cash
flows indicate that that the CGUs to which goodwill is allocated might be impaired.
Research and Development
Research and development costs are expensed except in cases where development costs meet certain identifiable criteria for deferral. Deferred development
costs, which have probable future economic benefits, can be clearly defined and measured, and are incurred for the development of new products or
technologies, are capitalized. These development costs, net of related research and development investment tax credits, are not amortized until the products or
technologies are commercialized or when the asset is available for use, at which time, they are amortized over the estimated life of the commercial production
of such products or technologies.
The amortization method and the life of the commercial production are assessed annually and the assets are tested for impairment whenever an indication
exists that an asset might be impaired.
The Corporation claims research and development investment tax credits as a result of incurring scientific research and experimental development
expenditures. Research and development investment tax credits are recognized when the related expenditures are incurred and there is reasonable assurance of
their realization. Investment tax credits are accounted for by the cost reduction method whereby the amounts of tax credits are applied as a reduction of the
expense or deferred development costs.
Investments
Investments are stated at the lower of cost and fair market value. Cost is determined on a weighted average basis at a consolidated level.
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Investments in Associates
An associate is an entity over which the Corporation has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant
influence is the power to participate in the financial and operating policy decisions of the associate but is not the control or joint control over those policy
decisions.
The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting, except
when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations.
Under the equity method, an investment in an associate is initially recognized in the consolidated statements of financial position at cost and adjusted
thereafter to recognize the Corporation’s share of the profit or loss and other comprehensive income of the associate. When the Corporation's share of losses
of an associate exceeds the Corporation's interest in that associate (which includes any long-term interests that, in substance, form part of the Corporation's
net investment in the associate), the Corporation discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that
the Corporation has incurred legal or constructive obligations or made payments on behalf of the associate.
An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate. On acquisition of the
investment in an associate, any excess of the cost of the investment over the Corporation's share of the net fair value of the identifiable assets and liabilities of
the associate is recognized as goodwill, which is included within the carrying amount of the investment. Any excess of the Corporation's share of the net fair
value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognized immediately in the consolidated statements of
earnings in the period in which the investment is acquired.
The requirements of International Accounting Standard (“IAS”) 36, Impairment of Assets are applied to determine whether it is necessary to recognize any
impairment loss with respect to the Corporation’s investment in an associate. When necessary, the entire carrying amount of the investment (including
goodwill) is tested for impairment in accordance with IAS 36, Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in
use and fair value less costs of disposal) with its carrying amount, any impairment loss recognized forms part of the carrying amount of the investment. Any
reversal of that impairment loss is recognized in accordance with IAS 36, Impairment of Assets to the extent that the recoverable amount of the investment
subsequently increases.
Assets Held For Sale
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather
than through continuing use. This condition is regarded as met only when the asset (or disposal group) is available for immediate sale in its present condition
subject only to terms that are usual and customary for sales of such asset (or disposal group) and its sale is highly probable. Management must be committed
to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.
When the Corporation is committed to a sale plan involving disposal of an investment, or a portion of an investment, in an associate or joint venture, the
investment or the portion of the investment that will be disposed of is classified as held for sale when the criteria described above are met, and the
Corporation discontinues the use of the equity method in relation to the portion that is classified as held for sale. Any retained portion of an investment in an
associate or a joint venture that has not been classified as held for sale continues to be accounted for using the equity method. The Corporation discontinues
the use of the equity method at the time of disposal when the disposal results in the Corporation losing significant influence over the associate or joint
venture.
After the disposal takes place, the Corporation accounts for any retained interest in the associate or joint venture in accordance with IAS 39, Financial
Instruments: Recognition and Measurement unless the retained interest continues to be an associate or a joint venture, in which case the Corporation uses the
equity method.
Non-current assets (or disposal groups) classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.
Impairment of Non-Current Assets
Management assesses, at the end of the reporting period, whether there is an indication that an asset may be impaired. If any indication exists, or when annual
impairment testing for an asset is required, the Corporation estimates the asset’s recoverable amount. An asset’s or CGU’s recoverable amount is the higher of
the asset’s or CGU’s fair value less costs of disposal and its value in use. When the
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carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken
into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples,
quoted share prices for publicly traded companies or other available fair value indicators.
The Corporation bases its impairment calculation on detailed budgets and forecast calculations, which are prepared for the Corporation’s assets or CGU to
which such assets are allocated. These budgets and forecast calculations generally cover a period of three to five years. A long-term growth rate is calculated
and applied to project future cash flows after the final year included in the forecast.
Impairment losses of continuing operations are recognized in the consolidated statements of earnings in expense categories consistent with the function of the
impaired asset. An impairment loss recognized for goodwill may not be reversed. At the end of the reporting period, the Corporation assesses if there is an
indication that impairment losses recognized in previous periods for other assets have decreased or no longer exist. Where an impairment loss is subsequently
reversed, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount provided that the increased carrying amount
does not exceed the carrying amount that would have been determined had no impairment loss been recognized in prior years. A reversal of an impairment
loss is recognized immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is
treated as a revaluation increase.
Taxation
Income tax expense represents the sum of current and deferred taxes. Current and deferred taxes are recognized in the consolidated statements of earnings,
except to the extent they relate to items recognized in the consolidated statements of comprehensive income or directly in the statements of changes in equity.
Current tax
Current tax payable is based on taxable income for the year. Taxable income differs from earnings as reported in the consolidated statements of earnings
because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Corporation’s liability
for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the particular reporting period.
Deferred tax
Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the Corporation’s consolidated financial
statements and the corresponding tax bases used in the computation of taxable income. Deferred tax liabilities are generally recognized for all taxable
temporary differences. Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable income will be
available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary
difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in
a transaction that affects neither the taxable income nor the accounting earnings.
Deferred tax liabilities are recognized for taxable temporary differences associated with investments and interests in subsidiaries and associates, except where
the Corporation is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable
future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that
it is probable that there will be sufficient taxable income against which to utilize the benefits of the temporary differences and they are expected to reverse in
the foreseeable future.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient
taxable income will be available to allow all or part of any such asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realized, in
each case based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax
liabilities and assets reflects the tax consequences that would follow from the
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manner in which the Corporation expects, at the end of the particular reporting period, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they
relate to income taxes levied by the same taxation authority and the Corporation intends to settle its current tax assets and liabilities on a net basis. Deferred
tax assets and liabilities are not discounted. Current and deferred tax are recognized in the consolidated statements of earnings, except when they relate to
items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other
comprehensive income or directly in equity, respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the
tax effect is included in the accounting for the business combination.
Stock-Based Compensation
The Corporation maintains an equity-based long-term incentive award program to align interests of its management team with those of its Shareholders by
focusing the management team on long-term objectives over a multi-year period, with the value of the award fluctuating based on stock price appreciation.
The Corporation has two equity-based award plans and accounts for grants under these plans in accordance with the fair value-based method of accounting
for stock-based compensation for the applicable period. The Corporation currently makes its equity grants under its Equity Incentive Plan dated June 22, 2015
(the “2015 Equity Incentive Plan”), which provides for grants of stock options (“Options”), Restricted Share Units (“RSU”), Deferred Share Units (“DSU”),
Performance Share Units (“PSU”), Restricted Shares (“RS”), and other Common Share-based awards as the Board may determine. Prior to the Corporation’s
2015 annual shareholder meeting (the “2015 Annual Meeting”), equity-based awards were granted solely under the Corporation’s 2010 stock option plan, as
amended from time to time (the “2010 Stock Option Plan” and together with the 2015 Equity Incentive Plan, the “Plans”) and consisted only of Options. The
Corporation no longer grants Options under the 2010 Stock Option Plan, but it remains in effect only to govern the terms of outstanding Options granted prior
to the date of the 2015 Annual Meeting.
Stock Options
Compensation expense for equity-settled stock options awarded to participants under the plans is measured at the fair value at the grant date using the Black-
Scholes valuation model and is recognized using the graded vesting method over the vesting period of the options granted. Stock-based compensation
expense recognized is adjusted to reflect the number of options that has been estimated by management for which conditions attaching to service will be
fulfilled as of the grant date until the vesting date so that the recognized expense corresponds to the options that have vested. The stock-based compensation
expense credit is attributed to reserves when the expense is recognized in the consolidated statements of earnings. When options are exercised, any
consideration received from participants as well as the related compensation cost recorded as reserves are credited to share capital.
Non-employee equity-settled share-based payments are measured at the fair value of the goods and services received, except where that fair value cannot be
estimated reliably. If the fair value cannot be measured reliably, non-employee equity-settled share-based payments are measured at the fair value of the
equity instrument granted as measured at the date the entity obtains the goods or the counterparty renders the service. The Corporation subsequently re-
measures non-employee equity-settled share-based payments at each vesting period and settlement date with any changes in fair value recognized in the
consolidated statements of earnings. Stock-based compensation expense is recognized over the contract life of the options or the option settlement date,
whichever is earlier.
Other Equity-Based Awards Under the 2015 Equity Incentive Plan
The Corporation’s equity-based long-term incentive award program historically consisted solely of stock option grants on an irregular, discretionary schedule.
Effective for 2017, the Corporation replaced the stock option component of the long-term incentive program for its management team with a regular, annual
grant program to be comprised of 67% PSUs and 33% RSUs. The RSUs and the PSUs are subject to service, market and non-market vesting conditions and
no dividends are expected to be paid during the vesting period. Therefore, the fair market value of an RSU and PSU is equal to the market price of the
underlying Common Share at the grant date. The Corporation also offers DSUs, RSUs and RS for members of its Board of Directors, in addition to the cash
retainers paid.
On the grant date, the fair value of the awards is measured using the closing TSX stock price, or the closing Nasdaq stock price if the Common Shares are not
traded on the TSX. Share-based compensation expense is recognized over the vesting period in the consolidated statements of earnings at the end of every
reporting period with a corresponding increase to reserves. Once the awards are exercised and transferred to the counterparty, the related amount recorded as
reserves is credited to share capital.
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Restricted Share Units
An RSU is a unit equivalent in value to a Common Share which entitles the holder to receive Common Shares after a specified vesting period determined by
the Plan Administrator of the 2015 Equity Incentive Plan (the “Plan Administrator”), in its sole discretion. Upon settlement, holders will receive one fully
paid Common Share in respect of each vested RSU. The RSUs vest in equal annual installments over a four-year period (graded vesting method), generally
subject to continued employment through each vesting date.
Performance Share Units
A PSU is a unit equivalent in value to a Common Share which entitles the holder to receive Common Shares based on the achievement of performance goals
established by the Plan Administrator, including in consultation with management, over a performance period. The PSUs vest on the third anniversary of the
date of the grant (cliff vesting), and based on a weighted mix of revenue and Adjusted EBITDA targets of the Corporation for the applicable three-year
performance period and subject to an additional total shareholder return condition (the “TSR Condition”) as well as the individual remaining employed by, or
continuing to provide services to, the Corporation. The grantee is eligible for additional PSUs up to 50% of the PSUs granted on the grant date to the extent
the TSR Condition and other performance conditions are met. The additional PSUs have a service, non-market and market (i.e., the TSR Condition) vesting
conditions, all of which need to be satisfied to vest. The fair market value is based on a valuation to reflect the probability of the market condition to be met.
The service and non-market condition, will not affect the fair value at grant date. Market conditions, such as the TSR Condition upon which vesting is
conditioned, is considered when estimating the fair value of the equity instruments granted. Market conditions are reflected as an adjustment (discount) to the
initial estimate of fair value at grant date of the instrument to be received and there is no true-up for differences between estimated and actual vesting due to
market conditions.
Upon settlement, holders will receive fully paid Common Shares in proportion to the number of vested PSUs held and the level of performance achieved. Any
unearned PSUs will be forfeited.
For the PSUs, the grant date for calculating the compensation expense is considered to occur only when the non-market conditions are determined and
communicated to employees.
Deferred Share Units
The Corporation offers DSU grants to the members of the Board. Upon settlement, holders will receive one fully paid Common Share in respect of each
vested DSU. The Corporation recognizes services received in a share-based payment transaction as an expense over the requisite service period and
recognizes a corresponding increase in equity as the services are received in an equity-settled share-based payment transaction. Vesting for the DSU grants
begins on the accounting grant date and will vest over either a one-, two- or three-year period. The accounting grant date is the date on which the Corporation
and the Directors have a shared understanding of all the terms and conditions of the arrangement. If the accounting grant date occurs after the service
commencement date, then the Corporation estimates the grant-date fair value of the DSUs for the purpose of recognizing the expense from the service
commencement date until the accounting grant date. All grants are subject to forfeiture if the director ceases to serve as a director prior to vesting and vested
DSUs can only be settled at such time. DSU’s are only subject to service conditions and because no dividends are expected to be paid during the vesting
period, the fair market value of a DSU is equal to the market price of the underlying Common Share at the grant date.
Restricted Shares
An RS is a fully paid Common Share that is subject to restrictions on transfer and a risk of forfeiture for a period of time, and which shall be held by the
Corporation or its designee in escrow until such time as the restricted period lapses. The Plan Administrator shall have the authority to determine at the time
of grant, the duration of the restricted period and other restrictions applicable to the restricted Common Shares. Except for the restrictions applicable to the
restricted Common Shares, during the restricted period, the holder shall have all the rights and privileges of a holder of Common Shares as to the restricted
Common Shares, including the right to vote.
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Dividend Equivalents
RSUs, PSUs and DSUs may be credited with dividend equivalents in the form of additional RSUs, PSUs, DSUs and other share-based awards, as applicable.
Dividend equivalents shall vest in proportion to the awards to which they relate. Such dividend equivalents shall be computed by dividing: (i) the amount
obtained by multiplying the amount of the dividend declared and paid per Common Share by the number of RSUs, PSUs, DSUs or other share-based awards,
as applicable, held by the participant on the record date for the payment of such dividend, by (ii) the highest closing price of the Common Shares on any stock
exchange on which the Common Shares are then listed on the date of grant, at the close of the first business day immediately following the dividend record-
date.
Provisions
Provisions represent liabilities of the Corporation for which the amount or timing of payment is uncertain. Provisions are recognized when the Corporation
has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and
the amount can be reliably estimated. Provisions are measured at the present value of the expected expenditures required to settle the obligation using a
discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in provisions due to the
passage of time is recognized in financial expenses on the consolidated statements of earnings.
Provision for jackpots
The Corporation offers progressive jackpot games. Each time a progressive jackpot game is played, a portion of the amount wagered by the player is
contributed to the jackpot for that specific game or group of games. Once a jackpot is won, the progressive jackpot is reset with a predetermined base amount.
The Corporation maintains a provision for the reset of each jackpot and the progressive element added as the jackpot game is played. The provision for
jackpots at the reporting date is included in provisions. The Corporation believes that its provisions are sufficient to cover the full amount of any required
payout.
Deferred consideration
The acquisition-date fair value of any deferred consideration is recognized as part of the consideration transferred by the Corporation in exchange for the
acquiree. Changes in the fair value of deferred consideration that result from additional information obtained during the measurement period (i.e., a maximum
of one year from the acquisition date) about facts and circumstances that existed at the acquisition date are adjusted retrospectively against goodwill. The
Corporation estimates, based on expected future cash flows, the amount that would be required to settle the applicable obligation and recognizes the present
value of the same.
Provision for minimum revenue guarantee
A provision for minimum revenue guarantee is recognized pursuant to an agreement with the vendor in connection with the terms of certain of the
Corporation’s past divestitures. The Corporation estimates, based on expected future cash flows, the amount that would be required to settle the applicable
obligation and recognizes the present value of the same.
Contingent liabilities
Contingent liabilities are not recognized in the consolidated statements of financial position but are reported in the notes. They may arise from uncertainty as
to the existence of a liability or represent a liability in respect of which the amount cannot be reliably measured.
Critical Accounting Estimates and Judgments
The preparation of the Corporation’s consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that
can have a significant effect on the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during the reporting period.
Estimates and judgments are significant when:
•
•
the outcome is highly uncertain at the time the estimates are made; or
different estimates or judgments could reasonably have been used that would have had a material impact on the consolidated financial
statements.
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The consolidated financial statements include estimates based on currently available information and management’s judgment as to the outcome of future
conditions and circumstances. Management uses historical experience, general economic conditions and trends, and assumptions regarding probable future
outcomes as the basis for determining estimates.
Estimates and their underlying assumptions are reviewed on a regular basis and the effects of any changes are recognized immediately. Changes in the status
of certain facts or circumstances could result in material changes to the estimates used in the preparation of the consolidated financial statements and actual
results could differ from the estimates and assumptions.
Set forth below are descriptions of items that management believes require its most critical estimates and judgments.
Key Sources of Estimation Uncertainty
Goodwill impairment
Goodwill impairment exists when the carrying value of a CGU exceeds its recoverable amount. Management uses estimates in determining the value in use or
fair value less costs of disposal of the CGUs to which goodwill has been allocated. The estimates include but are not limited to the control premium, the
implied trading multiple, costs of disposal, expected cash flows, growth rates and discount rates. A change in future earnings or any other assumptions may
have a material impact on the fair value of the CGU, and could result in an impairment loss. Refer to note 10 for further details.
Tax provision in respect of prior years
Determining the Corporation’s income tax and its provisions for income taxes involves a significant degree of estimation and judgement, particularly in
respect of open tax returns relating to prior years where the liabilities remain to be agreed with the local tax authorities. Provisions for income taxes are
recognized based on management’s best estimate of the outcome after taking into consideration all available evidence, and where appropriate, after taking
external advice. The tax provision recorded in the Corporation’s 2017 consolidated financial statements in respect of prior years relate to intercompany
trading arrangements entered into in the normal course of business. Due to the uncertainty associated with such tax items it is possible that at a future date, on
resolution of the open tax matters, the final outcome may vary significantly and there is the potential for a material adjustment to the carrying amounts of the
liability recorded as a result of this estimation and uncertainty.
Fair value measurement and valuation process
The Corporation measures certain financial assets and liabilities at fair value for financial reporting purposes (see note 28). Management has a review process
which is designed to ensure that fair values are calculated in a consistent manner. The valuation techniques and inputs are reviewed by management to ensure
consistency and any changes are analyzed and approved. Valuations for financial assets and liabilities are performed and reviewed on a quarterly basis, and
are reviewed and approved by key management.
In estimating the fair value, management uses market observable data to the extent it is available. Where observable market data does not exist for non-
derivative financial assets and liabilities, the Corporation internally calculates the fair value using valuation techniques that maximize the use of observable
inputs. These inputs are reviewed and approved by management.
Deferred consideration
The Corporation has made and may make acquisitions which include deferred payments as part of the consideration for the acquiree. The Corporation re-
evaluates the fair value of any deferred consideration, including an “earn out”, on its business acquisitions at the end of each reporting period. Significant
estimates are required to determine the fair value of the deferred consideration. The Corporation considers the key inputs of the particular arrangement and
market participant assumptions when developing the projected cash flows that are used to determine the fair value of the deferred consideration. This includes
the need to estimate the likelihood and timing of achieving the relevant milestones of such deferred consideration or “earn out”. The Corporation exercises
judgment when applying a probability assessment for each of the potential outcomes. In addition, the Corporation must consider the time value of money. In
determining the discount rate applied to the estimated cash outflows, the Corporation considers the risks inherent to the payment of the particular deferred
consideration, such as projection risks, credit risks and liquidity risks.
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Judgments
Useful lives of long-lived assets
Judgment is used to estimate each component of an asset’s useful life and is based on an analysis of all pertinent factors including, but not limited to, the
expected use of the asset and, in the case of an intangible asset, contractual provisions that enable the renewal or extension of the asset’s legal or contractual
life without substantial cost, as well as renewal history. Incorrect estimates of useful lives could result in an increase or decrease in the annual amortization
expense and future impairment charges.
Functional currency
The Corporation’s worldwide operations expose the Corporation to transactions denominated in a number of different currencies, which are required to be
translated into one currency for consolidated financial statement reporting purposes. The Corporation’s foreign currency translation policy is designed to
reflect the economic exposure of the Corporation’s operations to various currencies.
The Corporation’s foreign operations (including subsidiaries, joint ventures, associates and branches) based mainly outside Canada may have different
functional currencies. The functional currency of an operation is the currency of the primary economic environment to which it is exposed. In order to
determine the functional currency, management will first consider the currency that influences sales prices of the goods and services provided by the
operations and the currency that influences the costs incurred by the operations. Then, if based on these two primary factors, the functional currency is not
obvious, management will examine secondary factors such as the currency in which funds from financing are obtained, the currency in which cash receipts
are retained and the levels of interactions with the parent company. In determining the functional currency of an operation, management uses its judgment to
determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.
Investments in associates
Management assesses the relationship with investees to determine if the Corporation has control or significant influence over such investee. Management
determines that it has control over an investee when it is exposed, or has rights, to variable returns from its investment in an entity and has the ability to affect
those returns through its power over the investee.
When the Corporation does not have control over an investee but has the power to participate in the financial and operating policy decisions of the investee,
management determines that it has significant influence over the investee.
Impairment of investments
The Corporation needs to use judgment when assessing whether the investments held are impaired. The Corporation determines whether the investment’s
decline is significant or prolonged by analyzing the historical volatility of the investment as well as the period of time over which the investment value has
been depressed. Generally, the Corporation will judge that a decrease of 25% in the value of the investment or a decline for a period of 12 months to be
significant and prolonged respectively.
Contingent liabilities
The Corporation reviews outstanding legal cases following developments in legal proceedings at each balance sheet date, considering, among other things:
the nature of the litigation, claim or assessment; the legal processes and potential level of damages in the jurisdiction in which the litigation, claim or
assessment has been brought; the progress of the case (including progress after the date of the financial statements but before those statements are issued); the
opinions or views of legal counsel and other advisors; experience of similar cases; and any decision of the Corporation’s management as to how it will
respond to the litigation, claim or assessment. The Corporation assesses the probability of an outflow of resources to settle the obligation as well as if the
outflow can be reliably measured. If these conditions are not met, no provision will be recorded and the relevant facts will be disclosed as a contingent
liability. To the extent that the Corporation’s assessments at any time do not reflect subsequent developments or the eventual outcome of any claim, its future
financial statements may be materially affected, with a favourable or adverse impact on the Corporation’s business, financial condition or results of
operations.
26
3.
RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncements – Not Yet Effective
At the date of authorization of these financial statements, the Corporation has not applied the following new and revised standards that have been issued but
are not yet effective:
IFRS 9
IFRS 15
IFRS 16
IFRS 17
Financial instruments
Revenue from contracts with customers
Leases
Insurance contracts
IFRS 2 (amendments)
Classification and measurement of share-based payment transactions
IFRS 4 (amendments)
Applying IFRS 9 financial instruments with IFRS 4 insurance contracts
IFRS 9 (amendments)
Prepayment features with negative compensation
IFRS 10 & 28 (amendments)
Sale or contribution of assets between an investor and its associate or joint venture
IAS 7 (amendments)
Disclosure initiative
IAS 12 (amendments)
Recognition of deferred tax assets for unrealized losses
IAS 28 (amendments)
Long-term interests in associates and joint ventures
IAS 40 (amendments)
Transfers of investment property
IFRS 15 (clarifications)
Clarifications to IFRS 15 revenue from contracts with customers
IFRIC 22
IFRIC 23
Foreign currency transactions and advance considerations
Uncertainty over income tax treatments
Annual improvements
Annual improvements to IFRS: 2014 – 16 cycle – IFRS 12 amendments
Annual improvements
Annual improvements to IFRS: 2014 – 16 cycle – IFRS 1 and IAS 28 amendments
Subject to full analysis the Corporation does not expect that the adoption of the standards listed above will have a material impact on the financial statements
of The Stars Group in future periods, except as noted below:
IFRS 9, Financial Instruments
The IASB issued IFRS 9 relating to the classification and measurement of financial instruments. IFRS 9 uses a single approach to determine whether a
financial asset is measured at amortized cost or fair value, and this approach replaces the previous requirements of IAS 39, Financial Instruments:
Recognition and Measurement. The approach in IFRS 9 is based on how an entity manages its financial assets (i.e., its business model) and the contractual
cash flow characteristics of those financial assets. IFRS 9 also amends the impairment criteria by introducing a new expected credit losses model for
calculating impairment on financial assets and commitments to extend credit. The standard also introduces minor changes applicable to financial liabilities.
Further, IFRS 9 includes new hedge accounting requirements that align hedge accounting more closely with risk management. These new requirements do not
fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, but do allow more hedging strategies
that are used for risk management to qualify for hedge accounting and for more judgment by management in assessing the effectiveness of those hedging
relationships, replacing the rules-based approach to assessing hedge effectiveness under IAS 39. Extended disclosures in respect of risk management activity
will also be required under the new standard.
Based on the analysis undertaken to date, the Corporation expects the following impact on its consolidated financial statements and disclosures as a result of
the adoption of the new standard on January 1, 2018:
Certain equity investments that are currently classified as available-for-sale ($7.0 million as at December 31, 2017) will be reclassified to financial assets at
fair value through profit or loss on January 1, 2018. Related fair value gains of $nil will be transferred from the available-for-sale financial assets reserve to
retained earnings on January 1, 2018 and fair value gains related to these investments amounting to $nil were recognized in profit or loss in the 2017 financial
year as these investments are currently held at cost.
27
Investment in debt instruments held by the Corporation (i.e., bonds) that are currently classified as available-for-sale will satisfy the conditions for
classification as at fair value through other comprehensive income and hence there will be no change to the accounting for these assets. Related fair value
gains of $nil will be transferred from the available-for-sale financial assets reserve to the financial assets at fair value through other comprehensive income
reserve on January 1, 2018.
The other financial assets held by the Corporation include debt instruments currently measured at amortized cost which continue to meet the conditions for
classification at amortized cost under IFRS 9. Accordingly, the Corporation does not expect the new guidance to affect the classification and measurement of
these financial assets.
The new impairment model requires the recognition of impairment provisions based on expected credit losses rather than only incurred credit losses as is the
case under IAS 39. It applies to financial assets classified at amortized cost, debt instruments measured at fair value through other comprehensive income,
contract assets under IFRS 15, Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee contracts. Based
on the assessments undertaken to date, the Corporation does not expect a material increase in the loss allowance against these assets.
The impact of historic modifications arising on the Corporation’s existing long-term debt are required to be recognized on transition to the new standard. This
will result in an adjustment to the carrying amount of long-term debt and a corresponding adjustment in the opening balance of retained earnings on January
1, 2018. The de-recognition rules remain unchanged from IAS 39 Financial Instruments: Recognition and Measurement.
As permitted by IFRS 9, the Corporation intends to elect to continue to apply the hedge accounting requirements of IAS 39 to all of its hedging relationships,
rather than apply the new requirements of IFRS 9 upon adoption of the new standard on January 1, 2018.
The new standard also introduces requirements for expanded disclosure and changes in presentation. These requirements are expected to change the nature
and extent of the Corporation’s disclosures about its financial instruments, particularly in the year of adoption.
The Corporation will apply the new rules retrospectively from January 1, 2018, with the practical expedients permitted under the standard. Comparative
information for 2017 will not be restated.
IFRS 15, Revenues from Contracts with Customers
The Financial Accounting Standards Board and IASB issued converged standards in respect of revenue recognition. IFRS 15 affects any entity entering into
contracts with customers, unless those contracts fall within the scope of other standards such as insurance contracts, financial instruments or lease contracts.
IFRS 15 supersedes the revenue recognition requirements in IAS 18, Revenue, IFRIC 13, Customer Loyalty Programs, and the majority of other industry-
specific guidance.
The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue, i.e., at a point in time or over time.
The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and
judgmental thresholds have been introduced, which may affect the amount or timing of revenue recognized.
The Corporation has completed its analysis and expects the following impact on its consolidated financial statements and disclosures as a result of the
adoption of the new standard on January 1, 2018:
The timing and amount of revenue recognized is not expected to be materially affected as a result of adoption, but the Corporation does expect an impact on
presentation and disclosure due to the requirement to present revenue from contracts with customers separately from other sources of income.
The Corporation does not believe contract assets and liabilities as of January 1, 2018 will be material such that they require separate disclosure in the
consolidated statement of financial position or in the notes to the consolidated financial statements.
The new standard will be applied using the modified retrospective approach, whereby the cumulative impact of adoption will be recognized in retained
earnings as of January 1, 2018 and comparative information for 2017 will not be restated. The Corporation does not believe this approach will result in an
adjustment to the opening balance of retained earnings on adoption.
28
IFRS 16, Leases
The IASB recently issued IFRS 16 to replace IAS 17, Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize
assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-
use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments.
This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors.
The Corporation intends to adopt IFRS 16 from its effective date of January 1, 2019. The Corporation is currently evaluating the impact of this standard, and
does not anticipate applying it prior to its effective date.
4.
CHANGE IN ACCOUNTING ESTIMATE
During the year ended December 31, 2016, the Corporation determined that it was necessary to accelerate the amortization of the Full Tilt software no longer
used as a result of the previously announced migration of the Full Tilt brand and players to the PokerStars platform reducing the remaining life from 39 to 24
months. Although the software will no longer be used, the Corporation determined that there is value in preventing its use by others. This change in
accounting estimate results in an increase in amortization of intangibles expense from approximately $11.28 million to approximately $18.10 million annually
from May 2016 through April 2018.
In connection with the Innova Offering (as defined below in note 12) the Corporation entered into an EBITDA support agreement with Innova Gaming
Group Inc. (TSX: IGG) (“Innova”) pursuant to which the Corporation agreed to pay Innova each year until June 30, 2020 a maximum of CDN$2 million per
year based on any applicable EBITDA shortfall recognized by Innova in each such year. During the year ended December 31, 2016, Innova informed the
Corporation that its EBITDA expectations would result in a shortfall in each of the remaining four years and as a result, the Corporation recorded a provision
of $5.33 million, representing the present value of the expected remaining EBITDA support payments. For information regarding the disposition of the
Corporation’s ownership in Innova and the corresponding reclassification, see notes 12 and 17.
29
5.
SEGMENTAL INFORMATION
For the years ended December 31, 2017 and 2016, the Corporation had one reportable segment, primarily related to online gaming, which for the purposes of
the financial statements is further divided into the Poker and Casino & Sportsbook product lines. The Corporation’s “Chief Operating Decision Makers”
receive product revenue information throughout the year for the purposes of assessing their respective performance. Other gaming related sources of revenue
are aggregated into “Other Gaming”, while certain other nominal sources of revenue and corporate costs are included in “Corporate”.
Segmental net earnings for the year ended December 31, 2017:
Revenue
Selling
General and administrative
Financial
Gaming duty
Gain from investments
Net loss from associates
Net earnings (loss) before income taxes
Income taxes
Net earnings (loss)
Other segmental information
Depreciation & amortization
Bad debt
Total Assets
Total Liabilities
Poker
$000’s
Casino &
Sportsbook
$000’s
Other Gaming
$000’s
Total Gaming
$000’s
Corporate
$000’s
Year Ended December 31, 2017
877,296
384,012
685
50,322 1,311,630
(192,271)
(438)
(523,011) (48,247)
(1,249)
(161,790)
(130,771)
—
4,605
29,919
—
(2,569)
331,137 (44,644)
927
304,856 (45,571)
26,281
Total
$000’s
1,312,315
(192,709)
(571,258)
(163,039)
(130,771)
34,524
(2,569)
286,493
27,208
259,285
147,027
7,171
159
—
5,398,310 16,816
3,089,732 21,963
147,186
7,171
5,415,126
3,111,695
Segmental net earnings for the year ended December 31, 2016:
Year ended December 31, 2016 (As reclassified * )
Poker
$000’s
Casino &
Sportsbook
$000’s
Other Gaming
$000’s
Total
Gaming
$000’s
Corporate
$000’s
Revenue
Selling
General and administrative
Financial
Gaming duty
Acquisition-related costs
Gain (loss) from investments
Net earnings from associates
Gain on settlement of deferred consideration
Net earnings (loss) before income taxes
Income taxes
Net earnings (loss)
Other segmental information
Depreciation & amortization
Bad debt
Total Assets
Total Liabilities
846,059
264,114
108
44,966 1,155,139
(162,642)
(143)
(514,105) (71,018)
4,264
(142,563)
—
(113,102)
(199)
—
879 (20,157)
623
—
—
2,466
225,873 (86,323)
(27)
221,846 (86,296)
4,027
Total
$000’s
1,155,247
(162,785)
(585,123)
(138,299)
(113,102)
(199)
(19,278)
623
2,466
139,550
4,000
135,550
139,301
4,142
582
1,938
5,412,449 50,026
3,230,806 29,941
139,883
6,080
5,462,475
3,260,747
30
(*) The Corporation reclassified interest revenue previously included within “Revenue”, to “Gain (loss) from investments” totaling $0.65 million for the year
ended December 31, 2016. The Corporation has determined that the impact of these corrections is immaterial.
The Corporation also evaluates revenue performance by geographic region based on the primary jurisdiction where the Corporation is licensed or approved to
offer, or offers through third party licenses or approvals, its products and services. The following tables set out the proportion of revenue attributable to each
gaming license or approval (as opposed to the jurisdiction where the customer was located) that either generated a minimum of 5% of total consolidated
revenue for the year ended December 31, 2017 or 2016, or that the Corporation otherwise deems relevant based on its historical reporting of the same or
otherwise:
Geographic Area
Isle of Man
Malta
Italy
United Kingdom
Spain
France
Other licensed or approved
jurisdictions
Geographic Area
Isle of Man
Malta
Italy
United Kingdom
Spain
France
Other licensed or approved
jurisdictions
Poker
$000’s
Casino & Sportsbook
$000’s
Other Gaming
$000’s
Total Gaming
$000’s
Corporate
$000’s
Total
$000’s
Year Ended December 31, 2017
349,375
210,742
82,106
56,155
47,912
50,214
80,792
877,296
29,338
224,101
52,284
15,140
34,842
10,410
17,897
384,012
1
2
575
258
669
508
378,714
434,845
134,965
71,553
83,423
61,132
—
—
—
—
—
—
378,714
434,845
134,965
71,553
83,423
61,132
48,309
50,322
146,998
1,311,630
685
685
147,683
1,312,315
Poker
$000’s
Casino & Sportsbook
$000’s
Other Gaming
$000’s
Total Gaming
$000’s
Corporate
$000’s
Total
$000’s
Year ended December 31, 2016 (As reclassified)
3
4
624
387
653
573
358,703
392,176
109,963
70,663
67,349
54,918
—
—
—
—
—
—
358,703
392,176
109,963
70,663
67,349
54,918
42,722
44,966
101,367
1,155,139
108
108
101,475
1,155,247
339,513
225,974
77,646
56,837
42,326
51,989
51,774
846,059
19,187
166,198
31,693
13,439
24,370
2,356
6,871
264,114
31
The distribution of some of the Corporation’s non-current assets (goodwill, intangible assets and property and equipment) by geographic region is as follows:
Geographic Area
Canada
Isle of Man
Malta
Italy
United Kingdom
France
Other licensed or approved jurisdictions
6.
EXPENSES CLASSIFIED BY NATURE
Financial
Interest and bank charges
Foreign exchange loss (gain)
General and administrative
Processor costs
Office
Salaries and fringe benefits
Research and development salaries
Stock-based compensation
Depreciation of property and equipment
Amortization of deferred development costs
Amortization of intangible assets
Professional fees
(Reversal of) Impairment of assets held for sale, associates and intangible assets
Bad debt
Loss on disposal of assets
27
11
10
10
Selling
Marketing
Royalties
Gaming duty
Acquisition-related costs
Professional fees
As at December 31,
2017
$000’s
2016
$000’s
53,394
4,446,503
—
35
6,511
—
15,744
4,522,187
39,993
4,567,314
—
47
6,380
—
15,638
4,629,372
Year Ended December 31,
2017
$000’s
Note
2016
$000’s
(As reclassified)
160,201
2,838
163,039
69,518
81,174
170,422
25,180
10,622
8,925
10,275
127,986
66,185
(6,799)
7,171
599
571,258
162,437
30,272
192,709
130,771
—
—
167,945
(29,646)
138,299
56,555
73,713
182,080
27,661
10,289
8,181
5,942
125,760
71,008
16,931
6,080
923
585,123
142,205
20,580
162,785
113,102
199
199
The Corporation changed the presentation of certain items within its consolidated statements of earnings for the comparative period to conform to the current
year’s presentation. The Corporation reclassified $7.71 million travel and entertainment costs previously included within “Selling” expenses to “Office”
expenses. The Corporation has determined that the impact of this correction is
32
immaterial. The Corporation also segregated Selling expenses into “Marketing” and “Royalties” in order to provide a better understanding to the readers of
the distribution of expenses within Selling expenses. None of these reclassifications had a net earnings impact on the consolidated statements of earnings.
During the year ended December 31, 2017, the Corporation received $5.77 million in indemnification proceeds from the sellers of Stars Interactive Group for
gaming duty, professional fees and taxes owed for periods prior to the Stars Interactive Group Acquisition. The amounts received from the sellers were
classified as Gaming duty, Professional fees and Income taxes. In addition, the Corporation received a refund of $2.85 million in taxes and penalties from the
Belgian tax authorities, and insurance indemnification proceeds of $2.91 million in respect of Autorité des marchés financiers (AMF) and other investigation
professional fees. The amount received from the Belgian tax authorities was classified as Income taxes and the insurance indemnification was classified as
Professional fees.
7.
GAIN (LOSS) FROM INVESTMENTS
NYX Gaming Group Limited
In connection with the Corporation’s December 2014 sale of Ongame Network Ltd. to what was then known as NYX Gaming Group Limited (“NYX Gaming
Group”), the Corporation and NYX Gaming Group entered into a strategic investment transaction pursuant to which the Corporation purchased from NYX
Gaming Group CDN$9 million unsecured convertible debentures (initially CDN$10 million but the Corporation subsequently sold and assigned an aggregate
of CDN$1 million to four individuals), which were later amended to, among other things, adjust the repayment terms such that they would be repayable solely
in cash. The debenture was redeemed in full during the year ended December 31, 2017 (see note 13).
In July 2015, the Corporation announced that it completed the sale of CryptoLogic Ltd. (“CryptoLogic”) to NYX Gaming Group and Amaya (Alberta) Inc.
(formerly Chartwell Technology Inc.) (“Chartwell”) to NYX Digital Gaming (Canada) ULC, a subsidiary of NYX Gaming Group (the “NYX Sub”) (together,
the “Chartwell/Cryptologic Sale”) for gross proceeds of approximately CDN$150 million, subject to adjustment, of which CDN$110 million was paid in cash
and CDN$40 million was paid by the NYX Sub through the issuance of exchangeable preferred shares (the “NYX Sub Preferred Shares”). The Corporation
used the majority of the cash net proceeds from the Chartwell/Cryptologic Sale for deleveraging, including the 2015 refinancing of the debt incurred as part of
the financing for the Stars Interactive Group Acquisition.
In November 2017, the Corporation completed the disposition of all its securities of NYX Gaming Group, including NYX Gaming Group ordinary shares,
NYX Gaming Group ordinary share purchase warrants, and the NYX Sub Preferred Shares, representing approximately 13.7% of NYX Gaming Group’s
ordinary shares on a partially diluted basis, for net cash proceeds of $27.9 million and a gain of $14.0 million, when Scientific Games Corporation (NYSE:
SGMS) acquired NYX Gaming Group.
Jackpotjoy plc
In connection with the January 2017 London Stock Exchange (“LSE”) listing of Jackpotjoy plc (LSE: JPJ) (“Jackpotjoy”), parent company of The Intertain
Group Ltd. (“Intertain”) and WagerLogic Malta Holdings Ltd. (“WagerLogic”), a former subsidiary of the Corporation which it sold in February 2014, and in
exchange for its 4,920,000 Intertain common shares (which the Corporation acquired between 2014 and 2015, including through open market purchases, the
exercise of common share purchase warrants and an exchange for shares it acquired from the purchaser of WagerLogic) and the conversion of certain
CDN$3.85 million 5.0% Intertain convertible debentures, the Corporation, after exchanging certain exchangeable shares, received 5,561,666 Jackpotjoy
ordinary shares. In December 2017, the Corporation completed the sale of its ordinary shares in Jackpotjoy, representing approximately 7.5% of Jackpotjoy’s
then issued and outstanding ordinary shares, for net cash proceeds of $59.8 million and a gain of $15.0 million.
33
8.
INCOME TAXES
Details of income tax expense were as follows:
Current income tax expense
Current income tax expense (recovery) - prior year adjustment
Deferred income tax recovery relating to the origination and reversal of temporary differences
Deferred income tax (recovery) expense - prior year adjustment
Income tax expense
Year Ended December 31,
2017
$000’s
2016
$000’S
9,391
21,923
(3,568)
(538)
27,208
8,521
(137)
(4,386)
2
4,000
The Corporation’s applicable Canadian statutory tax rate is equal to the Federal and Provincial combined tax rate for the period applicable in the jurisdiction
within Canada where the Corporation’s head office is registered (i.e., Ontario, previously Quebec). Income taxes reported differ from the amount computed
by applying the statutory rates to earnings before income taxes. The reconciliation is as follows:
Net earnings before income taxes
Canadian statutory tax rate
Statutory income taxes
Non-taxable income
Non-deductible expenses
Differences in effective income tax rates in foreign jurisdictions
Deferred tax assets not recognized
Adjustment in respect of prior years
Income tax expense
Year Ended December 31,
2017
$000’s
2016
$000’s
286,493
26.7%
76,494
(143)
3,590
(117,153)
43,035
21,385
27,208
139,550
26.9%
37,539
(99)
4,710
(102,206)
64,191
(135)
4,000
The Corporation operates in and earns revenues from many jurisdictions and is therefore subject to a variety of taxes, duties and levies including, without
limitation, gaming duties, value added taxes (“VAT”), corporate income taxes, employment related taxes, withholding taxes and business rate taxes. As a
result, the Corporation pays significant levels of tax globally with its total tax contribution for the year ended December 31, 2017 being in excess of $190
million (December 31, 2016 – in excess of $160 million).
The Corporation’s effective income tax rate for the year ended December 31, 2017, excluding prior year adjustments, was 2.03% (December 31, 2016 –
2.96%), significantly lower than the main Canadian corporate income tax rate. The main driver of this is that the Corporation primarily operates from the Isle
of Man and Malta, which are jurisdictions with low corporate income tax rates.
During the year ended December 31, 2017, the Corporation received notification of a proposed tax assessment from the Canadian tax authorities relating to
transfer pricing. The proposed assessment covers periods prior to the Stars Interactive Group Acquisition covering the 2003 to 2007 tax years. For the year
ended December 31, 2017 the Corporation has recorded a tax provision based on the proposed assessment for both Federal and Provincial tax of $26.5 million
including interest. The Corporation received the Federal tax assessment after the balance sheet date, but has not yet received a Provincial tax assessment. The
Corporation intends to vigorously defend its position against the assessment and any future related assessments.
34
Deferred Tax
Recognized deferred tax assets and liabilities
Significant components of the Corporation’s deferred income tax balance at December 31, 2017 and 2016 were as follows:
At January 1, 2016
(Charged) / credited to net earnings
Reclassification
(Charged) / credited to other
comprehensive income
Impairment
At December 31, 2016
Credited to net earnings
Reclassification
Credited to other comprehensive income
Charge direct to equity - share-based payment transactions
Acquisition of subsidiary
Foreign exchange on translation
At December 31, 2017
Unrecognized deferred tax assets
Property &
Equipment
$000’s
Transaction
Costs
$000’s
Intangibles
$000’s
Tax Losses
$000’s
Other
$000’s
Total
$000’s
38
(10)
—
(3)
—
25
131
—
—
—
—
—
156
4,284
—
(4,284)
(19,112)
1,808
—
—
—
—
—
—
—
—
—
—
—
—
4
(17,300)
426
—
14
—
(72)
253
(16,679)
301
(174)
—
12
—
139
170
—
—
—
—
(1)
308
(5,987)
2,760
4,284
(81)
—
976
3,379
—
146
359
—
(14)
4,846
(20,476)
4,384
—
(72)
4
(16,160)
4,106
—
160
359
(72)
238
(11,369)
Deferred tax assets have not been recognized in respect of the items shown below. The amounts shown are the gross temporary differences and to calculate
the potential deferred asset it is necessary to multiply the amounts by the tax rates in each case.
Tax losses
Other temporary differences
Total deferred tax asset unrecognized
As at December 31,
2017
$000’s
1,293,846
19,567
1,313,413
2016
$000’S
687,620
34,150
721,770
Deferred tax assets have not been recognized in respect of these items because it is not probable that future taxable profits will be available in these
jurisdictions against which the Corporation can utilize the benefit from them.
Included in tax losses not recognized as at December 31, 2017 are Canadian non-capital tax losses of $100.22 million (December 31, 2016 - $77.56 million)
that may be applied against earnings for up to 20 years from the end of the year the losses were generated. Tax losses also include foreign subsidiary non-
capital losses of $1,193.62 million (December 31, 2016 - $610.06 million) that may be applied against future years. The majority of those losses ($1,170.09
million; December 31, 2016 - $582.64 million) can be carried forward for up to 9 years from the end of the year the tax losses were generated.
No deferred tax liability has been recognized for unremitted earnings totaling $1,127.1 million (December 31, 2016 - $695.9 million), as the Corporation
controls the reversal of the temporary difference and it is probable that the temporary differences will not reverse in the foreseeable future.
35
9.
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per Common Share for the following periods:
Numerator
Numerator for basic and diluted earnings per Common Share - net earnings
Denominator
Denominator for basic earnings per Common Share – weighted
average number of Common Shares
Effect of dilutive securities
Stock options
Performance share units
Restricted share units
Warrants
Convertible Preferred Shares
Effect of dilutive securities
Dilutive potential for diluted earnings per Common Share
Basic earnings per Common Share
Diluted earnings per Common Share
10.
GOODWILL AND INTANGIBLE ASSETS
For the year ended December 31, 2017:
Year Ended December 31,
2017
2016
$
259,231,000 $
136,144,000
146,818,764
141,463,244
558,996
18,748
17,076
717,792
55,576,213
56,888,825
203,707,589
$
$
1.77 $
1.27 $
1,585,173
—
—
—
52,384,503
53,969,676
195,432,920
0.96
0.70
Other Software
Technology
$000’s
Customer
Relationships
$000’s
Brands
$000’s
Deferred
Goodwill
Development
Costs
$000’s
$000’s
Total
$000’s
Software
Technology
Acquired
through
Business
Combinations
$000’s
Cost
Balance – January 1, 2017
Additions
Additions through business
combination
Reclassification
Translation
Balance – December 31, 2017
Accumulated amortization and
impairments
Balance – January 1, 2017
Amortization
Translation
Balance – December 31, 2017
Net carrying amount
At January 1, 2017
At December 31, 2017
116,079
—
1,413
—
—
117,492
15,673
1,893
1,423,719
—
485,253
—
48,808
23,212
2,810,681 4,900,213
25,105
—
—
—
—
1,146
18,712 1,423,719
—
—
—
—
—
485,253
—
—
1,413
(201)
—
(201)
1,146
71,819 2,810,681 4,927,676
—
—
61,163
29,909
—
91,072
5,798
3,162
424
9,384
229,377
94,915
—
324,292
—
—
—
—
9,832
10,275
—
20,107
5,471
—
—
5,471
311,641
138,261
424
450,326
54,916
26,420
9,875 1,194,342
9,328 1,099,427
485,253
485,253
38,976 2,805,210 4,588,572
51,712 2,805,210 4,477,350
36
For the year ended December 31, 2016:
Cost
Balance – January 1, 2016
Additions
Additions through business
combination
Disposals
Reclassification
Translation
Balance – December 31, 2016
Accumulated amortization and
impairments
Balance – January 1, 2016
Amortization
Disposals
Impairment
Translation
Balance – December 31, 2016
Net carrying amount
At January 1, 2016
At December 31, 2016
Other Software
Technology
$000’s
Customer
Relationships
$000’s
Brands
$000’s
Deferred
Goodwill
Development
Costs
$000’s
$000’s
Total
$000’s
Software
Technology
Acquired
through
Business
Combinations
$000’s
115,283
—
824
—
—
(28)
116,079
19,992
7,669
1,423,719
—
485,253
—
30,309
20,961
2,810,470 4,885,026
28,630
—
—
(11,646)
—
(342)
—
—
—
—
—
—
—
—
15,673 1,423,719
485,253
—
200
1,024
(1,784)
(678)
—
(13,430)
(678)
(359)
48,808 2,810,681 4,900,213
—
—
11
32,122
27,478
—
1,563
—
61,163
13,966
3,367
(11,634)
155
(56)
5,798
134,462
94,915
—
—
—
229,377
—
—
—
—
—
—
3,122
5,942
(1,784)
2,552
—
9,832
—
—
—
5,471
—
5,471
183,672
131,702
(13,418)
9,741
(56)
311,641
83,161
54,916
6,026 1,289,257
9,875 1,194,342
485,253
485,253
27,187 2,810,470 4,701,354
38,976 2,805,210 4,588,572
The Corporation recognized impairment losses (classified in general and administrative expenses) related to goodwill and software technology acquired
through business combinations of $7.19 million during the year ended December 31, 2016. The Corporation recognized impairment losses of $2.55 million
during the year ended December 31, 2016 related to deferred development costs. The primary factors leading to the recognition of the impairment losses in
2016 were as follows:
•
•
$4.7 million of goodwill and $1.0 million in software technology acquired through business combinations that was recognized on the acquisition
of a subsidiary was derecognized due to the lack of positive revenue and cashflow forecasts in the subsidiary.
The Corporation determined that a capitalized research and development cost which had not met certain identifiable criteria was to be terminated
during the development stage. As a result, the Corporation recognized an impairment loss of $2.55 million in 2016 in deferred development costs.
Impairment Testing
The Corporation performed an annual impairment test for its gaming operations in connection with the preparation of its financial statements for the year
ended December 31, 2017. The Corporation identified the gaming operations as a single CGU for impairment testing purposes.
The recoverable amount of the CGU is determined from value in use calculations. The key assumptions for the value in use calculations are those regarding
the discount rate, growth rate, cash flows and Adjusted EBITDA forecasts. Adjusted EBITDA is defined by the Corporation as net earnings (loss) before
interest and financing costs (net of interest income), income taxes, depreciation and amortization, stock-based compensation, restructuring and certain other
items. These assumptions have been revised in the year ended December 31, 2017. Management estimates discount rates using pre-tax rates that reflect
current market assessments of the time value of money and the risks specific to the CGU.
The Corporation prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next three to five years and
extrapolates cash flows based on an estimated growth rate of 1.9% and a discount rate of 9.7% (December 31,
37
2016 – 1.9% and 11.7%, respectively). The estimated growth rate is based on the inflation rates of many of the European markets in which the Corporation is
operating.
The Corporation believes that any reasonable change to these principal assumptions is unlikely to cause the CGU’s carrying value to exceed its recoverable
amount. This fair value measurement is a level 3 measurement in the fair value hierarchy.
Goodwill
Based on the goodwill impairment test performed, the recoverable amount of the CGU was in excess of its carrying amount and accordingly, there is no
impairment of the carrying value of the goodwill.
Brand
Based on the indefinite life intangible asset impairment test performed, the fair value of the asset was in excess of its carrying amount and accordingly, there
is no impairment of the carrying value of the intangible asset.
11.
PROPERTY AND EQUIPMENT
For the year ended December 31, 2017:
Cost
Balance – January 1, 2017
Additions
Disposals
Translation
Balance – December 31, 2017
Accumulated depreciation
Balance – January 1, 2017
Depreciation
Disposals
Translation
Balance – December 31, 2017
Net carrying amount
At January 1, 2017
At December 31 2017
Revenue-
Producing
Assets
$000’s
Furniture
and Fixtures
$000’s
Computer
Equipment
$000’s
Building
$000’s
Total
$000’s
84
—
(84)
—
—
24
—
(24)
—
—
60
—
9,356
2,724
(571)
988
12,497
2,017
3,198
(301)
410
5,324
7,339
7,173
38
18,627
8,273
(1,251)
506
26,155
5,239
4,764
(860)
259
9,402
21,605
—
—
2,323
23,928
1,592
963
—
462
3,017
13,388
16,753
20,013
20,911
49,672
10,997
(1,906)
3,817
62,580
8,872
8,925
(1,185)
1,131
17,743
40,800
44,837
For the year ended December 31, 2016:
Cost
Balance – January 1, 2016
Additions
Disposals
Translation
Balance – December 31, 2016
Accumulated depreciation
Balance – January 1, 2016
Depreciation
Disposals
Translation
Balance – December 31, 2016
Net carrying amount
At January 1, 2016
At December 31 2016
Revenue-
Producing
Assets
$000’s
Furniture
and Fixtures
$000’s
Computer
Equipment
$000’s
Building
$000’s
Total
$000’s
117
3
(40)
4
84
29
16
(22)
1
24
88
60
11,099
1,536
(2,762)
(517)
9,356
1,536
3,023
(1,971)
(571)
2,017
9,563
7,339
14,589
5,267
(965)
(264)
18,627
2,143
4,144
(742)
(306)
5,239
26,351
—
—
(4,746)
21,605
1,356
998
—
(762)
1,592
12,446
13,388
24,995
20,013
52,156
6,806
(3,767)
(5,523)
49,672
5,064
8,181
(2,735)
(1,638)
8,872
47,092
40,800
12.
INVESTMENTS IN ASSOCIATES
In May 2015, the Corporation completed the spin-off of Diamond Game Enterprises, which it had purchased in February 2014 for approximately $25 million,
through the initial public offering (the “Innova Offering”) of common shares of what was then known as Innova. The Innova Offering resulted in the
Corporation receiving aggregate net proceeds of approximately CDN$34.1 million and maintaining ownership of approximately 40% of the issued and
outstanding common shares of Innova.
During the year ended December 31, 2016, the Corporation recognized an impairment loss (classified in general and administrative expenses) of $4.21
million as a result of the significant and prolonged decline in the fair market value of the Innova common shares before the shares were reclassified. On
October 28, 2016, the Corporation decided to pursue a potential disposition of its ownership in Innova. The investment was therefore reclassified to assets
held for sale as of that date (see note 17).
During the year ended December 31, 2017, the Corporation acquired a 21.13% ownership interest in the fully diluted share capital of Mediarex Enterprises
Limited (“Mediarex”). The Corporation recognized an impairment loss of $2.57million in respect of the Mediarex investment as a result of a significant
decline in earnings and expected cash flows. The following table shows a reconciliation from the opening balance to the closing balance for investment in
associates:
Balance – January 1, 2016
Income included in net earnings from associates
Reclassified to long-term investments
Impairment loss included in general and administrative expenses
Translation
Reclassified to assets held for sale
Balance – December 31, 2016
Acquired during the year
Impairment loss included in net loss from associates
Balance – December 31, 2017
Note
$000’s
6
17
10,734
623
(501)
(4,206)
487
(7,137)
—
2,569
(2,569)
—
All associates are accounted for using the equity method in these consolidated financial statements as described in note 2.
39
13.
INVESTMENTS
The Corporation held the following investments:
Funds – Available-for-sale
Bonds – Available-for-sale
Debentures – Fair value through profit/loss1
Equity in quoted companies – Available-for-sale
Equity in private companies – Available-for-sale
Total investments
Current portion
Non-current portion
As at December 31,
2017
$000’s
Carrying value &
fair value
2016
$000’s
Carrying value &
fair value
7,045
115,343
—
280
6,981
129,649
122,668
6,981
65,427
91,696
7,556
123,808
6,921
295,408
288,487
6,921
1
A financial asset is designated as fair value through profit or loss on initial recognition if it is part of a contract containing one or more embedded
derivatives and the entire contract is designated as such.
Investments relate primarily to customer deposits held in accounts segregated from investments held for operational purposes. As of December 31, 2017,
Customer deposits were covered by $122.7 million in investments and $227.1 million in cash.
During the year ended December 31, 2017, a wholly owned subsidiary of the Corporation entered into a support agreement (the “Support Agreement”) with
Scientific Games relating to the proposed acquisition by Scientific Games of all outstanding ordinary shares of NYX Gaming Group. After entering into the
Support Agreement, the Corporation completed the disposition of all its NYX Gaming Group investments to Scientific Games (note 7). The gains are
presented in income from investments in the consolidated statements of earnings.
The Corporation also completed the sale of its investments in Jackpotjoy during the year ended December 31, 2017, (note 7). The gains are presented in
income from investments in the consolidated statements of earnings.
There were no impairments recognized on investments during the year ended December 31, 2017 (December 31, 2016: $3.19 million). See note 31 for details
on credit risk.
The following table provides information about the carrying value of bonds and debentures held by the Corporation that are due over the current and non-
current terms:
Bonds
Total
1 year or less
$000’s
1 to 5 years
$000’s
Greater than
5 years
$000’s
38,014
38,014
72,645
72,645
4,684
4,684
For the year ended December 31, 2017, the Corporation recognized a gain from current investments as follows:
Investment income earned
Realized gains
Unrealized losses
Changes in fair value through profit/loss
Total
Funds
$000’s
Bonds
$000’s
Debentures
$000’s
Equity in
quoted
companies
$000’s
Equity in
private
companies
$000’s
Total
$000’s
473
3,657
(4,299)
—
(169)
2,647
2,330
(1,969)
—
3,008
253
—
—
—
253
1,182
35,096
(78)
—
36,200
186 4,741
— 41,083
— (6,346)
13
13
199 39,491
Investment income from bonds and debentures includes interest income and premium and discount amortization. Income from funds and equity includes
dividends and distributions from quoted companies.
40
Debentures – Fair value through profit or loss
During the year ended December 31, 2014, the Corporation acquired then-convertible debentures for a total cost of CDN$9 million from NYX Gaming
Group, which bear interest at 6.00% per annum (the Corporation originally acquired CDN$10 million of such debentures but subsequently sold and assigned
CDN$1 million of the same soon thereafter). The debentures previously had a maturity date of November 17, 2016 and were convertible at the Corporation’s
option into fully paid common shares of NYX Gaming Group at any time prior to the maturity date at a conversion price of CDN$3.20 per common share.
However, pursuant to an amendment to the debentures, the Corporation and NYX Gaming Group extended the maturity date of the debentures and agreed that
they would be repaid solely in cash monthly payments of CDN$1 million beginning on May 17, 2017 until the balance due date of April 17, 2018, subject to
certain automatic set-off rights against a supplier licensing agreement the Corporation had entered into with NYX Gaming Group (the “Licensing
Agreement”) (see note 24 where this commitment is presented as the minimum revenue guarantee related to the Chartwell/Cryptologic Sale). The debentures
were fully repaid during the year ended December 31, 2017.
As at January 1, 2016
Realized gain on investment
Unrealized loss on investment
Converted to equity
Translation
As at December 31, 2016
Realized gain on investment
Redemption of debenture
Translation
As at December 31, 2017
Subsidiaries
Debentures
$000’s
12,260
1,035
(909)
(5,310)
480
7,556
253
(8,365)
556
—
As at December 31, 2017, the Corporation had the following significant subsidiaries:
Name of principal subsidiary
Stars Group Holdings B.V.
Stars Interactive Holdings (IOM) Limited
Worldwide Independent Trust Limited
REEL Italy Limited
Rational Entertainment Enterprises Limited
Naris Limited
Stars Interactive Limited
RG Cash Plus Limited
Rational Gaming Europe Limited
REEL Spain Plc
14.
ACCOUNTS RECEIVABLE
Country of
incorporation
Principal
business
Percentage of
ownership
Netherlands
Isle of Man
Isle of Man
Malta
Isle of Man
Isle of Man
Isle of Man
Isle of Man
Malta
Malta
Intermediate holding company and investment vehicle
Intermediate holding company
Treasury
Various
Gaming services
Treasury
Intermediate holding company
Treasury
Various
Gaming services
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
The Corporation’s accounts receivable balances at December 31, 2017 and December 31, 2016 consist of the following;
Balances held with processors
Balances due from live events
VAT receivable
Other receivables
Total accounts receivable balance
41
As at December 31,
2017
$000’s
2016
$000’s
75,147
10,260
6,684
8,318
100,409
62,002
5,910
6,292
7,353
81,557
15.
CASH AND CASH EQUIVALENTS, RESTRICTED CASH ADVANCES AND COLLATERAL
Cash and cash equivalents
Cash and cash equivalents – operational includes an amount of $24.7 million held by a subsidiary of the Corporation that is subject to exchange controls in
the country of operation. This balance is not available for general use by the Corporation or any of its other subsidiaries.
Restricted cash advances and collateral
Restricted cash held by the Corporation consists of the following components:
Guarantees in connection with licenses held
Funds in connection with hedging contracts
Segregated funds in respect of payment processors
Guarantee in connection with acquisition of a subsidiary
Cash portion of Kentucky Bond Collateral *
Other
Restricted cash advances and collateral – total
Restricted cash advances and collateral – current portion
Restricted cash advances and collateral – non-current portion
As at December 31,
2017
$000’s
2016
$000’s
4,333
5,113
2,749
1,201
40,000
300
53,696
7,862
45,834
5,728
2,879
2,625
—
40,000
263
51,495
5,767
45,728
*
During the year ended December 31, 2016, $40 million of restricted cash was collateralized as part of the Kentucky Bond Collateral (as defined in note
18 below) and currently appears in Cash portion of the Kentucky Bond Collateral. The Kentucky Bond Collateral will be held until there is legal
evidence conclusively showing final discharge or release from the bond, a final appellate ruling reversing the applicable judgment or court order
releasing the bond.
16.
PREPAID EXPENSES AND DEPOSITS
Prepaid royalties
Prepaid expenses
Vendor deposits
Total current portion of prepaid expenses and deposits
Prepaid royalties
Vendor deposits
Total non-current portion of prepaid expenses and deposits
As at December 31,
2017
$000’s
2016
$000’s
5,704
22,281
1,408
29,393
16,444
70
16,514
6,184
14,888
1,495
22,567
20,698
100
20,798
Prepaid royalties include prepaid revenue share paid to business partners. Prepaid expenses are included within selling and general and administrative
expenses.
17.
ASSETS HELD FOR SALE
In connection with the Corporation’s ownership of approximately 40% of the issued and outstanding common shares of Innova, senior management
committed to a plan to dispose of its ownership in Innova and classified the investment as assets held for sale during the three months ended December 31,
2016 (see note 12). During the year ended December 31, 2017, the Corporation completed the disposition of all of its ownership of the issued and outstanding
common shares in Innova for an amount of CDN $20.5 million (USD $16.1 million). Nil gain (loss) was recognized on sale.
42
18.
CREDIT FACILITY
The Corporation obtained a first lien revolving credit facility of $100 million on August 1, 2014 in connection with the Stars Interactive Group Acquisition
(the “Credit Facility”). Maturing on August 1, 2019, the Credit Facility can be used to fund working capital needs and for general corporate purposes. The
interest rate under the Credit Facility is, at the Corporation's option, either LIBOR plus 4.00% or ABR plus 3.00%. The applicable commitment fee on the
Credit Facility is based on a first lien leverage ratio of 3.75 to 1.00 and could range from 0.375% to 0.50%. Borrowings under the Credit Facility are subject
to the satisfaction of customary conditions, including the absence of a default or an event of default and compliance with certain representations and
warranties.
As at December 31, 2017 and December 31, 2016 there were no amounts outstanding under the Credit Facility. However, in connection with the Kentucky
Proceeding (as defined in note 30 below) on February 22, 2016, the Corporation filed a notice of appeal to the Kentucky Court of Appeals and posted a $100
million supersedeas bond to stay enforcement of the order for damages during the pendency of the appeals process. The posting of the bond required the
delivery of cash collateral in the amount of $40 million and letters of credit in the aggregate amount of $30 million (collectively, the “Kentucky Bond
Collateral”), thereby reducing the availability under the Credit Facility to $70 million as of the date hereof.
19.
LONG-TERM DEBT
The following is a summary of long-term debt outstanding at December 31, 2017, 2016 and 2015 (all capitalized terms used in the table below relating to
such long-term debt are defined below in this note):
USD First Lien Term Loan
EUR First Lien Term Loan
USD Second Lien Term Loan
CDN 2013 Debentures
Total long-term debt
Current portion
Non-current portion
Interest rate
4.83%
3.75%
8.33%
7.50%
December 31,
2017,
Principal
outstanding
balance in
local
denominated
currency
000’s
December 31,
2016,
Principal
outstanding
balance in
local
denominated
currency
000’s
December 31,
2017
Carrying
amount
$000’s
1,895,654 1,848,397 2,021,097
286,143
210,000
—
382,222
95,000
—
453,540
56,632
—
2,358,569
4,990
2,353,579
December
31,
2015
Carrying
amount
$000’s
December 31,
2015,
Principal
outstanding
December 31,
balance in
2016
local
Carrying
denominated
amount
currency
$000’s
000’s
1,965,928 2,041,616 1,978,763
307,584
161,524
21,556
2,469,427
32,889
2,436,538
296,198
166,453
—
2,428,579
47,750
2,380,829
289,048
210,000
30,000
During the year ended December 31, 2017, the Corporation incurred the following interest on its then-outstanding long-term debt:
USD First Lien Term Loan
EUR First Lien Term Loan
USD Second Lien Term Loan
Total
Effective interest rate
Interest
$000's
Interest
Accretion
$000's
Total Interest
$000's
5.54%
4.37%
16.05%
76,851
16,824
14,340
108,015
11,817
1,271
5,179
18,267
88,668
18,095
19,519
126,282
During the year ended December 31, 2016, the Corporation incurred the following interest on its then-outstanding long-term debt:
USD First Lien Term Loan
EUR First Lien Term Loan
USD Second Lien Term Loan
CDN 2013 Debentures
Total
Effective interest rate
Interest
$000's
5.71%
5.68%
13.26%
7.50%
95,356
16,950
17,082
—
129,388
Interest
Accretion
$000's
Total Interest
$000's
7,721
1,241
4,929
125
14,016
103,077
18,191
22,011
125
143,404
43
The Corporation’s debt balance for the year ended December 31, 2017 was as follows:
USD First Lien Term Loan
EUR First Lien Term Loan
USD Second Lien Term Loan
Total
Accretion
Principal
Movements
$000's
Opening
Balance
$000's
1,965,928 (125,442)
296,198 100,529
166,453 (115,000)
2,428,579 (139,913)
Transaction
costs
$000's
(3,906) 11,817
1,271
5,179
(4,735) 18,267
(829)
—
$000's
Translation
$000's
Total
$000's
Current
$000's
Long-term
$000's
— 1,848,397
453,540
56,632
56,371 2,358,569
56,371
—
7,042 1,841,355
450,241
3,299
(5,351)
61,983
4,990 2,353,579
The Corporation’s debt balance for the year ended December 31, 2016 was as follows:
USD First Lien Term Loan
EUR First Lien Term Loan
USD Second Lien Term Loan
CDN 2013 Debentures
Total
Transaction
costs
$000's
Principal
Movements
$000's
Opening
Balance
$000's
1,978,763 (20,587)
(3,204)
—
21,556 (22,561)
2,469,427 (46,352)
307,584
161,524
Accretion
$000's
Translation
$000's
Total
$000's
Current
$000's
Long-term
$000's
—
7,752
1,241
—
4,929
—
—
—
— 13,922
— 1,965,928 45,848 1,920,080
288,686
(9,423)
172,063
—
1,005
—
(8,418) 2,428,579 47,750 2,380,829
296,198
166,453
—
7,512
(5,610)
—
The principal repayments of the Corporation’s currently outstanding long-term debt over the next five years, as adjusted for revised estimates of excess cash
flow allocations to the principal repayment of the First Lien Term Loans, amount to the following:
USD First Lien Term Loan
EUR First Lien Term Loan
USD Second Lien Term Loan
Total
(a)
First and Second Lien Term Loans
1 Year
$000's
2 Years
$000's
3 Years
$000's
19,443
4,709
—
24,152
19,443
4,709
—
24,152
19,443
4,709
—
24,152
4 Years
$000's
1,837,326
444,960
—
2,282,286
5 Years
$000's
—
—
95,000
95,000
On August 1, 2014, the Corporation completed the Stars Interactive Group Acquisition, which was partly financed through the issuance of long-term debt,
allocated into first and second lien term loans. Giving effect to a previously disclosed refinancing in August 2015 (the “Refinancing”), and the Repricing (as
defined below), as at December 31, 2017, the first lien term loans consisted of a $1.85 billion first lien term loan priced at LIBOR plus 3.50% (the “USD First
Lien Term Loan”) and a €378 million seven-year first lien term loan priced at EURIBOR plus 3.75% (the “EUR First Lien Term Loan” and, together with the
USD First Lien Term Loan, the “First Lien Term Loans”), with 1.00% LIBOR and 0% EURIBOR floors respectively, and each repayable on August 22, 2021.
Also without giving effect to the Refinancing, Repricing and Prepayments (as defined below), as at December 31, 2017, the second lien term loan consisted
of a $95 million loan priced at LIBOR plus 7.00%, with a 1.00% LIBOR floor and repayable on August 1, 2022 (the “USD Second Lien Term Loan”).
On March 3, 2017, the Corporation completed the repricing and retranching of the First Lien Term Loans and amended the applicable credit agreement
(collectively, the “Repricing”). The Repricing included reducing the applicable interest rate margin on the First Lien Term Loans by 0.5% to LIBOR plus
3.5% with a LIBOR floor of 1% to EURIBOR plus 3.75% with a 0% EURIBOR floor, respectively, and retranching such loans by raising €100 million of
incremental debt on the EUR First Lien Term Loan and using the proceeds to reduce the USD First Lien Term Loan by $106 million. The Corporation and the
lenders also amended the credit agreement for the First Lien Term Loans to, among other things, reflect the Repricing and waive the required 2016 and 2017
excess cash flow repayments (as defined and described in the credit agreement) previously due on March 31, 2017 and March 31, 2018, respectively.
The Repricing has been accounted for as a debt modification as the terms of the amended credit agreement were not considered to be substantially different
than the previous terms and as a result there was no significant impact on the carrying amount.
On August 8, 2017, and September 20, 2017, the Corporation made principal prepayments without penalty (the “Prepayments”) of $40 million and $75
million, respectively, under the USD Second Lien Term Loan using cash on its balance sheet, cash flow from operations, or a combination thereof.
44
First Lien Term Loans
Except as set forth above, the Corporation is required to allocate up to 50% of the excess cash flow of the Corporation to the principal repayment of the First
Lien Term Loans. Excess cash flow is referred to as EBITDA of Stars Group Holdings B.V. on a consolidated basis for such excess cash flow period (i.e.,
each fiscal year commencing with the fiscal year ending on December 31, 2015), minus, without duplication, debt service, capital expenditures, permitted
business acquisitions and investments, taxes paid in cash, increases in working capital, cash expenditures in respect of swap agreements, any extraordinary,
unusual or nonrecurring loss, income or gain on asset dispositions, and plus, without any duplication, decreases in working capital, capital expenditures
funded with the proceeds of the issuance of debt or the issuance of equity, cash payments received in respect of swap agreements, any extraordinary, unusual
or nonrecurring gain realized in cash and cash interest income to the extent deducted in the computation of EBITDA.
The percentage allocated to the principal repayment can fluctuate based on the following:
•
•
If the total secured leverage ratio at the end of the applicable excess cash flow period is less than or equal to 4.75 to 1.00 but is greater than 4.00
to 1.00, the repayments will be 25% of the excess cash flow.
If the total secured leverage ratio at the end of the applicable excess cash flow period is less than or equal to 4.00 to 1.00, the repayment will be
0% of the excess cash flow.
The agreement for the First Lien Term Loans restricts Stars Group Holdings B.V. and its subsidiaries from, among other things, incurring additional debt or
granting additional liens on its assets and equity, distributing equity interests and distributing any assets to third parties.
Second Lien Term Loan
Giving effect to the Refinancing and Prepayments, the principal balance of the USD Second Lien Term Loan decreased during the year, with $95 million
outstanding at December 31, 2017. The applicable and effective interest rates are noted in the tables above.
(b)
2013 Debentures
On February 7, 2013, the Corporation closed a private placement of units, issuing and selling 30,000 units at a price of CDN $1,000 per unit for aggregate
gross proceeds of CDN $30 million. Each unit consisted of certain non-convertible subordinated debentures (the “CDN 2013 Debentures”) and non-
transferable Common Share purchase warrants. The CDN 2013 Debentures matured on January 31, 2016 and CDN $30 million was repaid on February 1,
2016 and the then-remaining outstanding warrants expired on January 31, 2016. As of such date, the Corporation had no further obligations under or with
respect to the same.
20.
CAPITAL MANAGEMENT
The Corporation’s objective in managing capital is to ensure a sufficient liquidity position to manage its business and growth objectives while maximizing
return to shareholders through the optimization of debt and equity. On an ongoing basis, liquidity is necessary to finance its marketing activities, research and
development activities, general and administrative expenses, working capital and overall capital expenditures.
The Corporation has historically financed its liquidity needs, primarily through borrowings, hybrid instruments and issuance of capital stock. Since the Stars
Interactive Group Acquisition, the Corporation has met all its current liquidity requirements from the cash flow generated from operations.
The capital structure of the Corporation and its subsidiaries consists of net debt, which includes long-term debt, and is offset by cash balances, and total
equity attributable to shareholders. The Corporation’s capital management objectives are to optimize its capital structure with a view to both deleverage
existing operations and minimize dilution by focusing on, among other things, improving profitability, repaying debt and undertaking stock buy-back
programs.
For additional information regarding the Corporation’s liquidity risk, see note 31.
21.
DERIVATIVES
The Corporation is exposed to interest rate and currency risk. The Corporation uses derivative financial instruments for risk management purposes and
anticipates that such instruments will mitigate interest rate and currency risk, as applicable. As such, any change in cash flows associated with derivative
instruments is expected to be offset by changes in cash flows related to the hedged position.
45
Cash flow hedge accounting
On March 2, 2015, a subsidiary of the Corporation entered into cross-currency interest rate swap agreements (the “March 2015 Swap Agreements”). A USD
notional amount of $1.74 billion was designated in cash flow hedge relationships to hedge the interest rate and foreign exchange risk of the USD First Lien
Term Loan bearing a minimum floating interest rate of 5.0% (USD three-month LIBOR plus a 4.0% margin, with a LIBOR floor of 1.0%). The March 2015
Swap Agreements, which mature in August 2019, fixed the Euro to USD exchange rate at 1.1102 and fixed the Euro interest payments at an average rate of
4.6016%.
In connection with the Refinancing (see note 19), a subsidiary of the Corporation entered into two additional cross-currency interest rate swap agreements to
hedge the interest rate and foreign exchange risk, effective August 12, 2015, for a USD notional amount of $325 million (the “August 2015 Swap
Agreements” and together with the March 2015 Swap Agreements, the “Swap Agreements” or “CCIRS”). A portion of the August 2015 Swap Agreements
(USD notional amount of $302 million) was designated in cash flow hedge relationships to hedge the interest rate and foreign exchange risk of the USD First
Lien Term Loan bearing a minimum floating interest rate of 5.0% (USD three-month LIBOR plus a 4.0% margin, with a LIBOR floor of 1.0%). The August
2015 Swap Agreements, which mature in August 2019, fixed the Euro to USD exchange rate of 1.094 and fixed the Euro interest payments at an average rate
of 4.657%. During the year ended December 31, 2017, the Corporation unwound and settled a notional principal amount of $616.54 million of the CCIRS for
a gain of $13.9 million.
As part of the Repricing (see note 19), the Corporation reduced the applicable interest rate margin on the First Lien Term Loans by 50 basis points to LIBOR
plus 350 basis points with a LIBOR floor of 100 basis points. As a result, the Corporation de-designated and re-designated the applicable hedging instruments
in new hedge accounting relationships. An amount of $17.53 million was recognized as Financial expenses during the year ended December 31, 2017 relating
to the amortization of the Other comprehensive income balance brought forward from the previous hedge accounting relationship.
During the year ended December 31, 2017, there was no ineffectiveness with respect to the cash flow hedge (December 31, 2016 – ineffectiveness gain of
$470,000) recognized in financial expenses. At the end of 2017, there were forward contracts to sell USD and purchase a notional amount of GBP67.5 million
to hedge the Corporation’s exposure to GBP expenses in 2018. These contracts have been designated as cashflow hedges. There were no equivalent contracts
outstanding at the end of 2016.
During the year ended December 31, 2017, $16.58 million (December 31, 2016 - $7.75 million) was reclassified from “Reserves” to the consolidated
statements of earnings as Financial expenses. The fair value of the Swap Agreements in hedging relationships included in the derivative liabilities of the
Corporation as at December 31, 2017 was $111.76 million (December 31, 2016 – derivative asset of $52.04 million).
Net investment hedge accounting
During the year ended December 31, 2017 and during a portion of the year ended December 31, 2016, the Corporation designated a portion of the USD First
Lien Term Loan, its entire principal amount of the USD Second Lien Term Loan and its then-outstanding deferred consideration (i.e., the deferred purchase
price for the Stars Interactive Group Acquisition) as a foreign exchange hedge of its net investment in its foreign operations. Accordingly, the portion of the
losses arising from the translation of the USD-denominated liabilities (net of transaction costs) that was determined to be an effective hedge during the period
was recognized in other comprehensive income under the heading foreign currency translation reserve, offsetting a portion of the losses arising from
translation of the Corporation’s net investment in its foreign operations.
During the years ended December 31, 2017 and December 31, 2016, there was no ineffectiveness with respect to the net investment hedge.
For the year ended December 31, 2017, the Corporation recorded an unrealized exchange loss on translation of $134.72 million (December 31, 2016 - $48.29
million) in the “Cumulative translation adjustment” in reserves related to the translation of a portion of the USD First Lien Term Loan, USD Second Lien
Term Loan and the deferred consideration.
Derivative instruments without hedge accounting
At December 31, 2017, the Corporation had a series of forward foreign exchange contracts in place to protect against the translation of non-USD monetary
balance sheet items. These contracts had a maturity date of January 31, 2018. As at December 31, 2016, the Corporation had a series of forward foreign
exchange contracts to sell USD for Euros. These economic hedges are intended to mitigate the impact of the fluctuation of the USD to Euro exchange rates on
foreign currency liabilities. The series of contracts were for the sale of $ 125.52 million for €114.34 million at a rate of $1.0978 to €1.0000 with a maturity
date of March 31, 2017.
46
For the year ended December 31, 2017, the Corporation recognized a loss of $7.11 million. For the year ended December 31, 2016, the Corporation
recognized a realized loss in income on forward foreign exchange contracts of $1.47 million and an unrealized loss in income of $4.92 million.
Put liabilities
In connection with the July 31, 2015 acquisition of Stars Fantasy Sports Subco, LLC (“Stars Fantasy”), which currently provides software development and
related services and support to the Corporation’s BetStars brand, the Corporation granted a put option to the sellers whereby such sellers had the right, but not
the obligation, to sell to the Corporation all the equity interests then held by such sellers. During the year ended December 31, 2017, the Corporation acquired
the remaining equity interests from the sellers for an amount of $5.95 million. At December 31, 2016 the derivative was recorded at the present value of $5.59
million. The put option was categorized as a Level 3 within the fair value hierarchy and used a 5.7% discount rate to determine its fair value.
The following table summarizes the fair value of derivatives as at December 31, 2017 and 2016 and the change in fair value for the years ended December 31,
2017 and 2016:
Derivative Assets
Opening balance, as at January 1, 2016
Unrealized (loss) gain in fair value
Total derivative asset as at December 31, 2016
Acquisition
Realized gain
Settlement
Unrealized gain (loss) in fair value
Total derivative asset as at December 31, 2017
Current portion
Non-current portion
Derivative Liabilities
Opening balance, as at January 1, 2016
Unrealized loss (gain) in fair value
Accretion
Translation
Total derivative liability as at December 31, 2016
Unrealized (gain) loss in fair value
Realized gain on settlement
Settlement
Translation
Total derivative liability as at December 31, 2017
Current portion
Non-current portion
Forward Contracts
$000's
Cross-currency
interest rate swap
contracts
$000's
Currency options
$000's
Total
$000's
4,012
(4,012)
—
—
—
—
2,037
2,037
2,037
—
9,473
42,565
52,038
—
—
(13,904)
(38,134)
—
—
—
—
—
—
906
(375)
726
(1,257)
—
—
—
13,485
38,553
52,038
906
(375)
(13,178)
(37,354)
2,037
2,037
—
Forward Contracts
$000's
Cross-currency
interest rate swap
contracts
$000's
Put Liability
$000's
Total
$000's
16,538
(16,538)
—
—
—
110,855
—
—
907
111,762
—
111,762
6,102
(815)
307
—
5,594
—
—
(5,594)
—
—
—
—
24,824
(14,247)
307
(368)
10,516
109,029
(2,829)
(5,771)
817
111,762
—
111,762
2,184
3,106
—
(368)
4,922
(1,826)
(2,829)
(177)
(90)
—
—
—
47
22.
COMMITMENTS
The Group as Lessee
At December 31, 2017, the Corporation’s future minimum lease payments under non-cancellable operating leases and other obligations aggregate to $61.6
million and are payable as follows:
Rent
Other
Total
The Group as Lessor
Within one year
$000’s
Later than one year
but not later than
5 years
$000’s
More than 5 years
$000’s
9,400
18
9,418
28,323
—
28,323
23,828
—
23,828
At December 31, 2017, the Corporation’s future minimum lease receipts under non-cancellable operating leases aggregate to $17.6 million and are receivable
as follows;
Rent
Total
23.
OTHER PAYABLES
Within one year
$000’s
Later than one year
but not later than
5 years
$000’s
More than 5 years
$000’s
1,964
1,964
7,855
7,855
7,806
7,806
The Corporation’s other payables at December 31, 2017 primarily comprise customer rewards and value-added tax (“VAT”) as described below. The customer
rewards relate to the Stars Rewards cross vertical loyalty program Stars Rewards include randomized rewards, such as “Stars Coins”, which can be used to
make a wide variety of purchases and entry into tournaments, in lieu of cash. The VAT payable primarily relates to a provision for VAT for prior periods
which has arisen following recent engagement with the Swiss tax authority on the application of the law.
Austria gaming duty
VAT payable
Customer rewards
Brokerage account payable
Bonuses payable to employees
Other payables
Total current portion of other payable
24.
PROVISIONS
As at December 31,
2017
$000’s
2016
$000’s
—
12,990
29,508
—
195
21
42,714
7,245
—
40,396
7,397
1,550
—
56,588
The provisions in the consolidated statements of financial position include, among other items, the provision for jackpots, which are repayable in accordance
with applicable terms and conditions, the provision for the then-outstanding deferred consideration primarily relating to the deferred payment for the Stars
Interactive Group Acquisition and the minimum revenue guarantee or EBITDA support agreement, as applicable, in connection with the sale of WagerLogic,
the Chartwell/Cryptologic Sale and the Innova Offering (see notes 4 and 12). The minimum revenue guarantee is a quarterly payment, which is not contingent
on future events.
48
Deferred Consideration
The purchase price for the Stars Interactive Group Acquisition included a deferred payment of $400 million payable on February 1, 2017. The fair value of
the deferred payment as at December 31, 2016 of $195.51 million was recorded in Provisions. The fair value measurement at December 31, 2016 was
calculated utilizing a discounted cash flow approach using a 6% discount rate and categorized as a Level 3 within the fair value hierarchy. A 1% change in the
discount rate would have impacted the value by $9.4 million. The Corporation paid the remaining balance of the deferred consideration in full during the year
ended December 31, 2017.
The carrying amounts and the movements in the provisions during the year ended December 31, 2017 and 2016 are as follows:
Balance at January 1, 2016
Adjustment to provision recognized
Payments
Accretion of discount
Gain on settlement of deferred consideration
Foreign exchange translation losses (gains)
Balance at December 31, 2016
Adjustment to provision recognized
Payments
Accretion of discount
Reclassification
Foreign exchange translation losses
Balance at December 31, 2017
Current portion at December 31, 2016
Non-current portion at December 31, 2016
Current portion at December 31, 2017
Non-current portion at December 31, 2017
Minimum
revenue
guarantee
$000’s
Other
$000’s
Total
$000’s
Player
bonuses
and jackpots
$000’s
2,688
13,885
(15,013)
—
—
11
1,571
48,146
(44,121)
—
(1,444)
113
4,265
Deferred
consideration
(*)
$000’s
382,728
—
(200,000)
22,277
(2,466)
(24)
202,515
(815)
(197,510)
2,048
—
62
6,300
19,395
5,762
(8,998)
1,095
—
382
17,636
(121)
(9,311)
839
—
1,075
10,118
1,087
4,613
(5,700)
—
—
—
—
—
—
—
—
—
—
1,571
—
4,265
—
202,515
—
6,300
—
8,694
8,942
7,025
3,093
—
—
—
—
405,898
24,260
(229,711)
23,372
(2,466)
369
221,722
47,210
(250,942)
2,887
(1,444)
1,250
20,683
212,780
8,942
17,590
3,093
(*) Deferred consideration of $6.30 million as at December 31, 2017 was recognized on acquisition of Diamond Game and is contingent on future events.
The payout of player bonuses and jackpots are dependent on when a player decides to cash out his or her winnings or deposits or when a player hits a jackpot.
25.
CUSTOMER DEPOSITS
The Corporation holds customer deposits, along with winnings and any bonuses in trust accounts from which money may not be removed if it would result in
a shortfall of such deposits. These deposits are included in current assets in the consolidated statements of financial position under Cash - customer deposits
and Current investments – customer deposits and includes cash and short term, highly liquid investments. Customer deposits are segregated as follows:
Cash - customer deposits
Current investments - customer deposits
Total
Customer deposits liability
As at December 31,
2017
$000's
2016
$000's
227,098
122,668
349,766
349,766
138,225
228,510
366,735
366,735
Customer deposit liabilities relate to customer deposits which are held in multiple bank and investment accounts that are segregated from those holding
operational funds.
49
26.
SHARE CAPITAL
The authorized share capital of the Corporation consists of an unlimited number of Common Shares, with no par value, and an unlimited number of
convertible preferred shares (“Preferred Shares”), with no par value, issuable in series. As at December 31, 2017, 147,947,874 shares were issued and fully
paid (December 31, 2016 - 145,101,127).
Opening balance, as at January 1, 2016
Exercise of stock options
Exercise of warrants
Ending balance, as at December 31, 2016
Exercise of stock options and other equity awards
Repurchase of Common Shares
Ending balance, as at December 31, 2017
Common
Shares
Number
133,426,193
408,359
11,266,575
145,101,127
Preferred
Shares
Number
1,139,249
—
—
1,139,249
2,923,184
(76,437)
147,947,874
—
—
1,139,249
Common
Shares
$000’s
Preferred
Shares
$000’s
887,015
1,215
290,174
1,178,404
21,923
(493)
1,199,834
684,385
—
—
684,385
—
—
684,385
As at December 31, 2017, the Preferred Shares are convertible into 58,084,801 Common Shares (December 31, 2016 – 54,750,496). The Preferred Shares
rank senior to the Common Shares with respect to amounts payable in the event of its liquidation, dissolution or winding-up. The Preferred Shares are not
entitled to receive dividends and have no voting rights (or any related notice rights, including notice of shareholder meetings) except with respect to
amendments to the terms of the Preferred Shares or as otherwise required under applicable laws. Each Preferred Share is convertible at the holder’s option at
any time in whole or in part, initially into 41.67 Common Shares (the “Conversion Ratio”), based on an initial conversion price of CDN $24.00 per Common
Share (the “Initial Conversion Price”). The Conversion Ratio will be adjusted each February 1 and August 1 by multiplying the Conversion Ratio then in
effect immediately prior to such adjustment by 1.03.
The Corporation may give notice to holders of Preferred Shares to force conversion (in whole or in part under certain circumstances) if the following two
conditions are satisfied: (i) the closing share price of the Common Shares has been in excess of 175% of the Initial Conversion Price on any 20 trading days
within a 30 consecutive day period, and (ii) except in certain circumstances, the average daily volume on any 20 trading days within the 30 consecutive day
period referred to above was at least 1.75 million Common Shares. Any mandatory conversion will also be subject to specified regulatory and consent
conditions.
The Preferred Shares also contain anti-dilution Conversion Ratio adjustments for certain dividends or distributions (cash, shares or otherwise), share splits,
share combinations, below-market equity issuances, or rights, options or warrant issuances, tender offer or exchange offer payments, and reorganization
events. In addition, upon a “fundamental change”, additional Common Shares may be issuable to holders of Preferred Shares as a premium. Under the terms
of the Preferred Shares, for so long as each of GSO Capital Partners LP (“GSO”) and BlackRock Financial Management, Inc. (“BlackRock”) holds 50% or
more of the Preferred Shares issued to it on August 1, 2014, the Corporation undertakes:
•
•
•
•
•
•
not to incur indebtedness unless (i) the ratio of Consolidated Net Debt to LTM EBITDA (as each term is defined in the Corporation’s current
articles) would be 6.7 to 1 or less on a pro forma basis, or (ii) such indebtedness is Permitted Debt (as defined in the Corporation’s current
articles);
not to issue equity securities ranking equal or superior to the Preferred Shares;
not to make acquisitions that (i) individually exceed US$250.0 million, or (ii) since August 1, 2014, total US$500.0 million or more (subject
to specified ordinary course of business and consent exceptions);
(i) not to require a mandatory conversion of Preferred Shares if such mandatory conversion would require a regulatory filing or waiver for any
holder of Preferred Shares in excess of that required for an institutional investor waiver in the State of New Jersey, and (ii) to notify GSO and
BlackRock in writing at least 60 days prior to any action that will require a regulatory filing or waiver for any holder of Preferred Shares in
excess of that required for an institutional investor waiver in New Jersey;
to cooperate with holders of Preferred Shares in connection with anti-trust or competition filings relating to their investment in the
Corporation and/or conversion of Preferred Shares;
to maintain the listing of the Common Shares on the Nasdaq; and
50
•
to comply with the Corporation’s continuous disclosure requirements and provisions of the registration rights agreement to which it is a party.
If the Corporation fails to comply with these undertakings, the Conversion Ratio may be increased between a range of 2% and 6% per annum, depending on
which undertaking is breached, for each year in which the breach occurs.
During the year ended December 31, 2017:
•
•
the Corporation issued nil Common Shares as a result of the exercise of warrants.
the Corporation issued 2,899,184 Common Shares for cash consideration of $16.63 million as a result of the exercise of stock options and other
equity awards. The exercised stock options and other equity awards were initially valued at $5.26 million using the Black-Scholes valuation
model. Upon the exercise of stock options and other equity awards, the value originally allocated to the stock options and other equity awards
in reserves was reallocated to the Common Shares so issued.
During the year ended December 31, 2016:
•
•
the Corporation issued 11,266,575 Common Shares for cash consideration of $1.29 million as a result of the exercise of warrants. The exercised
warrants were initially valued at $288.98 million using the Black-Scholes valuation model. Upon the exercise of the warrants, the value
originally allocated to the warrants in reserves was reallocated to the Common Shares so issued.
the Corporation issued 408,359 Common Shares for cash consideration of $921,000 as a result of the exercise of stock options. The exercised
stock options were valued at $294,000 using the Black-Scholes valuation model. Upon the exercise of the stock options, the value originally
allocated to the stock options in reserves was reallocated to the Common Shares so issued.
27.
RESERVES
The following table highlights the classes of reserves included in the Corporation’s equity:
Balance – January 1,
2016
Cumulative translation
adjustments
Stock-based
compensation
Exercise of warrants
Exercise of stock options
Realized gains (losses)
Unrealized (losses) gains
Balance – December 31,
2016
Cumulative translation
adjustments
Stock-based
compensation
Exercise of equity awards
Realized (losses) gains
Unrealized gains (losses)
Reclassification (see
below)
Deferred Tax on stock-
based compensation
Other
Balance – December 31,
2017
Warrants
$000’s
Equity
awards
$000’s
Treasury
shares
$000’s
Cumulative
translation
adjustments
$000’s
Available-for-
Derivatives
sale investments
$000’s
$000’s
Other
$000’s
Total
$000’s
303,620 21,147
(30,035)
54,202
(12,282)
(56,937)
1,249 280,964
—
—
— 10,289
(288,982)
—
—
—
—
(294)
—
—
—
—
—
—
—
—
22,969
—
—
—
—
—
—
—
—
—
4,394
(2,095)
—
— 22,969
—
— 10,289
—
—
(42,263)
50,865
— (288,982)
—
(294)
— (37,869)
— 48,770
14,638 31,142
(30,035)
77,171
(9,983)
(48,335)
1,249 35,847
—
—
—
(189,012)
— 10,622
—
—
—
(5,258)
—
—
50
—
—
359
—
—
—
—
—
—
—
—
493
—
—
—
— (189,012)
—
— 10,622
—
(37,090)
32,474
—
160,069
(151,311)
—
(5,258)
— 122,979
— (118,837)
—
—
—
—
(8,868)
9,197
—
(379)
—
—
—
—
—
—
—
5,594
(5,127)
359
960
14,688 36,865
(29,542)
(120,709)
(5,402)
(33,983)
(4,257) (142,340)
51
During the year ended December 31, 2017, the principal reclassification made by the Corporation was $9.19 million from the Cumulative translation
adjustments reserves to the “available-for-sale investments” reserve to correct an error in the recording of the change in valuation of the available-for-sale
investments as at December 31, 2015. The reclassification in the period does not impact the Corporation’s net assets as at December 31, 2015, December 31,
2016 or December 31, 2017 or Net earnings for the years ending December 31, 2015, December 31, 2016 or December 31, 2017. There was also no impact to
Total comprehensive income as reported for the year ending December 31, 2015. For the year ending December 31, 2015, the loss in fair value reported in the
available-for-sale investments in Other comprehensive income of $17.02 million was overstated by $9.19 million and the unrealized foreign currency
translation gain from continuing operations reported as $81.58 million was overstated by $9.19 million.
Treasury Shares
Chartwell acquisition “sunset” clause
The Corporation cancelled 76,437 common shares related to the acquisition of Chartwell in 2011 that were unclaimed and surrendered to the Corporation. These
securities were cancelled due to the expiration of the “sunset” provisions set forth in the arrangement agreement for the purchase, which provided for the
cancellation of a right of the holder to receive cash consideration, for any certificates formerly representing Chartwell shares that were not deposited with all
other documents as required by the applicable plan arrangement on or before the fourth anniversary of the date of purchase. The difference between the
aggregate purchase price and the book value of the reclaimed shares was accounted for in the Treasury shares account in Reserves within Equity during the
first quarter of 2017.
Share repurchase under 2015 Normal Course Issuer Bid (“NCIB”)
On February 13, 2015, the TSX approved the Corporation’s 2015 NCIB to purchase for cancellation up to 6,644,737 common shares, representing
approximately 5% of the Corporation’s issued and outstanding common shares as of January 26, 2015. The Corporation purchased and cancelled an aggregate
of 1,455,300 common shares pursuant to the 2015 NCIB for an aggregate purchase price of approximately CDN $45.5 million. The 2015 NCIB terminated on
February 17, 2016.
Cumulative Translation Adjustments
Exchange differences relating to the translation of the net assets of the Corporation’s foreign operations from their functional currency into the Corporation’s
presentational currency are recognized directly in the Cumulative translation adjustment reserve.
Available-for-sale Investments
This reserve recognizes the realized and unrealized gain and loss movements in the available-for-sale investments that are held by the Corporation. See note
28.
Derivatives
This reserve recognizes the realized and unrealized gain and loss movements in the hedge instruments held by the Corporation. See note 28.
Stock Options
See note 2 for details on Stock Options.
The following table provides information about outstanding stock options issued under the Plans:
Beginning balance
Transactions during the period:
Issued
Exercised
Forfeited
Ending balance
As at December 31, 2017
As at December 31, 2016
Number of
options
10,358,475
202,000
(2,899,184)
(785,675)
6,875,616
Weighted
average
exercise
price CDN $
20.54
18.30
7.47
27.56
25.24
Number of
options
12,000,819
65,000
(408,359)
(1,298,985)
10,358,475
Weighted
average
exercise
price CDN $
20.69
20.35
3.01
27.45
20.54
52
During the year ended December 31, 2017, the Corporation granted an aggregate of 202,000 stock options under the Plans.
The outstanding stock options issued under the Plans are exercisable at prices ranging from CDN$2.85 to CDN$35.30 per share and have a weighted average
contractual term of 4.08 years.
The weighted average share price of options exercised during the year ended December 31, 2017 was CDN$7.47 (December 31, 2016 – CDN$3.01).
A summary of exercisable options per stock option grant under the Plans is as follows:
Exercise prices CDN $
2.85 to 7.95
8.43 to 35.30
16.00 to 18.30
Outstanding options
Exercisable options
Weighted
average
outstanding
maturity
period
(years)
0 to 3
3 to 5
5 to 7
4.08
Number of
options
402,066
6,245,050
228,500
6,875,616
Number of
options
402,066
3,986,875
10,000
4,398,941
Exercise
price
CDN $
2.85 to 7.95
18.48 to 35.30
16
25.16
The Corporation recorded a compensation expense for the year ended December 31, 2017 of $10.6 million (December 31, 2016 – $10.29 million). As at
December 31, 2017, the Corporation had $4.3 million of compensation expense related to the issuance of stock options to be recorded in future periods.
The stock options issued during the years ended December 31, 2017 and 2016 were accounted for at their grant date fair value of $579,000 and $209,000,
respectively, as determined by the Black-Scholes valuation model using the following weighted-average assumptions:
Expected volatility
Expected life
Expected forfeiture rate
Risk-free interest rate
Dividend yield
Weighted average share price
Weighted average fair value of options at grant date
2017
55%
4.75 years
17%
1.02%
Nil
CDN $18.30
CDN $4.46
2016
54%
4.75 years
17%
1.07%
Nil
CDN $20.35
CDN $4.31
The expected life of the options is estimated using the average of the vesting period and the contractual life of the options. The expected volatility is estimated
based on the Corporation’s public trading history on the TSX for the last 4.75 years. Expected forfeiture rate is estimated based on a combination of historical
forfeiture rates and expected turnover rates.
RSUs
The following table provides information about outstanding RSUs issued by the Corporation under the 2015 Equity Incentive Plan. See note 2 for details on
RSUs.
Balance as at January 1, 2017
Issued
Exercised
Forfeited
Balance as at December 31, 2017
53
2017
No. of units
Weighted Average Exercise Price
—
$22.41
$21.80
—
—
153,064
(12,000)
—
141,064
PSUs
The following table provides information about outstanding PSUs issued and potential additional PSUs issuable by the Corporation under the 2015 Equity
Incentive Plan. See note 2 for details on PSUs.
Balance as at January 1, 2017
Issued
Exercised
Forfeited
Balance as at December 31, 2017
RSs
2017
No. of units
Weighted Average Exercise Price
—
$22.47
—
—
—
282,036
—
—
282,036
The following table provides information about outstanding RSs issued by the Corporation under the 2015 Equity Incentive Plan. See note 2 for details on
RSs.
Balance as at January 1, 2017
Issued
Exercised
Forfeited
Balance as at December 31, 2017
DSUs
2017
No. of units
—
Weighted Average Exercise Price
—
$21.80
$21.80
—
12,000
(12,000)
—
—
The following table provides information about outstanding DSUs issued by the Corporation under the 2015 Equity Incentive Plan. See note 2 for details on
DSUs.
Balance as at January 1, 2017
Issued
Exercised
Forfeited
Balance as at December 31, 2017
Dividend Equivalents
During the year ended December 31, 2017, no dividends were declared.
Warrants
The following table provides information about outstanding warrants at December 31, 2017 and 2016:
2017
No. of units
Weighted Average Exercise Price
—
$15.26
—
—
—
92,703
—
—
92,703
Beginning balance
Issued
Exercised
Expired
Ending balance
As at December 31, 2017
As at December 31, 2016
Number of
warrants
4,000,000
—
—
—
4,000,000
Weighted
average
exercise
price CDN $
19.17
—
—
—
19.17
Number of
warrants
15,274,584
—
(11,273,902)
(682)
4,000,000
Weighted
average
exercise
price CDN $
5.14
—
0.16
6.25
19.17
54
The following table provides information about outstanding warrants per particular warrant grant:
Grant date
May 15, 2014
Expiry date
May 15, 2024
Number of
warrants
4,000,000
4,000,000
Exercise price CDN $
19.17
19.17
The warrants issued in 2014 were accounted for at their grant date fair value, as determined by the Black-Scholes valuation model using the following
weighted-average assumptions:
Expected volatility
Expected life
Expected forfeiture rate
Risk-free interest rate
Dividend yield
Weighted average fair value of warrants at grant date
28.
FAIR VALUE
2014
60%
10 years
0%
1.17%
Nil
CDN $28.64
The Corporation determined that the carrying values of its short-term financial assets and liabilities approximate their fair value because of the relatively short
periods to maturity of these instruments and low risk of credit.
Certain of the Corporation’s financial assets and liabilities are measured at fair value at the end of each reporting period. The following table provides
information about how the fair values of these financial assets and liabilities are determined as at each of December 31, 2017 and December 31, 2016:
Funds - Available-for-sale
Bonds - Available-for-sale
Equity in private companies - Available-for-sale
Equity in quoted companies - Available-for-sale
Total available-for-sale
Derivatives
Total financial assets
Derivatives
Total financial liabilities
Fair value &
carrying
value
$000’s
7,045
115,343
6,981
281
129,650
2,037
131,687
111,762
111,762
As at December 31, 2017
Level 1
$000’s
Level 2
$000’s
Level 3
$000’s
7,045
115,343
—
281
122,669
—
122,669
—
—
—
—
—
2,037
2,037
—
—
111,762
111,762
—
—
6,981
—
6,981
—
6,981
—
—
55
Funds - Available-for-sale
Bonds - Available-for-sale
Equity in private companies - Available-for-sale
Equity in quoted companies - Available-for-sale
Total available-for-sale
Equity in quoted companies - Fair value through profit/loss
Debentures - Fair value through profit/loss
Total fair value through profit/loss
Derivatives
Total financial assets
Derivatives
Provisions
Total financial liabilities
Fair value &
carrying
value
$000’s
As at December 31, 2016
Level 1
$000’s
Level 2
$000’s
Level 3
$000’s
58,518
98,605
6,921
115,480
279,524
8,328
7,556
15,884
52,038
347,446
10,516
195,506
206,022
58,518
98,605
—
115,480
272,603
—
—
—
—
272,603
—
—
—
—
—
—
7,556
7,556
52,038
59,594
—
—
6,921
—
6,921
8,328
—
8,328
—
15,249
—
—
—
4,922
—
4,922
5,594
195,506
201,100
Refer to note 31 for details on credit risk for the above financial assets.
The fair values of other financial assets and liabilities measured at amortized cost on the consolidated statements of financial position as at each of December
31, 2017, and December 31, 2016 are as follows:
As at December 31, 2017
First Lien Term Loans
USD Second Lien Term Loan
Total financial liabilities
Promissory note
Total financial assets
First Lien Term Loans
USD Second Lien Term Loan
Total financial liabilities
Fair value
Level 1
$000’s
2,370,335
95,713
2,466,048
$000’s
2,370,335
95,713
2,466,048
Level 2
$000’s
Level 3
$000’s
As at December 31, 2016
Fair value
$000’s
Level 1
$000’s
Level 2
$000’s
4,827
4,827
—
—
2,336,792
209,870
2,546,662
2,336,792
209,870
2,546,662
—
—
—
—
—
—
—
—
—
—
—
Level 3
$000’s
4,827
4,827
—
—
—
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When measuring the fair value of an asset or a liability, the Corporation uses market observable data to the extent possible. If the fair value
of an asset or a liability is not directly observable, it is estimated by the Corporation using valuation techniques that maximize the use of relevant observable
inputs and minimize the use of unobservable inputs (e.g., by the use of the market comparable approach that reflects recent transaction prices for similar
items, discounted cash flow analysis, or option pricing models refined to reflect the Corporation’s specific circumstances). Inputs used are consistent with the
characteristics of the asset or liability that market participants would take into account.
56
For the Corporation’s financial instruments which are recognized in the consolidated statements of financial position at fair value, the fair value
measurements are categorized based on the lowest level input that is significant to the fair value measurement in its entirety and the degree to which the
inputs are observable. The significance levels are classified as follows in the fair value hierarchy:
•
•
•
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly;
and
Level 3 – Inputs for the asset or liability that are not based on observable market data.
Transfers between levels of the fair value hierarchy are recognized by the Corporation at the end of the reporting period during which the transfer occurred as
part of its periodic review of fair values. There were transfers out of Level 3 and into Level 2 during Q3 2017 in respect of the NYX Sub Preferred Shares
(see Level 3 fair value table below). Following this transfer, the Corporation sold the NYX Sub Preferred Shares as part of its disposition of all its NYX
Gaming Group investments to Scientific Games during the year ended December 31, 2017 (note 7).
Valuation of Level 2 fair values
Derivative Financial Instruments
Currently, the Corporation uses cross currency swap and interest rate swap agreements to manage its interest rate and foreign currency risk and foreign
currency forward and option contracts to manage foreign currency risk. The valuation of these instruments is determined using widely accepted valuation
techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the
derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, spot and forward rates, as well as option
volatility.
To comply with the provisions of IFRS 13, Fair value measurement, the Corporation incorporates credit valuation adjustments to appropriately reflect both its
own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of its derivative
contracts for the effect of non-performance risk, the Corporation has considered the impact of netting and any applicable credit enhancements, such as
collateral postings, thresholds, mutual puts, and guarantees.
Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 (excluding, as at December 31, 2016,
the put option in relation to Stars Fantasy) of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2017 and
December 31, 2016, the Corporation has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative
positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation has
determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The put option in relation to Stars Fantasy,
previously classified as Level 3 in the fair value hierarchy, was settled during the year end December 31, 2017.
NYX Sub Preferred Shares
The Corporation changed its valuation methodology for the NYX Sub Preferred Shares from a binomial valuation approach to a net present value approach
using a discount rate of 2.3%, during the period ended September 30, 2017, based on the offer price from Scientific Games. Prior to this the investment was
classified as a Level 3 financial asset (2016: Level 3 financial asset). The Corporation disposed of all its investments in NYX Gaming Group during the
period ended December 31, 2017 (see note 13).
57
Reconciliation of Level 3 fair values
Some of the Corporation’s financial assets and liabilities are classified as Level 3 of the fair value hierarchy because the respective fair value determinations
use inputs that are not based on observable market data. As at December 31, 2016 and December 31, 2017, for each Level 3 asset or liability the valuation
techniques and key inputs used by the Corporation were as follows:
-
-
-
-
-
-
Equity in private companies (Level 3 Asset): Given the nature of the investee’s business, there is no readily available market data to carry an
extensive valuation. The Corporation assesses for impairment on an annual basis using latest management budgets, long-term revenue growth rates
and pre-tax operating margins.
Promissory note (Level 3 Promissory note): The Corporation received the full balance of the Promissory note during the year ended December 31,
2017 (2016 – 11.3% discount rate).
Deferred consideration (Level 3 Liability): The Corporation paid the remaining balance of the deferred consideration for the Stars Interactive
Group Acquisition in full during the year ended December 31, 2017. See also note 24.
Stars Fantasy put option (Level 3 Liability): The option was exercised during the year ended December 31, 2017. See also note 21.
Innova EBITDA support agreement (Level 3 Liability): As previously disclosed, in connection with the Innova Offering, the Corporation entered
into an EBITDA support agreement with Innova. The Corporation uses a net present value approach for the Innova EBITDA support agreement
using a 5.7% discount rate (2016 – 5.7% discount rate). The higher the discount rate, the lower the fair value. If the discount rate was 3.9%
higher/lower while all other variables were held constant, the carrying amount would decrease/increase by CDN$0.1 million. See also note 24.
Licensing Agreement (Level 3 Liability): As previously disclosed, in connection with the Chartwell/Cryptologic Sale, a subsidiary of the
Corporation entered into the Licensing Agreement. The Corporation uses a net present value approach for the Licensing Agreement using a 5.7%
discount rate, 9% revenue share percentage and long-term revenue forecast (2016 – 5.7% and 9% respectively). The higher the discount rate, the
lower the fair value. If the discount rate was 3.9% higher/lower while all other variables were held constant, the carrying amount would
decrease/increase by CDN$0.15 million. See also note 13.
The following table shows a reconciliation from opening balances to the closing balances for Level 3 fair values:
Balance – January 1, 2016
Loss included in gain (loss) from investments
Interest and accretion included in income from investments and financial expenses
Purchases
Sales
Reclassification
Conversion of Level 3 instruments
Loss on settlement
Unrealized gain included in other comprehensive income
Balance – December 31, 2016
Gain included in income from investments
Interest accretion included in financial expenses
Gain on settlement
Settlement of promissory note
Unrealized gain included in other comprehensive income
NYX Sub Preferred Shares transfer out of Level 3 (see notes above)
Balance – December 31, 2017
58
Level 3 Asset
Level 3 Promissory note
$000’s
$000’s
27,679
(14,124)
—
11,754
(2,566)
501
(8,377)
—
382
15,249
(398)
—
—
—
656
(8,526)
6,981
7,700
—
888
—
—
—
—
(3,761)
—
4,827
—
256
3,001
(8,084)
—
—
—
Balance – January 1, 2016
Accretion
Repayment of deferred consideration
Gain on settlement of deferred consideration
Balance – December 31, 2016
Accretion
Repayment of deferred consideration
Gain on settlement of deferred consideration
Settlement of put liability
Balance – December 31, 2017
29.
STATEMENT OF CASH-FLOWS
Changes in non-cash operating elements of working capital
Accounts receivable
Prepaid expenses
Accounts payable and accrued liabilities
Provisions
Other
Total
Changes in liabilities arising from financing activities
Level 3 Liability
$000’s
380,680
22,887
(200,000)
(2,467)
201,100
2,048
(197,510)
(44)
(5,594)
—
Year Ended December 31,
2017
$000’s
2016
$000’s
(6,708)
(6,243)
6,931
2,666
(447)
(3,801)
(15,262)
5,065
(26,349)
4,174
353
(32,019)
The table below details changes in the Corporation’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising
from financing activities are those which cash flows were, or future cash flows will be, classified in the Corporation’s consolidated statement of cash flows as
net cash flows from financing activities.
January 1, 2017
Financing cash flows
$000’s
$000’s
7,397
195,506
2,428,579
2,631,482
(7,602)
(197,510)
(144,632)
(349,744)
The effect of changes
in foreign exchange
rates
$000’s
205
—
56,371
56,576
Other changes
December 31, 2017
$000’s
$000’s
—
2,004
18,252
20,256
—
—
2,358,570
2,358,570
Settlement of margin
Deferred Consideration
Long-term debt
Balance – December 31, 2017
30.
CONTINGENT LIABILITIES
As part of management’s ongoing regulatory compliance and operational risk assessment process, management monitors legal and regulatory developments
and proceedings, and their potential impact on the business.
Kentucky
In particular, prior to the Stars Interactive Group Acquisition, the Commonwealth of Kentucky, ex. rel. J. Michael Brown, Secretary of the Justice and Public
Safety Cabinet, filed a legal proceeding against Oldford Group and certain affiliates thereof (the “Oldford Parties”) and various other defendants (the
“Kentucky Proceeding”), pursuant to which the Commonwealth sought to recover alleged gambling losses on behalf of Kentucky residents who played real-
money poker on the PokerStars website during the period between October 12, 2006 and April 15, 2011. On August 12, 2015, the trial court in the Kentucky
Proceeding entered a default judgment against the Oldford Parties following certain alleged discovery failures, including by certain former owners of Oldford
Group., and partial summary judgment on liability in favor of the Commonwealth. On December 23, 2015, the trial court entered an order for
59
damages in the amount of approximately $290 million, which the trial court trebled to approximately $870 million. The Corporation believes the action is
frivolous and will vigorously dispute the liability and therefore no provision has been recorded regarding this matter. The Corporation, through certain
subsidiaries, has filed a notice of appeal to the Kentucky Court of Appeals and posted a $100 million supersedeas bond to stay enforcement of the order for
damages during the pendency of the appeals process, which the Corporation continues to pursue. The posting of the bond required the delivery of cash
collateral in the amount of $40 million and letters of credit in the aggregate amount of $30 million Kentucky Bond Collateral, thereby reducing the
availability under the Credit Facility to $70 million as of the date hereof. To the extent the Oldford Parties may be ultimately obligated to pay any amounts
pursuant to a final adjudication following exhaustion of all appeals and other legal options, the Corporation intends to seek recovery against the former
owners of Oldford Group Ltd. There can be no assurance that the Corporation will be successful in its defense or that any such amounts will be recovered or
reimbursed by the former owners of the Oldford Group or otherwise.
In addition, there are also two currently pending class action complaints (one in the State of New Jersey, United States and one in Quebec, Canada) against
the Corporation and certain other defendants, each of which were filed during the year ended December 31, 2016 and generally allege, among other things,
that the Corporation violated certain securities laws by misrepresenting or failing to disclose information related to the charges made by the Autorité des
marchés financiers against the former Chief Executive Officer (the Quebec class action also alleges that the Corporation did not properly disclose that it had
inadequate or ineffective internal controls and that one or more of its directors and its former Chief Executive Officer were in breach of its Code of Business
Conduct). The class actions seek damages stemming from losses that the plaintiffs claim to have suffered as a result of the foregoing. The Corporation
believes that the class actions are without merit and intends to vigorously defend itself against them; however, there can be no assurance that the Corporation
will be successful in its defense. No provision has been recorded regarding these matters.
Given the nature of the legal and regulatory landscape of the industry in which it operates, from time to time the Corporation has also received notices,
communications and legal actions from regulatory authorities in various jurisdictions and other parties in respect of its activities. The Corporation has taken
legal advice as to the manner in which it should respond and the likelihood of success of such actions. Based on this advice and the nature of the actions, no
provisions have been recorded with respect to any such legal or regulatory notices, communications or actions for the year ended December 31, 2017.
31.
FINANCIAL INSTRUMENTS
Foreign Exchange Risk
As at December 31, 2017, the Corporation’s significant foreign exchange currency exposure on its financial instruments by currency was as follows (in U.S.
dollar equivalents):
Cash
Restricted cash
Available-for-sale investments
Accounts receivable
Derivatives
Accounts payable and accrued liabilities
Other payables
Long-term debt
Derivatives
Customer deposits
CDN
$000’s
EUR
$000’s
GBP
$000’s
12,735
—
—
8,519
6
(12,247)
(21)
—
—
(1,984)
94,674
925
7,460
48,207
(176)
(37,126)
(8,192)
(445,322)
(111,762)
(75,416)
6,655
—
—
9,594
2,308
(24,816)
—
—
—
(6,360)
The table below details the effect on earnings before tax of a 10% strengthening or weakening of the USD exchange rate at the balance sheet date for balance
sheet items denominated in CDN, EUR and GBP:
Currency
CDN
EUR
GBP
60
10% Strengthening
(weakening)
$000’s
701
(52,673)
(1,262)
The table below details the effect on equity of a 10% strengthening or weakening of the EUR:USD exchange rate on the cross currency interest rate swaps
that hedge the USD First Lien Term Loan. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and
represents management’s assessment of the reasonably possible change in foreign exchange rates.
EUR:USD exchange rate
Interest Rate Risk
Equity
$000's
- 10%
Equity
$000's
+ 10%
(121,958)
110,871
The Corporation’s exposure to changes in interest rates (particularly, fluctuations in LIBOR) relates primarily to interest paid on the Corporation’s long-term
indebtedness, as well as the interest earned on and market value of its cash and available-for-sale investments. The Corporation is also exposed to fair value
interest rate risk with respect to its USD First Lien Term Loan, which it attempts to mitigate by hedging through the Swap Agreements that fix the interest
rate on the same. The Corporation is also exposed to cash flow interest rate risk on the unhedged elements of the USD First Lien Term Loan, the EUR First
Lien Term Loan and the USD Second Lien Term Loan which bear interest at variable rates.
The table below details the effect on earnings before tax of a 100 basis points strengthening or weakening of the LIBOR and EURIBOR interest rates on these
loans. 100 basis points sensitivity is the sensitivity rate used when reporting interest rate risk internally to key management personnel and represents
management’s assessment of the reasonably possible change in interest rates:
LIBOR
EURIBOR
Net earnings (loss)
$000's
- 100 bps
+ 100 bps
1,751
—
(9,200)
(3,388)
The USD First Lien Term Loan and the USD Second Lien Term Loan each have a floor of 1.00% for the LIBOR and as such, the interest rate cannot decrease
below 4.50% and 8.00% respectively. The EUR First Lien Term Loan has a floor of 0% for the EURIBOR and as such, the interest rate cannot decrease
below 3.75%. Management monitors movements in the interest rates by reviewing the EURIBOR and LIBOR on a quarterly basis.
The table below details the effect on equity of a 100 basis points strengthening or weakening of the LIBOR and EURIBOR interest rates on the valuations of
the cross currency swaps that hedge the USD First Lien Term Loan. 100 basis points is the sensitivity rate used when reporting interest rate risk internally to
key management personnel and represents management’s assessment of the reasonably possible change in interest rates:
LIBOR
EURIBOR
Credit Risk
Equity
$000's
- 100 bps
+ 100 bps
18,665
(5,778)
(18,256)
3,480
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Corporation. The Corporation has
adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of
financial loss from defaults. The Corporation’s policy is to transact wherever possible with investment grade counterparties. This information is supplied by
independent rating agencies where available, and if not available, the Corporation uses other publicly available financial information and its own trading
records to rate its major customers. The Corporation’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value
of transactions concluded is spread amongst approved counterparties. Credit exposure is managed by the Corporation’s treasury and finance groups in
accordance with the Corporation’s treasury investment policy, which was approved by the Corporation’s Audit Committee.
Trade receivables consist of a large number of customers, spread across geographical areas. Ongoing credit evaluation is performed on the financial condition
of accounts receivable.
61
The Stars Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics.
The Stars Group defines counterparties as having similar characteristics if they are related entities.
The credit risk on banks, available-for-sale investments and derivative financial instruments is limited because the counterparties are banks with high credit-
ratings assigned by international credit-rating agencies. The Corporation’s treasury investment policy and related strategy is focused on the preservation of
capital and supporting its liquidity requirements, not on generating trading profits.
Trade receivables include amounts that are past due at the end of the reporting period for which the Corporation has not recognized an allowance for doubtful
debts because there has not been a significant change in credit quality and the amounts are still considered recoverable.
Age of receivables that are past due but not impaired:
Past due less than 181 days
Past due more than 181 days
Total
The allowance for doubtful accounts is $166,000 as at December 31, 2017 (December 31, 2016 – $309,000).
Age of impaired trade receivables:
Past due less than 181 days
Past due more than 181 days
Total past due
Liquidity Risk
As at December 31,
2017
$000’s
2016
$000’s
1,707
879
2,586
As at December 31,
2017
$000’s
2016
$000’s
—
166
166
217
163
380
—
309
309
Liquidity risk is the Corporation’s ability to meet its financial obligations when they come due. The Corporation is exposed to liquidity risk with respect to its
contractual obligations and financial liabilities. The Corporation manages liquidity risk by continuously monitoring forecasted and actual cash flows and
matching maturity profiles of financial assets and liabilities. The Corporation’s objective is to maintain a balance between continuity of funding and flexibility
through borrowing facilities available through the Corporation’s banks and other lenders. The Corporation’s policy is to seek to ensure adequate funding is
available from operations, established lending facilities and other sources, including the debt and equity capital markets, as required.
The Corporation’s principal sources of liquidity are its cash generated from operations and certain other currently available funds. Currently available funds
consist primarily of cash on deposit with banks and available-for-sale investments, which are comprised primarily of certain highly liquid, short-term
investments, including debt securities and funds. Generally, following the Stars Interactive Group Acquisition, the Corporation’s working capital needs are
minimal over the year as the gaming business requires customers to deposit funds prior to playing or participating in its real-money product offerings. The
Corporation believes that such deposits are typically converted to revenue efficiently and on a timely basis such that operating expenditures are sufficiently
covered. Management is also of the opinion that investing is a key element necessary for the continued growth of the Corporation’s customer base and the
future development of new and innovative products and services. Based on the Corporation’s currently available funds, funds available from the Credit
Facility and its ability to access the debt and equity capital markets, if necessary, management believes that the Corporation will have the cash resources
necessary to satisfy current obligations and working capital needs, and fund currently planned development activities and other capital expenditures for at
least the next 12 months. Notwithstanding, as a result of, among other things, the state of capital markets and the Corporation’s ability to access them on
favorable terms, if at all, micro and macro-economic downturns, and contractions of the Corporation’s operations may influence its ability to liquidate its
available-for-sale investments or otherwise secure the capital resources required to satisfy current or future obligations (including, without limitation, those
set forth below) and fund future projects, strategic initiatives and support growth.
Customer deposit liabilities relate to customer deposits which are held in multiple bank accounts and highly liquid investments which are segregated from
those holding operational funds. These deposits are included in current assets in the consolidated statements of financial position under Cash and cash
equivalents – customer deposits and Current investments – customer deposits (see note 25).
62
The following table provides information about the terms of the Corporation’s financial obligations and liabilities:
Accounts payable and accrued liabilities
Other payables
Customer deposits
Derivatives
Provisions
Long-term debt*
Total
* Includes principal and interest
32.
RELATED PARTY TRANSACTIONS
On
demand
$000’s
Less than 1
year
$000’s
101,169
42,498
349,766
—
—
—
493,433
48,496
216
—
—
17,590
150,026
216,328
2 to 5
years
$000’s
1,808
—
—
111,762
3,093
2,752,467
2,869,130
Greater than
5 years
$000’s
—
—
—
—
—
—
—
Key management of the Corporation includes the members of the Board, the Chief Executive Officer, Chief Financial Officer, Chief Technology Officer,
Executive Vice-President and Chief Legal Officer, and certain other key members, which include certain members of management of the Corporation’s
subsidiaries.
The compensation of such key management for the years ended December 31, 2017 and 2016 included the following:
Salaries, bonuses and short-term employee benefits
Director retainers
Stock-based payments
Year Ended December 31,
2017
$000’s
2016
$000’s
4,514
729
3,799
9,042
5,559
1,316
2,245
9,120
The remuneration of the Chief Executive Officer, Chief Financial Officer, Chief Technology Officer, Chief Operating Officer, Chief Corporate Development
Officer, Executive Vice-President and Chief Legal Officer consists primarily of a salary, cash bonuses and share-based awards. Director retainers include both
retainers, committee fees and share-based awards.
33.
SUBSEQUENT EVENTS
As previously disclosed on February 27, 2018, to further diversify the Corporation’s business geographically and expand its online sports betting product
offerings, it acquired a 62% equity interest in CrownBet Holdings Pty Limited (“CrownBet”), an Australian-based online sportsbook, from Crown Resorts
Limited for an aggregate amount of $117.7 million using cash on its consolidated statement of financial position.
On March 6, 2018, the Corporation also entered into agreements to increase its equity interest in CrownBet from 62% to 80% and for CrownBet to acquire
William Hill Australia Holdings Pty Ltd, (“William Hill Australia”), an Australian-based online sportsbook. The aggregate purchase price for both
transactions will be approximately $315 million, of which $234 million will be payable in cash for William Hill Australia and the remainder will be payable
in approximately 3.1 million newly-issued Common Shares. The management team of CrownBet will be entitled to an additional payment of up to $182
million in 2020 subject to certain performance conditions and payable in cash, additional Common Shares or a combination thereof, at the Corporation’s
discretion. To finance the cash portion of the purchase price for the transactions, the Corporation obtained committed financing for a $325 million incremental
USD First Lien Term Loan. The Corporation currently expects the transactions to close in April 2018.
Under the transaction agreements, the Corporation is entitled to appoint a majority of the directors on the board of directors of CrownBet.
Due to the proximity of the Corporation’s acquisition of a majority equity interest in CrownBet and its entering into agreements to increase its equity interest
in CrownBet and for CrownBet to acquire William Hill Australia, to the approval of the Corporation’s consolidated financial statements for the year ended
December 31, 2017, it is not possible for the Corporation to complete the initial accounting for such transactions, including disclosure details of goodwill, fair
value of consideration (actual and contingent), assets and liabilities assumed, contingent liabilities recognized, transactions recognized separately, non-
controlling interests and the impact on the amounts reported in the statement of comprehensive income.
63
64
Exhibit 99.3
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED
DECEMBER 31, 2017
March 14, 2018
TABLE OF CONTENTS
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
LIMITATIONS OF KEY METRICS AND OTHER DATA
OVERVIEW AND OUTLOOK
KEY METRICS
SELECTED FINANCIAL INFORMATION
DISCUSSION OF OPERATIONS
SUMMARY OF QUARTERLY RESULTS
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS BY ACTIVITY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECENT ACCOUNTING PRONOUNCEMENTS
OFF BALANCE SHEET ARRANGEMENTS
OUTSTANDING SHARE DATA
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING
RISK FACTORS AND UNCERTAINTIES
FURTHER INFORMATION
1
2
3
4
6
11
14
22
23
28
30
31
33
33
34
34
36
37
MANAGEMENT’S DISCUSSION AND ANALYSIS
This Management’s Discussion and Analysis (this “MD&A”) provides a review of the results of operations, financial condition and cash flows for The Stars
Group Inc. (“The Stars Group” or the “Corporation”) on a consolidated basis, for the three months and year ended December 31, 2017. This document
should be read in conjunction with the information contained in the Corporation’s audited consolidated financial statements and related notes for the year
ended December 31, 2017 (the “2017 Annual Financial Statements”) and the Corporation’s annual information form for the year ended December 31, 2017
(the “2017 Annual Information Form” and together with this MD&A and the 2017 Annual Financial Statements, the “2017 Annual Reports”). These
documents and additional information regarding the business of the Corporation are available on the System for Electronic Document Analysis and Retrieval
(“SEDAR”) at www.sedar.com, the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) at www.sec.gov, and the Corporation’s website at
www.starsgroup.com.
For reporting purposes, the Corporation prepared the 2017 Annual Financial Statements in U.S. dollars and, unless otherwise indicated, in conformity with
International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The financial information
contained in this MD&A was derived from the 2017 Annual Financial Statements. Unless otherwise indicated, all dollar (“$”) and “USD” amounts and
references in this MD&A are in and to U.S. dollars, references to ‘‘EUR’’ or “€” are to European Euros, references to “GBP” are to Great Britain pounds
sterling and references to ‘‘CDN’’ or “CDN $” are to Canadian dollars. Unless otherwise indicated, all references to a specific “note” refer to the notes to
the 2017 Annual Financial Statements.
As at December 31, 2017, the Corporation had two major lines of operations within its online gaming business, real-money online poker (“Poker”) and real-
money online casino and sportsbook (“Casino & Sportsbook”). As it relates to these two product lines, online revenues include revenues generated through
the Corporation’s online, mobile and desktop client platforms.
This MD&A references non-IFRS and non-U.S. generally accepted accounting principles (“GAAP”) financial measures, including those under the headings
“Selected Financial Information” and “Key Metrics” below. The Corporation believes these non-IFRS and non-U.S. GAAP financial measures will provide
investors with useful supplemental information about the financial performance of its business, enable comparison of financial results between periods where
certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in
operating its business and making decisions. Although management believes these financial measures are important in evaluating the Corporation, they are
not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with IFRS or U.S.
GAAP. They are not recognized measures under IFRS or U.S. GAAP and do not have standardized meanings prescribed by IFRS or U.S. GAAP. These
measures may be different from non-IFRS and non-U.S. GAAP financial measures used by other companies, limiting its usefulness for comparison purposes.
Moreover, presentation of certain of these measures is provided for period-over-period comparison purposes, and investors should be cautioned that the effect
of the adjustments thereto provided herein have an actual effect on the Corporation’s operating results.
Unless otherwise stated, in preparing this MD&A the Corporation has considered information available to it up to March 14, 2018, the date the
Corporation’s board of directors (the “Board”) approved this MD&A and the 2017 Annual Reports.
1
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
The 2017 Annual Reports, including this MD&A, contain certain information that may constitute forward-looking information and statements (collectively,
“forward-looking statements”) within the meaning of the Private Securities Litigation Reform Act of 1995 and applicable securities laws, including financial
and operational expectations and projections. These statements, other than statements of historical fact, are based on management’s current expectations and
are subject to a number of risks, uncertainties, and assumptions, including market and economic conditions, business prospects or opportunities, future plans
and strategies, projections, technological developments, anticipated events and trends and regulatory changes that affect the Corporation, its subsidiaries and
their respective customers and industries. Although the Corporation and management believe the expectations reflected in such forward-looking statements
are reasonable and are based on reasonable assumptions and estimates as of the date hereof, there can be no assurance that these assumptions or estimates are
accurate or that any of these expectations will prove accurate. Forward-looking statements are inherently subject to significant business, regulatory, economic
and competitive risks, uncertainties and contingencies that could cause actual events to differ materially from those expressed or implied in such
statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”,
“expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “would”, “should”, “believe”, “objective”, “ongoing”,
“imply” or the negative of these words or other variations or synonyms of these words or comparable terminology and similar expressions.
Specific factors and assumptions include, without limitation, the following factors, which are discussed in greater detail in the “Risk Factors and
Uncertainties” section of the 2017 Annual Information Form: the heavily regulated industry in which the Corporation carries on its business; interactive
entertainment and online and mobile gaming generally; current and future laws or regulations and new interpretations of existing laws or regulations, or
potential prohibitions, with respect to interactive entertainment or online gaming or activities related to or necessary for the operation and offering of online
gaming; potential changes to the gaming regulatory framework; legal and regulatory requirements; ability to obtain, maintain and comply with all applicable
and required licenses, permits and certifications to offer, operate, and market its products and services, including difficulties or delays in the same; significant
barriers to entry; competition and the competitive environment within the Corporation’s addressable markets and industries; impact of inability to complete
future acquisitions or to integrate businesses successfully; risks associated with advancements in technology, including artificial intelligence; ability to
develop and enhance existing products and services and new commercially viable products and services; ability to mitigate foreign exchange and currency
risks; ability to mitigate tax risks and adverse tax consequences, including, without limitation, the imposition of new or additional taxes, such as value-added
(“VAT”) and point of consumption taxes, and gaming duties; risks of foreign operations generally; protection of proprietary technology and intellectual
property rights; ability to recruit and retain management and other qualified personnel, including key technical, sales and marketing personnel; defects in the
Corporation’s products or services; losses due to fraudulent activities; management of growth; contract awards; potential financial opportunities in
addressable markets and with respect to individual contracts; ability of technology infrastructure to meet applicable demand; systems, networks,
telecommunications or service disruptions or failures or cyber-attacks; regulations and laws that may be adopted with respect to the Internet and electronic
commerce or that may otherwise impact the Corporation in the jurisdictions where it is currently doing business or intends to do business, particularly those
related to online gaming or that could impact the ability to provide online gaming products and services, including, without limitation, as it relates to payment
processing; ability to obtain additional financing on reasonable terms or at all; refinancing risks; customer and operator preferences and changes in the
economy; dependency on customers’ acceptance of its products and services; consolidation within the gaming industry; litigation costs and outcomes;
expansion within existing and into new markets; relationships with vendors and distributors; and natural events. These factors are not intended to represent a
complete list of the factors that could affect the Corporation; however, these factors, as well as those risk factors presented under the heading “Risk Factors
and Uncertainties” in the 2017 Annual Information Form, elsewhere in this MD&A and the 2017 Annual Reports and in other filings that The Stars Group
has made and may make in the future with applicable securities authorities, should be considered carefully.
Shareholders and investors should not place undue reliance on forward-looking statements as the plans, assumptions, intentions or expectations upon which
they are based might not occur. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement. Unless
otherwise indicated by the Corporation, forward-looking statements in this MD&A describe the Corporation’s expectations as of March 14, 2018 and,
accordingly, are subject to change after such date. The Corporation does not undertake to update or revise any forward-looking statements, except in
accordance with applicable securities laws.
2
LIMITATIONS OF KEY METRICS AND OTHER DATA
The numbers for the Corporation’s key metrics, which include quarterly real-money active uniques (“QAUs”), quarterly net yield (“QNY”), and net deposits
(“Net Deposits”), as well as certain other metrics, are calculated using internal company data based on the activity of customer accounts. While these numbers
are based on what the Corporation believes to be reasonable judgments and estimates of its customer base for the applicable period of measurement, there are
certain challenges and limitations in measuring the usage of its products and services across its customer base. Such challenges and limitations may also
affect the Corporation’s understanding of certain details of its business. In addition, the Corporation’s key metrics and related estimates may differ from
estimates published by third parties or from similarly-titled metrics of its competitors due to differences in methodology and access to information. Moreover,
QNY is a non-IFRS measure. For important information on the Corporation’s non-IFRS measures, see the information presented in italics under the heading
“Management’s Discussion and Analysis” above and the information under “Key Metrics” and “Selected Financial Information—Other Financial
Information” below. The Corporation continually seeks to improve its estimates of its active customer base, and such estimates may change due to
improvements or changes in the Corporation’s methodology.
For example, the methodologies used to measure the Corporation’s customer metrics are based on significant internal judgments and estimates, and may be
susceptible to algorithm, calculation or other technical errors, including, without limitation, how certain metrics may be defined (and the assumptions and
considerations made and included in, or excluded from, such definitions). Moreover, the Corporation’s business intelligence tools may fail on a particular data
backup or upload, which could lead to certain customer activity not being properly recorded or accurately included, in the calculation of a particular key
metric, such as QAUs. In addition, as it relates to certain of the Corporation’s product and service offerings, customers are required to provide certain
information when registering and establishing real-money accounts, which could lead to the creation of multiple accounts for the same customer (in nearly all
instances such account creation would violate the Corporation’s applicable terms and conditions of use) and customers could take advantage of certain
customer acquisition incentives to register and interact with the Corporation’s products and services, but not actually deposit or transfer funds into their real-
money accounts with the Corporation. Although the Corporation typically addresses and corrects any such failures, duplications and inaccuracies relatively
quickly, its metrics are still susceptible to the same and its estimations of such metrics may be lower or higher than the actual numbers.
The Corporation regularly reviews its processes for calculating and defining these metrics, and from time to time it may discover inaccuracies in its metrics or
make adjustments to improve their accuracy that may result in the recalculation or replacement of historical metrics or introduction of new metrics. These
changes may also include adjustments to underlying data, such as changes to historical revenue amounts as a result of certain accounting reallocations made
in later periods and adjustments to definitions in an effort to provide what management believes may be the most helpful and relevant data. The Corporation
also continuously seeks to improve its ability to identify irregularities and inaccuracies (and suspend any customer accounts that violate its terms and
conditions of use and limit or eliminate promotional incentives that are susceptible to abuse), and its key metrics or estimates of key metrics may change due
to improvements or changes in its methodology. Additionally, all the Corporation’s metrics are subject to software bugs, inconsistencies in the Corporation’s
systems and human error. Notwithstanding, the Corporation believes that any such irregularities, inaccuracies or adjustments are immaterial unless otherwise
stated.
If the public or investors do not perceive the Corporation’s customer metrics to accurately represent its customer base, or if it discovers material inaccuracies
in its customer metrics, the Corporation may be subject to certain liability and its reputation may be harmed, which could negatively affect its business, results
of operations and financial condition.
3
Business Overview and Background
OVERVIEW AND OUTLOOK
The Stars Group is a leading provider of technology-based products and services in the global gaming and interactive entertainment industries. The Stars
Group’s gaming business is its primary business and source of revenue and currently consists of the operations of Stars Interactive Holdings (IOM) Limited
and its subsidiaries and affiliates (collectively, “Stars Interactive Group”), which it acquired in August 2014 (the “Stars Interactive Group Acquisition”), and
CrownBet Holdings Pty Limited and its subsidiaries and affiliates (“CrownBet”), in which it acquired a majority equity interest in February 2018.
Through its Stars Interactive Group division, which is based in the Isle of Man and operates globally, and CrownBet, which operates and is based in Australia,
The Stars Group owns and operates gaming and related interactive entertainment businesses, such as online (including desktop and mobile) real-money poker,
casino and sports betting (also known as sportsbook) and play-money poker and casino. The Corporation offers these products and services under several
ultimately owned brands, including, among others, PokerStars, PokerStars Casino, BetStars, Full Tilt, and the PokerStars Players No Limit Hold’em
Championship, European Poker Tour, PokerStars Caribbean Adventure, Latin American Poker Tour, Asia Pacific Poker Tour, PokerStars Festival, and
PokerStars MEGASTACK live poker tour and event brands. These brands together have millions of registered customers globally and collectively form the
largest poker business in the world, comprising online poker games and tournaments, sponsored live poker competitions, marketing arrangements for branded
poker rooms in popular casinos in major cities around the world, and poker programming and content created for television and online audiences. The Stars
Group currently estimates that PokerStars holds a significant majority of the market share of real-money poker player liquidity, or the volume of real-money
online poker players, in regions where it offers real-money online poker and is among the leaders in play-money online poker player liquidity. The Stars
Group also estimates that its combined online casino, including PokerStars Casino, is currently among the world’s largest and fastest growing and currently
has one of the largest active player bases among its competitors. The Stars Group also has an emerging sportsbook, BetStars, that is currently primarily
focused on regulated jurisdictions within the European Union and a majority equity interest in CrownBet, which currently operates in the regulated Australian
online sports betting market.
In addition to pursuing growth opportunities in poker in existing and new markets, including through the innovation of new product features and
enhancements, geographic expansion, improvements to the poker ecosystem (as discussed below), and increased marketing campaigns, The Stars Group
believes there are potentially significant opportunities for growth in the online casino and sportsbook verticals. The Stars Group believes that such potential
opportunities include the ability to leverage its brand and product recognition (particularly poker) to acquire new customers, including recreational customers,
and capitalize on network effects and cross-selling these new verticals to its existing and new customer base. The Stars Group continues to improve its online
casino and sportsbook product offerings, including through mobile applications and other enhancements, expanding its game and sports portfolios and
geographic reach, and launching external marketing campaigns. In addition to online casino and sportsbook, The Stars Group currently intends to expand
upon and explore other growth opportunities, including, without limitation, expanding upon its current social gaming offering, and pursuing other interactive
entertainment opportunities.
The Stars Group believes it has a premier, scalable platform that diversifies its products and services both geographically and across verticals and as such,
continuously works to enhance this proprietary platform. The Corporation has invested significantly in its technology infrastructure since inception to provide
a positive, best-in-class experience for its customers, not only from a gameplay perspective, but most importantly, with respect to security and integrity across
its product and service offerings. The Stars Group dedicates nearly all of its research and development investments to its online gaming business, which seeks
to provide broad market applications for products and services derived from its technology base, and expects to continue investing significantly in research
and development in an effort to constantly improve customer experience and engagement. To support its strong reputation for security and integrity, The Stars
Group employs what it believes to be industry‑leading practices and systems with respect to various aspects of its technology infrastructure, including, but not
limited to, information and payment security, game integrity, customer fund protection, marketing and promotion, customer support, responsible gaming, and
loyalty programs, rebates and rewards (i.e., incentives).
The Stars Group also monitors and assesses its products and services, including through advanced business intelligence analytics regarding customer
engagement and behavior, to continuously improve the experience for all
4
of its customers and to ensure a safe, competitive and enjoyable environment. This includes implementing policies and controls over the use of abusive
technological tools and software, assessing pricing and incentives, and introducing improvements to product ecosystems. In particular, The Stars Group has
implemented, and continues to implement, policies and controls to significantly reduce or eliminate the use of certain sophisticated technology that may
provide an artificial competitive advantage for certain customers over others. It has also made, and may continue to make, changes to its pricing and
incentives to ensure that they align with its objectives to reward customers for loyalty and behavior that is positive to the overall customer experience and the
particular product’s ecosystem. For example, since the beginning of 2016, The Stars Group has introduced certain improvements in the poker ecosystem to
benefit and attract high-value, net-depositing customers (primarily recreational players) and reduce incentives for high-volume, net-withdrawing customers,
and adjust the pricing on poker games and tournaments (also known as rake and tournament fees) on certain offerings (which resulted in an effective increase
in pricing). Most recently, the Corporation launched the Stars Rewards program in July 2017, which is an integrated cross vertical loyalty program focused on
improving customer engagement, retention and the player experience. The Stars Rewards program seeks to offer an exciting, personalized gaming experience
that rewards players for their overall gameplay across poker, casino and sportsbook, in each case where available. Stars Rewards gives players randomized
prizes based on a number of factors, including the time passed since the player made his or her first real-money deposit, volume of play, player impact on the
overall ecosystem, such as whether the player is a net-withdrawing versus net-depositing player, and product and game selection.
The Stars Group anticipates that these and future planned improvements, despite an expected overall decrease in volume of gameplay and total deposit
balances held by high-volume, net-withdrawing players, will create a more attractive environment and experience for recreational players, allowing them to
play longer on its platforms and engage in its various product offerings. The Stars Group believes these initiatives have led and may continue to lead to an
increase in Net Deposits. The Stars Group has been, among other things, reinvesting resulting savings and funds from the poker ecosystem improvements into
marketing, increased incentives for certain customers, bonuses and promotions, new poker products and services, research and development, and to help
offset costs in the business, including certain taxes, gaming duties and other costs related to promoting the regulation of online gaming in various
jurisdictions.
The Stars Group, through certain of its subsidiaries, is licensed or approved to offer, or offers under third-party licenses or approvals, its products and services
in various jurisdictions throughout the world, including in Europe, both within and outside of the European Union, North America and elsewhere. In
particular, PokerStars is the world’s most licensed online gaming brand, holding licenses or related operating approvals in 17 jurisdictions. The Stars Group
intends to seek licensure with respect to more European Union member states if and when such member states introduce their own independent regulatory and
licensing regimes compliant with European Union law. Outside of the European Union, The Stars Group anticipates there may be a potential for the
regulation of online gaming, including online poker, casino and/or sports betting, including with respect to shared liquidity, and that this may result in
potential licensing or partnerships with private operators in various jurisdictions. The Stars Group supports the regulation of online gaming, including
licensing and taxation regimes and pooled poker liquidity, which it believes will promote sustainable online gaming markets that are beneficial for consumers,
governments and the citizens of the regulating jurisdiction, operators and the gaming industry as a whole. The Stars Group expects to continue to invest
substantial resources into these efforts, particularly in markets that management believes may in the future have the greatest impact on its business. The Stars
Group strives to work with applicable governmental authorities to develop regulations that it expects would protect consumers, encourage responsible
gaming, ensure efficient taxation and promote regulated gameplay. The Stars Group also strives to be among the first licensed operators to obtain gaming
licenses and provide online gaming to customers in newly-regulated jurisdictions, in each case to the extent it would be in furtherance of The Stars Group’s
business goals and strategy and in compliance with its policies and procedures. See also “Regulatory Environment” in the 2017 Annual Information Form.
Notwithstanding, the online gaming industry is heavily regulated and failure by The Stars Group to obtain or maintain applicable licensure or approvals, or
otherwise comply with applicable requirements, restrictions and prohibitions, could, among other things, be disruptive to its business and adversely affect its
operations. The Stars Group may also be unable to capitalize on the expansion of online gaming or other trends and changes in the online gaming industry, in
part due to laws and regulations governing this industry. For example, new gaming or gaming-related laws or regulations, changes in existing gaming or
gaming-related laws or regulations, new interpretations of such laws or regulations or changes in the manner in which such laws and regulations are enforced,
may materially hinder or prevent The Stars Group from continuing to operate in those jurisdictions where it currently conducts business or where its
customers are located, which would harm its operating results and financial condition. For
5
additional risks and uncertainties related to regulation, see “Risk Factors and Uncertainties—Risks Related to Regulation” in the 2017 Annual Information
Form.
For additional information about The Stars Group, see the disclosure and discussion elsewhere in this MD&A and the 2017 Annual Reports. For additional
risks and uncertainties relating to, among other things, The Stars Group, its business, its customers, its regulatory and tax environment and the industries and
geographies in which it operates or where its customers are located, see “Risk Factors and Uncertainties” below and in the 2017 Annual Information Form, as
well as the risks and uncertainties contained elsewhere herein, the 2017 Annual Reports and in other filings that The Stars Group has made and may make in
the future with applicable securities authorities.
Recent Corporate Developments
Below is a general summary of certain recent corporate developments through the date hereof. For additional corporate developments and highlights, see the
2017 Annual Reports, the Corporation’s management’s discussion and analysis for the three and nine months ended September 30, 2017, and “Further
Information” below.
Nominee Agreement and Appointment of Board Observer
As previously disclosed, in January 2018 The Stars Group entered into an agreement with Mr. Tang Hao and his affiliated entity Discovery Key Investments
Limited, which based on publicly available information collectively hold approximately 17.9% of the outstanding common shares of The Stars Group
(“Common Shares”). In connection with that agreement, Mr. Melvin Zhang was appointed as an observer to the Board as a nominee of Mr. Tang. Mr. Zhang
will serve as an observer until such time as he and Mr. Tang have received certain licenses and approvals from certain of The Stars Group’s gaming regulatory
authorities, at which point Mr. Zhang will serve on the Board as a director. Also pursuant to the agreement, Mr. Tang is subject to certain restrictions on
director nominations and share ownership, including certain standstill restrictions with respect to acquiring greater than 20% of the outstanding Common
Shares. For additional information, see the 2017 Annual Information Form under the heading “Directors and Officers—Appointment of Observer to the
Board”.
CrownBet and William Hill Australia Holdings Pty Ltd.
As previously disclosed on February 27, 2018, the Corporation acquired a 62% equity interest in CrownBet from Crown Resorts Limited for an aggregate
amount of $117.7 million using cash on the Corporation’s balance sheet.
On March 6, 2018, the Corporation also entered into agreements to increase its equity interest in CrownBet from 62% to 80% and for CrownBet to acquire
William Hill Australia Holdings Pty Ltd. (“William Hill Australia”), an Australian-based online sportsbook. The aggregate purchase price for both
transactions will be approximately $315 million, of which $234 million will be payable in cash for William Hill Australia and the remainder will be payable
in approximately 3.1 million newly-issued Common Shares. The management team of CrownBet will be entitled to an additional payment of up to $182
million in 2020 subject to certain performance conditions and payable in cash, additional Common Shares or a combination thereof, at the Corporation’s
discretion. To finance the cash portion of the purchase price for the transactions, the Corporation obtained committed financing for a $325 million incremental
USD First Lien Term Loan (as defined below). The Corporation currently expects the transactions to close in April 2018.
Mr. Matthew Tripp, CrownBet’s Chief Executive Officer, will remain in his position and continue to operate the combined business in Australia. Under the
transaction agreements, The Stars Group is also entitled to appoint a majority of the directors on the board of directors of CrownBet.
KEY METRICS
The Corporation reviews a number of metrics, including those key metrics set forth below, to evaluate its business, measure performance, identify trends,
formulate business plans and make strategic decisions. Although management may have provided other key metrics in the past, it continues to review and
assess the importance, completeness and accuracy of such metrics as it relates to its evaluation of the Corporation’s business, performance and trends
affecting the same. This includes, without limitation, customer engagement, gameplay, depositing activity and various other customer trends, particularly
following the introduction of certain previously announced improvements in the poker ecosystem to benefit and attract recreational customers and reduce
incentives for high-volume, net-
6
withdrawing customers, the introduction of certain customer acquisition initiatives, and the Corporation’s expansion in real-money online casino and
sportsbook. As such, management may determine that particular metrics that may have been presented in the past may no longer be helpful or relevant to
understanding the Corporation’s current and future business, performance or trends affecting the same. As a result, such historic metrics may be replaced,
redefined or clarified, or new or alternative metrics may be introduced. For each applicable period, management intends to provide key metrics that it believes
may be the most helpful and relevant to a complete and accurate understanding of the Corporation’s business, performance and trends affecting the same, in
each case taking into account, among other things, the development of its product and service offerings, loyalty programs, customer acquisition efforts, and
expansion in new markets and verticals. For additional information on how the Corporation calculates its key metrics and factors that can affect such metrics,
see “Limitations of Key Metrics and Other Data” above.
With respect to QAUs and QNY, the Corporation provides applicable trend information for each of the quarterly periods since the first quarter of 2015, and
with respect to Net Deposits, it provides applicable trend information for each of the quarterly periods since the first quarter of 2016. As a result of
management’s continued review and assessment of such metrics as noted above, beginning with the second quarter of 2017 and as previously disclosed, it
determined that the prior definition of QAUs required further adjustment to remove those customers who were active during the applicable quarterly period
by taking advantage of certain customer acquisition promotional incentives, but had not yet made a deposit or transferred funds into their real-money accounts
with the Corporation for further gameplay, and to clarify the inclusions in and exclusions from the definition, particularly relating to free play, bonuses and
promotions. Management believes that these adjustments to its key metrics will provide a more accurate understanding of the Corporation’s customers,
including their engagement and activity. As such, QAUs and QNY (as QAUs serve as the denominator for QNY) for each quarterly period since the first
quarter of 2015 were re-calculated accordingly and first provided in the Q2 2017 MD&A. The Corporation believes that readers should consider QAUs, QNY
and Net Deposits together as customer growth and monetization trends reflected in such metrics are key factors that affect the Corporation’s revenues.
Quarterly Real-Money Active Uniques (QAUs)
The Corporation defines QAUs as active unique customers (online, mobile and desktop client) who (i) made a deposit or transferred funds into their real-
money account with the Corporation at any time, and (ii) generated real-money rake or placed a real-money bet or wager on or through one of the
Corporation’s real-money online poker, casino or sportsbook offerings during the applicable quarterly period. The Corporation defines unique as a customer
who played at least once on one of its real-money offerings during the period, and excludes duplicate counting, even if that customer is active across multiple
verticals (poker, casino and/or sportsbook). The definition of QAUs excludes customer activity from certain low-stakes, non-raked real-money poker games,
but includes real-money activity by customers using funds (cash and cash equivalents) deposited by the Corporation into such customers’ previously funded
accounts as promotions to increase their lifetime value. QAUs are a measure of the player liquidity on the Corporation’s real-money poker product offerings
and level of gameplay on all its real-money product offerings, collectively. Trends in QAUs affect revenue and financial results by influencing the volume of
gameplay, the Corporation’s product offerings, and its expenses and capital expenditures. QAUs are disclosed below on a combined basis for the
Corporation’s real-money online gaming brands.
7
During the three months ended December 31, 2017, the Corporation had 2.17 million combined QAUs, which represents a decrease of 7.3% over the prior
year period. The Corporation believes that the decrease when compared to the fourth quarter of 2016 was primarily the result of (i) the Corporation’s strategy
of focusing on positive return customer relationship management (“CRM”) initiatives to attract high-value, net-depositing customers (primarily recreational
players) which has resulted, and may continue to result, in a decrease in certain lower value customers, (ii) the cessation of operations in Australia and
Colombia, (iii) the recently imposed local licensing regime in the Czech Republic with more onerous customer registration requirements for online gaming
accounts requiring face-to-face verification, (iv) previously disclosed negative operating conditions in Poland primarily related to constraints on processing
payments in that jurisdiction, and (v) a normalization in Portugal as compared to the prior year period when the Corporation relaunched real money online
poker and casino in that jurisdiction. Notwithstanding, the Corporation’s QAUs were positively impacted by the growth and expansion of the Corporation’s
real-money online casino and sportsbook product offerings. Historically, QAUs have generally been higher in the first and fourth fiscal quarters. For a
description of seasonal trends and other factors, see “Summary of Quarterly Results” below.
The Corporation has faced and may continue to face challenges in increasing the size of its active customer base due to, among other things, competition from
alternative products and services, high-volume, net-withdrawing customers who detract from the overall poker ecosystem and discourage recreational
customers, the use of certain sophisticated technology that may provide an artificial competitive advantage for certain customers over others, and past and
potential future weakness in global currencies against the U.S. dollar, which decreases the purchasing power of the Corporation’s global customer base as the
U.S. dollar is the primary currency of gameplay on the Corporation’s product offerings. Notwithstanding, the Corporation intends to grow its customer base,
reactivate dormant users and retain existing customers by, among other things, continuing to introduce improvements in the poker ecosystem to benefit
recreational players, expanding the product depth of its casino offering, improving the user interface and user experience of its sportsbook, investing in CRM
initiatives, demonstrating the superiority of its products and services, improving the effectiveness of its marketing and promotional efforts, expanding the
availability of its offerings geographically, and continuing to introduce new and innovative products, features and enhancements. See also the 2017 Annual
Information Form, including under the headings “Business of the Corporation—Online Poker”, “—Online Casino and Sportsbook” and “—Business Strategy
of the Corporation”. To the extent the growth of or growth rate in the Corporation’s customer base declines, the Corporation’s revenue growth will become
increasingly dependent on its ability to increase levels of customer monetization.
Quarterly Net Yield (QNY)
The Corporation defines QNY as combined real-money online gaming and related revenue (excluding certain other revenues, such as revenues that are
included in Other Gaming revenues) for its two product lines (i.e., Poker and Casino & Sportsbook) as reported during the applicable quarterly period (or as
adjusted to the extent any accounting reallocations are made in later periods) divided by the total QAUs during the same period. QNY is a non-IFRS
measure. For a reconciliation of the numerator of QNY to the nearest IFRS measure, see below. For other important information on the Corporation’s non-
IFRS measures, see the information presented in italics under the heading “Management’s Discussion and Analysis” above and the information under
“Selected Financial Information—Other Financial Information” below. The Corporation also provides QNY on a constant currency basis. For information on
the Corporation’s constant currency revenues, see “Discussion of Operations—Foreign Exchange Impact on
8
Revenue” for each of the three months and year ended December 31, 2017. Trends in QNY are a measure of growth as the Corporation continues to expand
its core real-money online poker offerings and real-money online casino and sportsbook offerings. In addition, the trends in the Corporation’s ability to
generate revenue on a per customer basis across its real-money online gaming offerings are reflected in QNY and are key factors that affect the Corporation’s
revenue.
During the three months ended December 31, 2017, the Corporation’s QNY was $160, which represents an increase of 25.6% from the prior year period. The
growth in QNY was primarily the result of (i) the implementation of the Stars Rewards loyalty program and continued focus on high-value, net-depositing
customers (primarily recreational players), (ii) the Corporation’s strategy of focusing on positive return CRM initiatives to attract such customers which has
resulted, and may continue to result, in a decrease in certain lower value customers, and (iii) continued development of the casino and sportsbook product
offerings, including through additional third-party slots under the PokerStars Casino brand and improvement of the user experience and user interface under
the BetStars brand. During the three months ended December 31, 2017, the Corporation’s constant currency QNY was $154, which represents an increase of
21.3% from the prior year period. The growth in constant currency QNY was driven primarily by the same factors mentioned above.
There are many variables that impact the monetization of the Corporation’s product offerings through QNY, including the rake and fees charged in real-money
online poker, the amounts wagered and gross win margins (i.e., the percentage of wagers retained by the Corporation) in real-money online casino and
sportsbook, the amount of time customers play on its products, offsets to gross gaming revenue for loyalty program rebates, rewards, bonuses, and promotions
and VAT in certain jurisdictions, and the amount the Corporation spends on advertising and other expenses. The Corporation currently intends to increase
QNY in future periods by, among other things, (i) continuing to introduce new and innovative products and other initiatives to enhance and optimize the
customer experience and increase customer engagement, including through CRM initiatives to attract and retain high-value customers (primarily recreational
players), (ii) capitalizing on its existing online poker platforms and offerings, which provides customers with the highest level of player liquidity globally, (iii)
cross-selling its online poker, casino and sportsbook offerings to both existing and new customers, and (iv) continuing to expand and improve its online
casino and sportsbook offerings, including through the addition of new product offerings and new geographies. See also the 2017 Annual Information Form,
including under the headings “Business of the Corporation—Online Poker”, “—Online Casino and Sportsbook” and “—Business Strategy of the
Corporation”.
The tables below present reconciliations of the numerator of QNY (i.e., Poker and Casino & Sportsbook revenues) to the nearest IFRS measure (i.e., revenue)
as reported for the applicable period. Unless otherwise noted, any deviation in the reconciliations below to measures presented herein may be the result of
immaterial adjustments made in later periods due to certain accounting reallocations.
9
$000's
Revenue
Corporate
Other Gaming Revenue
Poker and Casino & Sportsbook
$000's
Revenue
Corporate
Other Gaming Revenue
Poker and Casino & Sportsbook
Net Deposits
Mar 31,
2015
272,292
(426)
(12,638)
259,228
Jun 30,
2015
259,500
(392)
(11,562)
247,546
Sep 30,
2015
247,327
(225)
(9,729)
237,373
Dec 31,
2015
293,201
(471)
(13,419)
279,311
Mar 31,
2016
288,518
(59)
(11,971)
276,488
Sep 30,
2016
270,681
—
(9,632)
261,049
Dec 31,
2016
310,286
(3)
(12,884)
297,399
Mar 31,
2017
317,320
(22)
(11,854)
305,444
Jun 30,
2017
305,305
(92)
(12,762)
292,451
Sep 30,
2017
329,443
(213)
(12,675)
316,555
Jun 30,
2016
285,762
(46)
(10,479)
275,237
Dec 31,
2017
360,247
(358)
(13,031)
346,858
The Corporation defines Net Deposits as the aggregate of gross deposits or transfer of funds made by customers into their real-money online accounts less
withdrawals or transfer of funds by such customers from such accounts, in each case during the applicable quarterly period. Gross deposits exclude (i) any
deposits, transfers or other payments made by such customers into the Corporation’s play-money and social gaming offerings, and (ii) any real-money funds
(cash and cash equivalents) deposited by the Corporation into such customers’ previously funded accounts as promotions to increase their lifetime value. Net
Deposits are closely correlated to the Corporation’s reported net gaming revenue. Some or all of such deposits eventually become revenue if and when the
deposits enter the online poker, casino or sportsbook ecosystems through applicable rake, tournament fees or wagering. Trends in Net Deposits are used by
management to gauge expected revenue performance across the Corporation’s current online real-money gaming offerings (i.e., poker, casino, sportsbook)
and are considered by management when making decisions with respect to changes to any such offering, including but not limited to, the recent and
continuing changes to the Corporation’s online poker ecosystem to benefit and attract high-value, net-depositing customers (primarily recreational players).
Net Deposits are not, and should not be considered, representative of revenue bookings or deferred revenues.
During the three months ended December 31, 2017, Net Deposits were $326.9 million, which represents an increase of 15% over the prior year period. The
increase in Net Deposits was due to growth, in absolute terms, of gross deposits, or transfers of funds made by customers into their real-money online
accounts, surpassing growth in withdrawals, or transfers of funds by such customers from such accounts. The Corporation believes that the increase was
primarily driven by the implementation of the Stars Rewards loyalty program and continued focus on high-value customers (primarily recreational players),
continued development of the casino and sportsbook product offerings, including through additional third-party slots under the PokerStars Casino brand and
improvement of the user experience and user interface under the BetStars brand.
As with QAUs and QNY, there are many variables that impact Net Deposits, most of which are substantially similar to those noted above impacting the
monetization of the Corporation’s product offerings as evidenced through QNY. In addition, there are certain factors that have impacted, and may in the future
impact, Net Deposits that are not
10
indicative of the performance or underlying health of the Corporation’s business. For example, as it relates to online poker and following the implementation
of certain previously disclosed changes to the poker ecosystem, the movement in customer real-money account balances (i.e., customer deposits on the
consolidated statements of financial position) by high-volume, net-withdrawing customers (primarily professional or highly experienced players) has reduced,
and may continue to reduce, Net Deposits as a result of increased withdrawals by such customers, but the Corporation believes that such movements will
ultimately create a more attractive environment and experience for recreational players, allowing them to play longer on its platforms and engage in its
various product offerings, which in turn may lead to increased Net Deposits. The Corporation believes that the funds in the accounts of the high-volume, net-
withdrawing customers are generally not additive to the overall poker ecosystem or to the Corporation’s revenues as such customers generally use only a
small portion of them to bet or wager. In the first and second quarters of 2016, following the initial implementation of such changes to the poker ecosystem,
including changes to its then-effective VIP program, the Corporation experienced significant movements in customer real-money account balances resulting
from increased withdrawals by high-volume, net-withdrawing customers. As the Corporation continues to make adjustments and improvements to its product
offerings, it expects that such customers may continue to withdraw at greater rates and amounts immediately following such adjustments and improvements,
which would impact Net Deposits accordingly.
For other factors that may cause Net Deposits to fluctuate, see “Overview and Outlook” above, “Summary of Quarterly Results”, “Liquidity and Capital
Resources—Market Risk” and “Risk Factors and Uncertainties” below, and the 2017 Annual Information Form, including, without limitation, under the
headings “Risk Factors and Uncertainties” and “Business of the Corporation—Seasonality and Other Factors Impacting the Business” therein.
Selected Financial Information
SELECTED FINANCIAL INFORMATION
Selected financial information of the Corporation for the three months ended December 31, 2017 and 2016, and for the years ended December 31, 2017, 2016
and 2015 is set forth below.
$000's, except per share amounts
Revenue
Net Earnings
Basic Net Earnings Per Common Share
Diluted Net Earnings Per Common Share
Total Assets (as at)
Total Long-Term Liabilities (as at)
Three Months Ended December 31,
Year Ended December 31,
2017
360,247
47,175
0.32 $
$
$
0.23 $
5,415,126
2,509,221
2016
2017
45,039
0.31 $
0.23 $
310,286 1,312,315
259,285
1.77 $
1.27 $
5,462,475 5,415,126
2,412,579 2,509,221
2016
1,155,247
135,550
0.96 $
0.70 $
5,462,475
2,412,579
2015
1,072,320
210,262
1.58
1.06
5,643,547
2,851,994
Revenue increased in both the three months and year ended December 31, 2017 as compared to the respective prior year periods and as compared to the year
ended December 31, 2015 primarily as a result of the growth of the Corporation’s online poker, casino and sportsbook product offerings. For additional
variance analysis on Poker revenues and Casino & Sportsbook revenues, see “Discussions of Operations” below. For revenue calculated on a constant
currency basis, see “Foreign Exchange Impact on Revenue” below for each of the three months and year ended December 31, 2017.
The decrease in the Corporation’s asset base from December 31, 2016 was primarily the result of a decrease in current investments, amortization in respect of
its intangible assets and a decrease in the fair value of the Swap Agreements (as defined and described below), partially offset by an increase in cash and cash
equivalents. For additional variance analysis on cash and cash equivalents, see “Cash Flows by Activity” below. The increase in outstanding long-term
liabilities from December 31, 2016 was primarily to the result of a decrease in the fair value of the Swap Agreements causing such fair value to move from
assets to liabilities. The decrease in the Corporation’s asset base from December 31, 2015 through December 31, 2016 was primarily the result of the
amortization of its intangible assets, while the decrease in outstanding long-term liabilities during the same period was primarily the result of reclassifying the
deferred purchase price for the Stars Interactive Group Acquisition in the initial aggregate
11
amount of $400 million to current liabilities (of which the Corporation paid $200 million in November 2016 and the remaining balance in 2017).
Other Financial Information
To supplement its 2017 Annual Financial Statements presented in accordance with IFRS, the Corporation considers certain financial measures that are not
prepared in accordance with IFRS, including those set forth below and QNY set forth above under “Key Metrics”. The Corporation uses such non-IFRS
financial measures in evaluating its operating results and for financial and operational decision-making purposes. The Corporation believes that such
measures help identify underlying trends in its business that could otherwise be masked by the effect of the expenses that it excludes in such measures or, in
the case of Adjusted Cash Flow from Operations, by cash that is not available for financial or operational use. The Corporation also believes that such
measures provide useful information about its operating results, enhance the overall understanding of its past performance and future prospects and allow for
greater transparency with respect to key metrics used by management in its financial and operational decision-making. However, these measures should not
be considered in isolation from, or as a substitute for, financial information prepared in accordance with IFRS. There are a number of limitations related to the
use of such non-IFRS measures as opposed to their nearest IFRS equivalents. See also the information presented in italics under the heading “Management’s
Discussion and Analysis” above and the information under “Limitations of Key Metrics and Other Data” and “Key Metrics” above.
$000's, except per share amounts
Revenue
Adjusted EBITDA
Adjusted Cash Flow from Operations
Adjusted Net Earnings
Adjusted Net Earnings per Diluted Share
Three Months Ended December 31,
Year Ended December 31,
2017
360,247
147,002
132,283
111,951
2016
310,286
147,604
142,806
107,013
2017
1,312,315
600,306
525,524
458,940
$
0.54 $
0.53 $
2.25 $
2016
1,155,247
524,093
420,928
366,699
1.88
Adjusted EBITDA, Adjusted Cash Flow from Operations, Adjusted Net Earnings and Adjusted Net Earnings per Diluted Share
The Corporation currently considers the following non-IFRS measures:
Adjusted EBITDA, which the Corporation defines as net earnings before financial expenses, income taxes expense (recovery), depreciation and amortization,
stock-based compensation, restructuring and certain other items as set out in the table below.
Adjusted Cash Flow from Operations, which the Corporation defines as net cash inflows from operating activities after adding back customer deposit liability
movements, and which the Corporation first introduced for the quarter ended June 30, 2017.
Adjusted Net Earnings, which the Corporation defines as net earnings before interest accretion, amortization of intangible assets resulting from purchase price
allocation following acquisitions, deferred income taxes, stock-based compensation, restructuring, foreign exchange, and certain other items as set out in the
table below.
Adjusted Net Earnings per Diluted Share, as defined by the Corporation means Adjusted Net Earnings divided by Diluted Shares. Diluted Shares means the
weighted average number of Common Shares on a fully diluted basis, including options, other equity-based awards, warrants and the Corporation’s
convertible preferred shares (“Preferred Shares”). The effects of anti-dilutive potential Common Shares are ignored in calculating Diluted Shares. See note 9
in the 2017 Annual Financial Statements. For the three months and year ended December 31, 2017, Diluted Shares equaled 206,807,485 and 203,707,589,
respectively.
12
The table below presents a reconciliation of Adjusted EBITDA, Adjusted Net Earnings and Adjusted Net Earnings per Diluted Share, each to the nearest
IFRS measure:
$000's, except per share amounts
Net earnings
Financial expenses
Income taxes expense (recovery)
Depreciation of property and equipment
Amortization of intangible and deferred development costs
EBITDA
Stock-based compensation
Termination of employment agreements
Termination of affiliate agreements
Loss on disposal of assets
(Gain) loss from investments
Acquisition-related costs
Gain on settlement of deferred consideration
Net loss (earnings) from associates and (reversal of) impairment of assets held for
sale, associates and intangible assets
Other costs (see table below)
Adjusted EBITDA
Current income tax expense
Depreciation and amortization (excluding amortization of purchase price
allocation intangibles)
Interest †
Adjusted Net Earnings
Diluted Shares
Adjusted Net Earnings per Diluted Share
Three Months Ended December 31,
Year Ended December 31,
2017
2016
47,175
39,713
26,352
2,370
35,851
151,461
2,708
1,677
—
—
(20,288)
—
—
1,631
9,813
147,002
(1,224)
45,039
36,565
(78)
2,072
34,783
118,381
1,893
3,643
1,099
361
4,749
—
(2,466)
9,646
10,298
147,604
(2,570)
2017
259,285
163,039
27,208
8,925
138,261
596,718
10,622
5,842
407
599
(34,524)
—
—
(4,230)
24,872
600,306
(7,914)
2016
135,550
138,299
4,000
8,181
131,702
417,732
10,289
15,008
4,485
923
19,278
199
(2,466)
16,308
42,337
524,093
(8,384)
(7,145)
(26,682)
111,951
206,807,485
(5,779)
(32,242)
107,013
200,132,710
(22,885)
(110,567)
458,940
203,707,589
$
0.54 $
0.53 $
2.25 $
(18,138)
(130,872)
366,699
195,432,920
1.88
† Excluding interest accretion and non-refundable late payment fees related to the unpaid balance of the deferred purchase price for the Stars Interactive
Group Acquisition in 2016.
There are a number of limitations related to the use of these measures rather than net earnings, which is the nearest IFRS equivalent of these financial
measures. Some of these limitations are:
•
•
these non-IFRS financial measures exclude the applicable items listed in the reconciliation table above and other costs as set forth in the table
below; and
the expenses that the Corporation excludes in its calculation of these non-IFRS financial measures may differ from the expenses, if any, that
its peer companies may exclude from similarly-titled non-IFRS measures when they report their results of operations. In addition, although
certain excluded expenses may have been incurred in the past or may be expected to recur in the future, management believes it is
appropriate to exclude such expenses at this time as it does not consider them as on-going core operating expenses as it relates specifically to
the Corporation as compared to its peer companies. For example, the Corporation currently excludes certain lobbying and legal expenses in
jurisdictions where it is actively seeking licensure or similar approval, not for such expenses in jurisdictions where it (or any of its
subsidiaries) currently operates, has customers, or holds a license or similar approval. Management believes that the Corporation’s
incremental cost of these lobbying and legal expenses in such jurisdictions is generally higher than its peers given liabilities and related issues
primarily stemming from periods prior to the Stars Interactive Group Acquisition or from matters not directly involving the Corporation or its
current business. Moreover, certain exclusions, such as retention bonuses and office restructuring and legacy business unit shutdown costs,
primarily relate to the
13
Corporation’s transformation following the Stars Interactive Group Acquisition and management believes such expenses are more similar to
acquisition-related costs than to on-going core operating expenses. Over time, as management continues assessing its operations and
calculating applicable non-IFRS measures, it believes that, subject to, among other things, unanticipated events or impacts of anticipated
events, it should have fewer adjustments or the amounts of such adjustments should decrease over time.
The table below presents certain items comprising “Other costs” in the reconciliation table above:
Non-U.S. lobbying and legal expenses
U.S. lobbying and legal expenses
Strategic review professional fees
Retention bonuses
Non-recurring professional fees
AMF and other investigation professional fees (net of
insurance proceeds)
Austria gaming duty
Office restructuring and legacy business
unit shutdown costs
Other costs
Three Months Ended December 31,
Year Ended December 31,
2017
$000's
2016
$000's
2017
$000's
2016
$000's
787
4,074
—
117
2,263
2,544
—
28
9,813
765
3,630
2,965
615
1,188
1,018
—
117
10,298
3,409
13,686
125
1,388
4,431
6,432
(5,000)
401
24,872
3,065
12,793
10,338
3,272
6,020
5,509
—
1,340
42,337
The table below presents a reconciliation of Adjusted Cash Flow from Operations to net cash inflows from operating activities, which is the nearest IFRS
measure:
Net cash inflows from operating activities
Customer deposit liability movement
Adjusted Cash Flow from Operations
Three Months Ended December 31,
2017
$000's
2016
$000's
Year Ended December 31,
2017
$000's
2016
$000's
123,757
8,526
132,283
148,295
(5,489)
142,806
494,600
30,924
525,524
349,936
70,992
420,928
The Corporation believes that removing movements in customer deposit liabilities provides a more meaningful understanding of its cash flow from operations
as customer deposits are not available funds for the Corporation to use for financial or operational purposes.
DISCUSSION OF OPERATIONS
Comparison of the Three Months Ended December 31, 2017 and 2016
$000's except percentage amounts
Revenue
Selling
General and administrative
Financial
Gaming duty
Gain (loss) from investments
Net loss from associates
Gain on settlement of deferred consideration
Income taxes expense (recovery)
2017
2016
Variance
% Change
Three Months Ended December 31,
360,247
67,251
162,857
39,713
37,188
20,288
—
—
26,352
14
310,286
45,505
151,552
36,565
29,420
(4,728)
(21)
2,466
(78)
49,961
21,746
11,305
3,148
7,768
25,016
21
(2,466)
26,430
16.1%
47.8%
7.5%
8.6%
26.4%
529.1%
100.0%
(100.0%)
33884.6%
Revenue
The revenue increase for the three months ended December 31, 2017 as compared to the prior year period was primarily attributable to (i) the implementation
of the Stars Rewards loyalty program, (ii) the continued development of the Corporation’s casino product offerings, including through additional third-party
slots under the PokerStars Casino brand, (iii) user experience and user interface improvements to the Corporation’s sportsbook product and a higher than
average gross win margin during the quarter, (iv) the expansion of the geographical reach of the Corporation’s casino and sportsbook products into eligible
markets, and (v) the re-launch of real-money online poker and real-money online casino in Portugal. As it relates to currency fluctuations during the quarter,
the general weakening of the U.S. dollar relative to certain foreign currencies had a positive impact on the Corporation’s revenue as compared to the prior
year period. See also “Foreign Exchange Impact on Revenue” below.
Revenue by Product Line and Geographic Region
Geographic Area
Isle of Man
Malta
Italy
United Kingdom
Spain
France
Other licensed or approved
jurisdictions
Geographic Area
Isle of Man
Malta
Italy
United Kingdom
Spain
France
Other licensed or approved
jurisdictions
Poker
$000’s
Casino & Sportsbook
$000’s
Other Gaming
$000’s
Total Gaming
$000’s
Corporate
$000’s
Total
$000’s
Three months ended December 31, 2017
93,415
54,847
22,009
15,193
13,796
13,855
21,235
234,350
6,761
64,762
16,467
4,599
10,679
4,383
4,857
112,508
1
1
133
58
167
123
12,548
13,031
100,177
119,610
38,609
19,850
24,642
18,361
38,640
359,889
—
—
—
—
—
—
358
358
100,177
119,610
38,609
19,850
24,642
18,361
38,998
360,247
Three months ended December 31, 2016 (As reclassified)
Poker
$000’s
Casino & Sportsbook
$000’s
Other Gaming
$000’s
Total Gaming
$000’s
Corporate
$000’s
Total
$000’s
88,323
52,727
19,947
13,518
11,870
13,807
8,521
46,267
10,347
3,507
6,917
1,144
1
1
177
104
185
160
96,845
98,995
30,471
17,129
18,972
15,111
—
—
—
—
—
—
96,845
98,995
30,471
17,129
18,972
15,111
17,022
217,214
3,482
80,185
12,256
12,884
32,760
310,283
3
3
32,763
310,286
The majority of the Corporation’s revenues are generated through Poker, followed by Casino & Sportsbook. Other offerings, including social and play-
money gaming, live poker events, branded poker rooms and other sources of revenue primarily related to gaming are aggregated into Other Gaming revenues.
Corporate revenues include certain other nominal sources of revenue. These revenues together comprise one segment as individually they do not meet any of
the quantitative thresholds or disclosure requirements described in IFRS 8, Operating segments.
Poker Revenue
Poker revenue for the three months ended December 31, 2017 was $234.4 million as compared to $217.2 million for the prior year period, which represents
an increase of 7.9% year-over-year. The increase in Poker revenue was primarily the result of (i) positive impacts of foreign exchange fluctuations, (ii) the
implementation of the Stars Rewards loyalty program, and (iii) the re-launch of online poker in Portugal. Notwithstanding, Poker revenues were negatively
impacted by, among other things (i) certain customers playing, either entirely or partially in place of poker, the Corporation’s real-money online casino
offerings, (ii) the cessation of operations in Australia and
15
Colombia, (iii) the new local licensing regime in the Czech Republic with more onerous customer registration requirements for online gaming accounts
requiring face-to-face verification, and (iv) previously disclosed negative operating conditions in Poland primarily related to constraints on processing
payments in that jurisdiction. For information on the impact of fluctuations in foreign exchange rates, see “Foreign Exchange Impact on Revenue” below.
Casino & Sportsbook Revenue
Casino & Sportsbook revenue for the three months ended December 31, 2017 was $112.5 million as compared to $80.2 million for the prior year period,
which represents an increase of 40.3% year-over-year. The increase in Casino & Sportsbook revenue was primarily the result of (i) the continued
development of the Corporation’s casino product offerings, including through additional third-party slots under the PokerStars Casino brand, (ii) user
experience and user interface improvements to the Corporation’s sportsbook product and a higher than average gross win margin during the quarter, (iii) the
expansion of the geographical reach of the Corporation’s casino and sportsbook products into eligible markets, and (iv) positive impacts of foreign exchange
fluctuations. Notwithstanding, Casino & Sportsbook revenues were negatively impacted by, among other things, the new local licensing regime in the Czech
Republic with more onerous customer registration requirements for online gaming accounts requiring face-to-face verification. For information on the impact
of fluctuations in foreign exchange rates, see “Foreign Exchange Impact on Revenue” below.
Revenue by Geographic Region
The Corporation also evaluates revenue performance by geographic region based on the primary jurisdiction where the Corporation is licensed or approved to
offer, or offers through third-party licenses or approvals, its online gaming products and services. The revenue tables above set out the proportion of revenue
attributable to each gaming license or approval (as opposed to the jurisdiction where the customer was located) that either generated a minimum of 5% of
total consolidated revenue for the three months ended December 31, 2017 or 2016 or that the Corporation otherwise deems relevant based on its historical
reporting of the same or otherwise.
With respect to Canada, the jurisdiction where its registered office is located, and based solely on calculations derived from internal records, the Corporation
estimates that revenue derived from customers in Canada, which currently relates only to Poker, would represent less than 5% of its total consolidated
revenue for the three months ended December 31, 2016 and 2017. These estimations are neither itemized nor otherwise separated from the revenues the
Corporation reports under IFRS or otherwise, and as such, they are neither reviewed nor audited, as applicable, by its independent external auditor nor can
they be reconciled to a reported IFRS measure.
Poker
Poker revenue increased in all geographic regions for the three months ended December 31, 2017 as compared to the prior year period. The increases were
generally the result of the same factors noted above under “Poker Revenue” for the same period. The growth in other licensed and approved jurisdictions was
also the result of obtaining local licenses to operate certain online gaming in Portugal and the Czech Republic (the Czech Republic had previously operated
under the Malta license and the Corporation had previously ceased operations in Portugal). The growth in Malta was partially offset by the movement of
Czech Republic to a local licensing regime.
Casino & Sportsbook
Casino & Sportsbook revenue increased in each geographic region, except the Isle of Man, for the three months ended December 31, 2017 as compared to the
prior year period. The increases were generally the result of the same factors noted above under “Casino & Sportsbook Revenue” for the same period. The
increase in Malta was also the result of the Corporation offering certain online casino and live dealer games under its Malta license to players in jurisdictions
otherwise served through the Isle of Man and the United Kingdom licenses. Malta was also positively impacted by the expansion of the Corporation’s online
casino and sportsbook product offerings into eligible markets. The decrease in the Isle of Man was the result of the use of the Corporation’s Malta license for
certain offerings as noted above. In addition, the increase in other licensed or approved jurisdictions was primarily the result of previously obtaining local
licenses to operate online gaming in Portugal and the Czech Republic (the Czech Republic had previously operated under the Malta license and the
Corporation had previously ceased operations in Portugal).
16
Other Gaming
Other Gaming revenue was relatively flat as a proportion of revenue during the three months ended December 31, 2017 as compared to the prior year period.
Foreign Exchange Impact on Revenue
The general weakening of the U.S. dollar, which is the primary currency of gameplay on the Corporation’s product offerings, relative to certain foreign
currencies (particularly the Euro, which is the primary depositing currency of the Corporation’s customers) during the three months ended December 31, 2017
as compared to the prior year period had a positive impact on the Corporation’s Poker, Casino & Sportsbook revenue. During the three months ended
December 31, 2017, the Corporation estimates the increase in the purchasing power of its consumer base, based on a weighted average of customer deposits,
was a result of an average 7.3% increase in the value of its customers’ local currencies relative to the U.S. dollar.
To calculate revenue on a constant currency basis, the Corporation translated revenue for the current period using the prior year’s monthly average exchange
rates for its local currencies other than the U.S. dollar, which the Corporation believes is a useful metric that facilitates comparison to its historical
performance, mainly because the U.S. dollar is the primary currency of gameplay on the Corporation’s product offerings and the majority of the Corporation’s
customers are from European Union jurisdictions.
If the Corporation had translated its total IFRS revenue for the three months ended December 31, 2017 using the constant currency exchange rates for its
source currencies other than the U.S. dollar, such revenues would have been $334.5 million, which is $25.8 million lower than actual IFRS revenues during
such period. As a result, excluding the impact of year-over-year changes in foreign exchange rates, such revenues for the quarter would have increased by
7.8%, as opposed to 16.1%, over the prior year period.
Expenses
Selling
The increase in selling expenses for the three months ended December 31, 2017 as compared to the prior year period was primarily the result of (i) an
increase in acquisition marketing costs in connection with online poker and sportsbook operations and (ii) an increase in royalty costs in connection with
online casino operations driven by the growth and expansion of third-party slot and live dealer game offerings.
General and Administrative
The increase in general and administrative expenses for the three months ended December 31, 2017 as compared to the prior year period was primarily the
result of (i) an increase in salary expenses due to investment in headcount, staff restructuring in connection with the Corporation’s previously announced
operational excellence program and the provision for expected annual staff incentives in the 2017 period, and (ii) an increase in professional fees driven by
the AMF investigations and additional public company compliance costs primarily related to the Corporation’s remediation efforts associated with and
improvements to internal control over financial reporting.
Financial
The increase in financial expenses for the three months ended December 31, 2017 as compared to the prior year period was primarily the result of foreign
exchange gains recorded in the prior year period. The increase was partially offset by reduced accretion recorded in respect of the deferred purchase price for
the Stars Interactive Group Acquisition.
Gaming Duty
The increase in gaming duty expenses for the three months ended December 31, 2017 as compared to the prior year period was primarily the result of (i)
gaming duty on Poker, Casino & Sportsbook revenues reflecting growth in such revenues in markets where gaming duty is applicable, such as Italy, Spain,
France and the United Kingdom, and (ii) gaming duty in markets recently licensed such as Portugal and the Czech Republic.
17
Foreign Exchange Impact on Expenses
The Corporation’s expenses are also impacted by currency fluctuations. Almost all its expenses are incurred in either the Euro, Great Britain Pound Sterling,
U.S. dollar or Canadian dollar. There are some natural hedges as a result of customer deposits made in such currencies, however the Corporation also enters
into certain economic hedges to mitigate the impact of foreign currency fluctuations as it deems necessary. Further information on foreign currency risk can
be found below in “Liquidity and Capital Resources—Market Risk—Foreign Currency Exchange Risk”.
Gain (Loss) from Investments
The gain recognized from investments during the three months ended December 31, 2017 as compared to a loss in the prior year period was primarily the
result of the completion of the Corporation’s previously announced disposition of its retained ownership in NYX Gaming Group Limited (“NYX Gaming
Group”) securities and NYX Sub Preferred Shares (as defined below) to Scientific Games Corporation and its ordinary shares of Jackpotjoy plc (LSE: JPJ)
(“Jackpotjoy”). For the prior year period, the loss from investments was primarily the result of a decrease in the value of the Corporation’s retained ownership
of certain preferred shares (the “NYX Sub Preferred Shares”) of NYX Digital Gaming (Canada) ULC, a subsidiary of NYX Gaming Group (“NYX Sub”),
issued to the Corporation as partial consideration for the disposition of two of the Corporation’s former businesses, CryptoLogic Ltd. and Amaya (Alberta)
Inc. (formerly Chartwell Technology Inc.), to NYX Gaming Group and NYX Sub.
Income Taxes Expense (Recovery)
The increase in income taxes expense for the three months ended December 31, 2017 as compared to the prior year period was primarily due to a tax
provision of $26.5 million relating to an ongoing transfer pricing dispute in Canada for one of the Corporation’s subsidiaries. The issue in dispute relates to
the subsidiary’s operations for its 2003 to 2007 fiscal years, prior to its acquisition by The Stars Group. For additional information, see note 8 in the 2017
Annual Financial Statements.
Comparison of the Years Ended December 31, 2017 and 2016
$000's except percentage amounts
Revenue
Selling
General and administrative
Financial
Gaming duty
Acquisition-related costs
Gain (loss) from investments
Net (loss) earnings from associates
Gain on settlement of deferred consideration
Income taxes
Revenue
2017
2016
Variance
% Change
Year Ended December 31,
1,312,315
192,709
571,258
163,039
130,771
—
34,524
(2,569)
—
27,208
1,155,247
162,785
585,123
138,299
113,102
199
(19,278)
623
2,466
4,000
157,068
29,924
(13,865)
24,740
17,669
(199)
53,802
(3,192)
(2,466)
23,208
13.6%
18.4%
(2.4%)
17.9%
15.6%
(100.0%)
279.1%
(512.4%)
(100.0%)
580.2%
The revenue increase for the year ended December 31, 2017 as compared to the prior year period was primarily attributable to (i) the continued development
of the Corporation’s casino product offerings, including through additional third-party slots under the PokerStars Casino brand, (ii) the expansion of the
geographical reach of the Corporation’s casino and sportsbook products into eligible markets, (iii) positive impacts of foreign exchange fluctuations, (iv) the
Corporation’s continued focus on recreational players including through the implementation of the Stars Rewards loyalty program, (v) user experience and
user interface improvements to the Corporation’s sportsbook product, and (vi) the re-launch of real-money online poker and real-money online casino in
Portugal and the launch of PokerStars NJ. As it relates to currency fluctuations during the full year period, the general weakening of the U.S. dollar relative to
certain foreign currencies had a positive impact on the Corporation’s revenue as compared to the prior year period. See also “Foreign Exchange Impact on
Revenue” below.
18
Revenue by Product Line and Geographic Region
Geographic Area
Isle of Man
Malta
Italy
United Kingdom
Spain
France
Other licensed or approved
jurisdictions
Geographic Area
Isle of Man
Malta
Italy
United Kingdom
Spain
France
Other licensed or approved
jurisdictions
Poker
$000’s
Casino & Sportsbook
$000’s
Year Ended December 31, 2017
Other Gaming
$000’s
Total Gaming
$000’s
Corporate
$000’s
Total
$000’s
349,375
210,742
82,106
56,155
47,912
50,214
80,792
877,296
29,338
224,101
52,284
15,140
34,842
10,410
1
2
575
258
669
508
378,714
434,845
134,965
71,553
83,423
61,132
—
—
—
—
—
—
378,714
434,845
134,965
71,553
83,423
61,132
17,897
384,012
48,309
50,322
146,998
1,311,630
685
685
147,683
1,312,315
Poker
$000’s
Casino & Sportsbook
$000’s
Other Gaming
$000’s
Total Gaming
$000’s
Corporate
$000’s
Total
$000’s
Year ended December 31, 2016 (As reclassified)
339,513
225,974
77,646
56,837
42,326
51,989
19,187
166,198
31,693
13,439
24,370
2,356
3
4
624
387
653
573
358,703
392,176
109,963
70,663
67,349
54,918
—
—
—
—
—
—
358,703
392,176
109,963
70,663
67,349
54,918
51,774
846,059
6,871
264,114
42,722
44,966
101,367
1,155,139
108
108
101,475
1,155,247
The majority of the Corporation’s revenues are generated through Poker, followed by Casino & Sportsbook. Other offerings, including social and play-
money gaming, live poker events, branded poker rooms and other sources of revenue primarily related to gaming are aggregated into Other Gaming revenues.
Corporate revenues include certain other nominal sources of revenue. These revenues together comprise one segment as individually they do not meet any of
the quantitative thresholds or disclosure requirements described in IFRS 8, Operating segments.
Poker Revenue
Poker revenue for the year ended December 31, 2017 was $877.3 million as compared to Poker revenue of $846.1 million for the prior year period, which
represents an increase of 3.7% year-over-year. The increase in Poker revenue was primarily the result of (i) positive impacts of foreign exchange fluctuations
(ii) the implementation of the Stars Rewards loyalty program, (iii) the Corporation’s previously announced strategy of focusing on recreational players,
including through initiatives such as changes to its previous online poker loyalty program, rake structure and the introduction of new poker promotions, (iv)
re-launch of online poker in Portugal and launch of PokerStars NJ, and (v) increased marketing spend in the fourth quarter of 2016 versus the prior year
period with some resulting revenue impact in the first quarter of 2017. Notwithstanding, Poker revenues were negatively impacted by, among other things, (i)
certain customers playing, either entirely or partially in place of poker, the Corporation’s real-money online casino offerings, (ii) a decline in customer activity
on the Full Tilt real-money online poker offerings, (iii) the temporary cessation of operations during a portion of the period in the Czech Republic and the
subsequent re-launch in the country under a local license with more onerous customer registration requirements for online gaming accounts requiring face-to-
face verification, (iv) the cessation of operations in Australia, Colombia, Israel and Slovenia, and (v) previously disclosed negative operating conditions in
Poland primarily related to constraints on processing payments in that jurisdiction. For information on the impact of fluctuations in foreign exchange rates,
see “Foreign Exchange Impact on Revenue” below.
19
Casino & Sportsbook Revenue
Casino & Sportsbook revenue for the year ended December 31, 2017 was $384.0 million as compared to $264.1 million for the prior year period, which
represents an increase of 45.4%. The increase in Casino & Sportsbook revenue was primarily the result of (i) the continued development of the Corporation’s
casino product offerings, including through additional third-party slots under the PokerStars Casino brand, (ii) the expansion of the geographical reach of the
Corporation’s casino and sportsbook products into eligible markets, (iii) the addition of new sports and user experience and user interface improvements to
the Corporation’s sportsbook product, and (iv) positive impacts from foreign exchange fluctuations. For information on the impact of fluctuations in foreign
exchange rates, see “Foreign Exchange Impact on Revenue” below.
Revenue by Geographic Region
The Corporation also evaluates revenue performance by geographic region based on the primary jurisdiction where the Corporation is licensed or approved to
offer, or offers through third-party licenses or approvals, its online gaming products and services. The revenue tables above set out the proportion of revenue
attributable to each gaming license or approval (as opposed to the jurisdiction where the customer was located) that either generated a minimum of 5% of
total consolidated revenue for the year ended December 31, 2017 or 2016 or that the Corporation otherwise deems relevant based on its historical reporting of
the same or otherwise.
With respect to Canada, the jurisdiction where its registered office is located, and based solely on calculations derived from internal records, the Corporation
estimates that revenue derived from customers in Canada, which currently relates only to Poker, would represent less than 5% of its total consolidated
revenue for the years ended December 31, 2016 and 2017. These estimations are neither itemized nor otherwise separated from the revenues the Corporation
reports under IFRS or otherwise, and as such, they are neither reviewed nor audited, as applicable, by nor can they be reconciled to a reported IFRS measure.
Poker
Poker revenue increased in each geographic region, except in Malta, France and the United Kingdom, for the year ended December 31, 2017 as compared to
the prior year period. The increases were generally the result of the same factors noted above under “Poker Revenue” for the same period. The increase in
Spain was also due to higher than anticipated jackpot payouts in the Corporation’s Spin & Go product during the first quarter of 2016. The growth in other
licensed and approved jurisdictions was also the result of obtaining local licenses to operate certain online gaming in Portugal and the Czech Republic (Czech
Republic had previously operated under the Malta license and the Corporation had previously ceased operations in Portugal) and the introduction of
PokerStars NJ to the New Jersey market. The decline in Malta was primarily the result of the movement of Czech Republic to local licensing regimes, and the
cessation of operations in Slovenia. The decline in France was primarily due to an increase in CRM initiatives, in anticipation of France potentially
transitioning to shared liquidity, leading to a reduction in net gaming revenue.
Casino & Sportsbook
Casino & Sportsbook revenue increased in each geographic region for the year ended December 31, 2017 as compared to the prior year period. The increases
were generally the result of the same factors noted above under “Casino & Sportsbook Revenue” for the same period. The increase in Malta was also the
result of the Corporation offering certain online casino and live dealer games under its Malta license to players in jurisdictions otherwise served through the
Isle of Man and the United Kingdom licenses. The increase in the Isle of Man was also a result of the expansion of the Corporation’s online casino into
certain additional eligible non-European Union markets. In addition, the significant increase in other licensed or approved jurisdictions was primarily the
result of obtaining local licenses to operate online gaming in Portugal and the Czech Republic (Czech Republic had previously operated under the Malta
license and the Corporation had previously ceased operations in Portugal), the introduction of online casino and sportsbook in Denmark and the introduction
of online casino in New Jersey. The significant increase in Italy was also due to the growth of online casino and the launch of online sportsbook in the middle
of the second quarter of 2016. The significant increase in France was due to the launch of online sportsbook in the latter half of the second quarter of 2016;
the Corporation does not currently offer online casino in France.
20
Other Gaming
Other Gaming revenue was relatively flat as a proportion of revenue during the year ended December 31, 2017 as compared to the prior year period.
Foreign Exchange Impact on Revenue
The general weakening of the U.S. dollar, which is the primary currency of gameplay on the Corporation’s product offerings, relative to certain foreign
currencies (particularly the Euro, which is the primary depositing currency of the Corporation’s customers) during the year ended December 31, 2017 as
compared to the prior year period had a positive impact on the Corporation’s Poker, Casino & Sportsbook revenue. During the year ended December 31,
2017, the Corporation estimates the increase in the purchasing power of its consumer base, based on a weighted average of customer deposits, was a result of
an average 2.3% increase in the value of its customers’ local currencies relative to the U.S. dollar.
If the Corporation had translated its total IFRS revenue for the year ended December 31, 2017 using the constant currency exchange rates for its source
currencies other than the U.S. dollar, such revenues would have been $1,276.3 million, which is $36.1 million lower than actual IFRS revenues during such
period. As a result, excluding the impact of year-over-year changes in foreign exchange rates, such revenues for the year would have increased by 10.5%, as
opposed to 13.6%, over the prior year period.
Expenses
Selling
The increase in selling expenses for the year ended December 31, 2017 as compared to the prior year period was primarily the result of (i) an increase in
acquisition marketing costs in connection with online poker and sportsbook operations, and (ii) an increase in royalty costs in connection with online casino
operations driven by the growth and expansion of third-party slot and live dealer game offerings.
General and Administrative
The decrease in general and administrative expenses for the year ended December 31, 2017 as compared to the prior year period was primarily the result of (i)
a reversal of the impairment of the Corporation’s investment in Innova Gaming Group Inc. (“Innova”) taken in prior years and (ii) a decrease in salary
expense as a result of staff restructuring in connection with the operational excellence program and a reduction in employee termination costs. The decrease
was partially offset by (i) increased payment processor costs due to higher net deposits, increased affiliate activities and fewer discounts received from
processors in the 2017 period and (ii) amortization of intangible assets and deferred development costs associated with the Stars Interactive Group
Acquisition and the development and launch of new products and offerings across online poker, casino, sportsbook and other gaming offerings.
Financial
The increase in financial expenses for the year ended December 31, 2017 as compared to the prior year period was primarily the result of (i) unrealized
foreign exchange gains related to the translation of the USD Second Lien Term Loan (as defined below) and the deferred purchase price for the Stars
Interactive Group Acquisition and (ii) unrealized foreign exchange gains generated on the Corporation’s outstanding U.S. dollar to Euro foreign exchange
contracts, both generated during the prior year period.
Gaming Duty
The increase in gaming duty expenses for the year ended December 31, 2017 as compared to the prior year period was primarily the result of (i) increases in
gaming duty on Poker, Casino & Sportsbook revenues reflecting growth in such revenues in markets where gaming duty is applicable, such as Italy, Spain,
France and the United Kingdom and (ii) gaming duty in newly licensed markets such as Portugal and the Czech Republic. The increase was partially offset by
the Corporation’s receipt of $5 million in indemnification proceeds from the sellers of the Stars Interactive Group in respect of gaming duty owed in Austria
for periods prior to the Stars Interactive Group Acquisition.
21
Foreign Exchange Impact on Expenses
The Corporation’s expenses are also impacted by currency fluctuations. Almost all of its expenses are incurred in either the Euro, Great Britain Pound
Sterling, U.S. dollar or Canadian dollar. There are some natural hedges as a result of customer deposits made in such currencies, however the Corporation also
enters into certain economic hedges to mitigate the impact of foreign currency fluctuations as it deems necessary. Further information on foreign currency risk
can be found below in “Liquidity and Capital Resources—Market Risk—Foreign Currency Exchange Risk”.
Gain (Loss) from Investments
The gain recognized from investments during the year ended December 31, 2017 as compared to the prior year period was primarily the result of (i) the
completed dispositions of the Corporation’s retained ownership interests in NYX Gaming Group, the NYX Sub Preferred Shares and Jackpotjoy securities
and (ii) the realized gain on the note received in connection with the sale of a former subsidiary, Cadillac Jack Inc., in 2015. For the prior year period, the loss
from investments comprised (i) a provision recorded relating to a certain EBITDA support agreement between the Corporation and Innova and (ii) a decrease
in the value of the Corporation’s retained ownership of the NYX Sub Preferred Shares.
Income Taxes Expense (Recovery)
The increase in income taxes for the year ended December 31, 2017 as compared to the prior year period was primarily due to a tax provision of $26.5 million
relating to an ongoing transfer pricing dispute in Canada for one of the Corporation’s subsidiaries. The issue in dispute relates to the subsidiary’s operations
for its 2003 to 2007 fiscal years, prior to its acquisition by The Stars Group. For additional information, see note 8 in the 2017 Annual Financial Statements.
This tax provision was partially offset by a refund of approximately $2.85 million received from the Belgian tax authorities relating to the closure of a prior
tax audit.
The following financial data for each of the eight most recently completed quarters has been prepared in accordance with IFRS, and all such periods have
been adjusted to reflect the impact of discontinued operations, as applicable. The presentation currency for each period presented below was and remains the
U.S. dollar.
SUMMARY OF QUARTERLY RESULTS
For the three months ended
$000’s, except per share amounts
Revenue
Net Earnings
Basic Net Earnings per Common Share
Diluted Net Earnings per Common Share
Mar 31,
2016
288,518
55,491
$ 0.42
$ 0.28
Jun 30,
2016
285,762
22,497
$ 0.16
$ 0.12
Sept 30,
2016
270,681
12,523
$ 0.09
$ 0.06
Dec 31,
2016
310,286
45,039
$ 0.31
$ 0.23
2017
317,320
65,753
$ 0.45
$ 0.33
Jun 30,
2017
305,305
70,483
$ 0.48
$ 0.35
2017
Dec 31,
Sept 30,
2017
329,443 360,247
47,175
0.32
0.23
75,874
$ 0.52 $
$ 0.37 $
Mar 31,
The year-over-year revenue increases since the first quarter of 2017 as compared to the prior year periods were primarily attributable to Casino & Sportsbook
revenues resulting from the continued rollout of casino and sportsbook products and the expansion of the geographical reach of such products into eligible
markets, in addition to the positive impact on poker revenues from the introduction of the Stars Rewards program. Prior to the third quarter of 2017, the
revenue increases were also a result of the previously announced changes to the Corporation’s customer loyalty program and rake structure, as well as
adjustments to the Corporation’s multi-table tournament payout structure, including through the reinvestment of a portion of the loyalty program cost
reductions and additional rake into CRM and lifecycle initiatives for recreational players.
22
For a discussion of trends and variances over the three months and years ended December 31, 2017 and 2016, see “Selected Financial Information”,
“Discussion of Operations”, “Liquidity and Capital Resources” and “Cash Flows by Activity” contained in this MD&A.
Given the nature of the Corporation’s business, including, without limitation, the extent of certain non-recurring and other costs, instead of evaluating IFRS
net earnings alone, the Corporation also analyzes Adjusted EBITDA, Adjusted Cash Flow from Operations, Adjusted Net Earnings and Adjusted Net
Earnings per Diluted Share to evaluate operating results and for financial and operational decision-making purposes. The Corporation believes that these
measures provide useful information about its operating results and enhances the overall understanding of its past performance and future prospects, as well
as its performance against peers and competitors. See “Selected Financial Information—Other Financial Information” above.
The Corporation’s results of operations can fluctuate due to seasonal trends and other factors. Historically, given the geographies where the majority of the
Corporation’s customers are located, and the related climate and weather in such geographies, among other things, revenues, key metrics and customer
activity have been generally higher in the first and fourth fiscal quarters than in the second and third fiscal quarters. In online sportsbook, fluctuations can also
occur around applicable sports seasons with increased customer activity around notable or popular sporting events. Additionally, with respect to online sports
betting, revenues from that vertical generally fluctuate in line with gross win margin (or the total customer wagers less customer winnings as a proportion of
the total amount wagered). However, the impact on revenues may be mitigated by the positive or negative impact of gross win margins on customer wagering,
which can fluctuate inversely with such margins. As a result, prolonged periods of high gross win margin can negatively impact customer experience,
enjoyment and engagement levels thereby resulting in lower customer wagering volumes on sports betting or other gaming verticals. Conversely, while
periods of low gross win margin tend to negatively impact revenues, this may be mitigated to an extent by increased customer wagering volume (generally
referred to as recycling of winnings) due to the positive impact of customer-friendly results on customer experience, enjoyment and engagement. Further,
changes to the Corporation’s Stars Rewards loyalty program impact net gaming revenue, which could also cause fluctuations. As such, results for any quarter
are not necessarily indicative of the results that may be achieved in another quarter or for the full fiscal year. There can be no assurance that the seasonal
trends and other factors that have impacted the Corporation’s historical results will repeat in future periods as the Corporation cannot influence or forecast
many of these factors. For other factors that may cause its results to fluctuate, including, without limitation, market risks, such as foreign exchange risks, see
“Overview and Outlook” above, “Liquidity and Capital Resources—Market Risk” and “Risk Factors and Uncertainties” below, and the 2017 Annual
Information Form, including, without limitation, under the headings “Risk Factors and Uncertainties” and “Business of the Corporation—Seasonality and
Other Factors Impacting the Business” therein.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation’s principal sources of liquidity are its cash generated from operations and certain other currently available funds. Currently available funds
consist primarily of cash on deposit with banks and investments, which are comprised primarily of certain highly liquid, short-term investments, including
money market funds. The Corporation’s working capital needs are generally minimal over the year as its current gaming business requires customers to
deposit funds prior to playing or participating in its real-money product offerings. The Corporation believes that such deposits are typically converted to
revenue efficiently and on a timely basis such that operating expenditures are sufficiently covered. Management also believes that investing is a key element
necessary for the continued growth of the Corporation’s customer base and the future development of new and innovative products and services. Based on the
Corporation’s currently available funds, funds available from the Credit Facility (as defined and detailed below) and its ability to access the debt and equity
capital markets, if necessary, management believes that the Corporation will have the cash resources necessary to satisfy current obligations and working
capital needs, and fund currently planned development activities and other capital expenditures for at least the next 12 months. Notwithstanding, as a result of,
among other things, the state of capital markets and the Corporation’s ability to access them on favorable terms, if at all, micro and macro-economic
downturns, and contractions of the Corporation’s operations may influence its ability to secure the capital resources required to satisfy current or future
obligations (including, without limitation, those set forth under “Contractual Obligations” below) and fund future projects, strategic initiatives and support
growth. For a description of the factors and risks that could affect the Corporation’s ability to generate sufficient amounts of cash and access the capital
markets, in the short- and long-terms, in order to maintain the Corporation’s capacity to meet its obligations and expected growth or fund development
activities, see “Risk Factors and Uncertainties” below and in the 2017 Annual Information Form.
23
The Corporation believes that it has improved its financial condition since December 31, 2016 by, among other things, paying all remaining amounts of the
deferred purchase price for the Stars Interactive Group Acquisition, completing the Repricing, making the Prepayments (each as defined below), decreasing
its leverage ratios and producing strong net cash inflows from operating activities. The Corporation expects to continue improving its financial condition
through its strong cash flow generation and liquidity, including as a result of continuing to introduce new and innovative products and pursuing expansion
into new jurisdictions. For additional information regarding the Corporation’s repayment of debt, including the Repricing, see below under “Long-Term
Debt”.
For additional information regarding the Corporation’s liquidity and capital resources, see the descriptions of the Corporation’s debt as set forth below under
“Credit Facility” and “Long-Term Debt” and the notes to the 2017 Annual Financial Statements, as well as the 2017 Annual Information Form. See also
“Risk Factors and Uncertainties” below and in the 2017 Annual Information Form, particularly under the heading “Risk Factors and Uncertainties—Risks
Related to the Corporation’s Substantial Indebtedness”.
Market Risk
The Corporation is exposed to market risks, including changes to foreign currency exchange rates and interest rates.
Foreign Currency Exchange Risk
The Corporation is exposed to foreign currency risk, which includes risks related to its revenue and operating expenses denominated in currencies other than
the U.S. dollar. In general, the Corporation is a net receiver of currencies other than the U.S. dollar, primarily the Euro, which is the primary depositing
currency of the Corporation’s customers. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, which is the primary
currency of game play on the Corporation’s product offerings, have in the past reduced, and may in the future reduce, the purchasing power of the
Corporation’s customers, thereby potentially negatively affecting the Corporation’s revenue and other operating results.
The Corporation has experienced and will continue to experience fluctuations in its net earnings as a result of translation gains or losses related to revaluing
certain current asset and current liability balances that are denominated in currencies other than the functional currency of the entities in which they are
recorded. The Corporation uses derivative financial instruments for risk management purposes, not for generating trading profits, and anticipates that such
instruments will mitigate some of its foreign currency risk. As such, any change in cash flows associated with derivative instruments is expected to be offset
by changes in cash flows related to the hedged position. However, it is difficult to predict the effect hedging activities could have on the Corporation’s results
of operations and there can be no assurance that any foreign currency exchange risks will be so mitigated or that such instruments will not result in a loss. The
Corporation recognized foreign currency losses of $0.5 million and $5.1 million in the three months ended December 31, 2017 and 2016, respectively, and
foreign currency losses of $2.8 million and foreign currency gains of $29.6 million in the years ended December 31, 2017 and 2016, respectively.
For additional information on derivatives, see also notes 2 and 21 in the 2017 Annual Financial Statements. Management monitors movements in foreign
exchange rates by frequently reviewing certain currency pairs. The Corporation may in the future enter into additional derivatives or other financial
instruments in an attempt to hedge its foreign currency exchange risk.
Interest Rate Sensitivity
The Corporation’s exposure to changes in interest rates (particularly fluctuations in LIBOR) relates primarily to interest paid on the Corporation’s long-term
indebtedness, as well as the interest earned on and market value of its cash and available-for-sale investments. The Corporation is also exposed to fair value
interest rate risk with respect to its USD First Lien Term Loan, which it attempts to mitigate by hedging through the Swap Agreements that fix the interest
rate on the same. The Corporation is also exposed to cash flow interest rate risk on the unhedged elements of the USD First Lien Term Loan, the EUR First
Lien Term Loan (as defined below) and the USD Second Lien Term Loan (as defined below), which each bear interest at variable rates.
As of the date hereof, the USD First Lien Term Loan and the USD Second Lien Term Loan each have a LIBOR floor of 1.00% and as such, the interest rate
cannot decrease below 4.50% and 8.00%, respectively. The EUR First Lien Term Loan has a EURIBOR floor of 0% and as such, the interest rate cannot
decrease below 3.75%. Management monitors movements in the interest rates by frequently reviewing the EURIBOR and LIBOR.
24
The Corporation’s cash consists primarily of cash on deposit with banks and its investments consist primarily of certain highly liquid, short-term instruments,
including debt securities and funds. The Corporation’s investment policy and strategy is focused on preservation of capital and supporting its liquidity
requirements, not on generating trading profits. Changes in interest rates affect the interest earned on the Corporation’s cash and investments and the market
value of those securities. However, any realized gains or losses resulting from such interest rate changes would occur only if the Corporation sold the
investments prior to maturity.
Liquidity Risk
The Corporation is also exposed to liquidity risk with respect to its contractual obligations and financial liabilities. The Corporation manages liquidity risk by
continuously monitoring its forecasted and actual cash flows and matching maturity profiles of financial assets and liabilities. The Corporation’s objective is
to maintain a balance between continuity of funding and flexibility through borrowing facilities available through the Corporation’s banks and other lenders.
The Corporation’s policy is to seek to ensure adequate funding is available from operations, established lending facilities and other sources, including the debt
and equity capital markets, as required.
Contractual Obligations
The following is a summary of the Corporation’s contractual obligations as at December 31, 2017:
$000's
Provisions
Long-Term Debt *
Derivatives
Purchase Obligations
Total
* Includes principal and interest
Total
Payments due by period
1-3 years
Less than
1 year
4-5 years
More than
5 years
16,418
2,902,493
111,762
61,569
3,092,242
13,325
150,026
—
9,418
172,769
3,093
295,409
111,762
16,877
427,141
—
2,457,058
—
11,446
2,468,504
—
—
—
23,828
23,828
In August and September 2017, the Corporation prepaid without penalty $40 million and $75 million, respectively (collectively, the “Prepayments”), under
the USD Second Lien Term Loan using cash on its balance sheet, cash flow from operations or a combination thereof. Following the Prepayments, the
outstanding principal balance of the USD Second Lien Term loan as of the date hereof is $95 million.
Credit Facility
The Corporation obtained a first lien revolving credit facility of $100 million on August 1, 2014 in connection with the Stars Interactive Group Acquisition
(the “Credit Facility”). Maturing on August 1, 2019, the Credit Facility can be used to fund working capital needs and for general corporate purposes. The
interest rate under the Credit Facility is, at the Corporation’s option, either LIBOR plus 4.00% or ABR plus 3.00%. The applicable commitment fee on the
Credit Facility is based on a first lien leverage ratio of 3.75 to 1.00 and could range from 0.375% to 0.50%. Borrowings under the Credit Facility are subject
to the satisfaction of customary conditions, including the absence of a default and compliance with certain representations and warranties.
As at each of December 31, 2017 and 2016, the available balance under the Credit Facility was $70 million. In connection with the previously reported
December 23, 2015 Commonwealth of Kentucky trial court order for damages against certain of its subsidiaries, the Corporation filed a notice of appeal to
the Kentucky Court of Appeals and posted a $100 million supersedeas bond to stay enforcement of the order for damages during the pendency of the appeals
process. In connection with the posting of the bond, the Corporation delivered cash collateral in the amount of $40 million and letters of credit in the
aggregate amount of $30 million (collectively, the “Kentucky Bond Collateral”), thereby reducing the availability under the Credit Facility from $100 million
to $70 million.
For additional information on the proceedings in Kentucky, see below under “Legal Proceedings and Regulatory Actions” and the 2017 Annual Reports,
including under the heading “Legal Proceedings and Regulatory Actions” in the 2017 Annual Information Form and note 30 of the 2017 Annual Financial
Statements.
25
Long-Term Debt
The following is a summary of long-term debt outstanding as at December 31, 2017, 2016 and 2015 (all capitalized terms used in the table below relating to
such long-term debt are defined below):
USD First Lien Term Loan
EUR First Lien Term Loan
USD Second Lien Term Loan
CDN 2013 Debentures
Total long-term debt
Current portion
Non-current portion
Interest rate
4.83%
3.75%
8.33%
7.50%
December 31,
2016,
Principal
outstanding
balance in
local
denominated
currency
000’s
December 31,
2017,
Principal
outstanding
balance in
local
denominated
currency
000’s
December 31,
2017
Carrying
amount
$000’s
1,895,654 1,848,397 2,021,097
286,143
210,000
—
382,222
95,000
—
453,540
56,632
—
2,358,569
4,990
2,353,579
December
31,
2015
Carrying
amount
$000’s
December 31,
2015,
Principal
outstanding
December 31,
balance in
2016
local
Carrying
denominated
amount
currency
$000’s
000’s
1,965,928 2,041,616 1,978,763
307,584
161,524
21,556
2,469,427
32,889
2,436,538
296,198
166,453
—
2,428,579
47,750
2,380,829
289,048
210,000
30,000
The decrease in outstanding long-term debt from December 31, 2016 to December 31, 2017 was primarily the result of the Prepayments and quarterly
scheduled debt principal repayments, partially offset by foreign exchange fluctuations, the Repricing, and interest accretion. The decrease in outstanding long-
term debt from December 31, 2015 to December 31, 2016 was primarily the result of the repayment of the CDN 2013 Debentures (as defined below). For
additional information regarding the interest on the Corporation’s outstanding long-term debt, including the effective interest rates, see the 2017 Annual
Financial Statements. To manage its interest rate exposure on certain of its debt, the Corporation previously entered into the Swap Agreements.
The principal repayments of the Corporation’s currently outstanding long-term debt over the next five years, as adjusted for revised estimates of excess cash
flow allocations to the principal repayment of the First Lien Term Loans (as defined below), amount to the following:
USD First Lien Term Loan
EUR First Lien Term Loan
USD Second Lien Term Loan
Total
CDN 2013 Debentures
1 Year
$000's
2 Years
$000's
3 Years
$000's
4 Years
$000's
5 Years
$000's
19,443
4,709
—
24,152
19,443
4,709
—
24,152
19,443 1,837,326
444,960
4,709
—
—
24,152 2,282,286
—
—
95,000
95,000
On February 7, 2013, the Corporation closed a private placement of units consisting of debentures and warrants, issuing and selling 30,000 units at a price of
CDN $1,000 per unit for aggregate gross proceeds of CDN $30 million (the “CDN 2013 Debentures”). The CDN 2013 Debentures matured on January 31,
2016 and were repaid in full on February 1, 2016 and the then-remaining outstanding warrants expired on January 31, 2016. As of such date, the Corporation
had no further obligations under or with respect to the same.
First and Second Lien Term Loans
On August 1, 2014, the Corporation completed the Stars Interactive Group Acquisition, which was partly financed through the issuance of long-term debt,
allocated into first and second lien term loans. Giving effect to a previously disclosed refinancing in August 2015 (the “Refinancing”) and the Repricing, as at
December 31, 2017, the first lien term loans consisted of a $1.85 billion first lien term loan priced at LIBOR plus 3.50% (the “USD First Lien Term Loan”)
and a €378 million seven-year first lien term loan priced at EURIBOR plus 3.75% (the “EUR First Lien Term Loan” and, together with the USD First Lien
Term Loan, the “First Lien Term Loans”), with 1.00% LIBOR and 0% EURIBOR floors, respectively, and each repayable on August 22, 2021. Giving effect
to the Refinancing,
26
Repricing and Prepayments, as at December 31, 2017, the second lien term loan consisted of a $95 million loan priced at LIBOR plus 7.00%, with a 1.00%
LIBOR floor and repayable on August 1, 2022 (the “USD Second Lien Term Loan”).
As previously disclosed, on March 3, 2017, the Corporation completed the repricing and retranching of the First Lien Term Loans and amended the applicable
credit agreement (collectively, the “Repricing”). The Repricing included reducing the applicable interest rate margin on the First Lien Term Loans by 0.5% to
LIBOR plus 3.5% with a LIBOR floor of 1% to EURIBOR plus 3.75% with a 0% EURIBOR floor, respectively, and retranching such loans by raising €100
million of incremental debt on the EUR First Lien Term Loan and using the proceeds to reduce the USD First Lien Term Loan by $106 million. The
Corporation and the lenders also amended the credit agreement for the First Lien Term Loans to, among other things, reflect the Repricing and waive the
required 2016 and 2017 excess cash flow repayments (as defined and described in the credit agreement) previously due on March 31, 2017 and March 31,
2018, respectively.
In addition to the Refinancing and Repricing, the Corporation also made the Prepayments during the year ended December 31, 2017. As a result of the
Refinancing, Repricing and Prepayments, the Corporation realized aggregate savings of approximately $6.5 million and $16.3 million in interest expense for
the three months and year ended December 31, 2017, respectively.
To finance the cash portion of the purchase price for CrownBet, a subsidiary of the Corporation, to acquire William Hill Australia, the Corporation obtained
committed financing for a $325 million incremental USD First Lien Term Loan. See “Overview and Outlook – Recent Corporate Developments” for
additional information.
First Lien Term Loans
Except as set forth above, the Corporation is required to allocate up to 50% of its excess cash flow to the principal repayment of the First Lien Term
Loans. With respect to the First Lien Term loans, excess cash flow means EBITDA of Stars Group Holdings B.V. (a direct or indirect parent of Stars
Interactive Group and CrownBet) on a consolidated basis for such excess cash flow period (i.e., each fiscal year commencing with the fiscal year ended on
December 31, 2015), minus, without duplication, debt service, capital expenditures, permitted business acquisitions and investments, taxes paid in cash,
increases in working capital, cash expenditures in respect of swap agreements, any extraordinary, unusual or nonrecurring loss, income or gain on asset
dispositions, and plus, without any duplication, decreases in working capital, capital expenditures funded with the proceeds of the issuance of debt or the
issuance of equity, cash payments received in respect of swap agreements, any extraordinary, unusual or nonrecurring gain realized in cash and cash interest
income to the extent deducted in the computation of EBITDA.
The percentage allocated to the principal repayment can fluctuate based on the following:
•
•
If the total secured leverage ratio (as defined in the credit agreement governing the First Lien Term Loans) at the end of the
applicable excess cash flow period is less than or equal to 4.75 to 1.00 but is greater than 4.00 to 1.00, the repayments will be 25% of
the excess cash flow.
If the total secured leverage ratio at the end of the applicable excess cash flow period is less than or equal to 4.00 to 1.00, the
repayment will be 0% of the excess cash flow.
As a result of the Refinancing and Repricing and respective amendments to the credit agreement for the First Lien Term Loans, the Corporation was not
required to allocate any excess cash flow to the principal repayment of the First Lien Term Loans during the fiscal years ended December 31, 2016 or 2017
and will not be required to do so during the fiscal year ending December 31, 2018. However, to the extent that the Corporation has such excess cash flow in
applicable periods beginning in 2019 and depending upon the total secured leverage ratio, the Corporation may be required to allocate the applicable portion
of such excess cash flow for such principal repayment.
The agreement for the First Lien Term Loans limits Stars Group Holdings B.V. and its subsidiaries’ ability to, among other things, incur additional debt or
grant additional liens on its assets and equity, distribute equity interests and distribute any assets to third parties.
As described above under “—Market Risk—Interest Rate Sensitivity”, the Corporation is exposed to fluctuations in the LIBOR rate as certain of its
indebtedness has variable interest rates, which could lead to increased interest charges. During the year ended December 31, 2015, a subsidiary of the
Corporation entered into cross currency
27
interest rate swap agreements (collectively, the “Swap Agreements”), designated and qualifying as cash flow hedges, to manage the interest rate exposure on
the USD First Lien Term Loan. Under the Swap Agreements, the subsidiary agreed to exchange a notional principal amount of approximately $2.07 billion of
the USD First Lien Term Loan into Euro denominated fixed rate debt in order to fix future interest and principal payments in terms of the Euro, which is the
subsidiary’s functional currency. In doing so, the Corporation currently expects to mitigate the impact of changes in interest rates and the impact of foreign
currency gains and losses resulting from changes in the U.S. dollar to Euro exchange rate, thereby potentially reducing the uncertainty of future cash flows.
As at December 31, 2017, the fair value of the Swap Agreements represented a liability of $111.76 million. As a result of the Swap Agreements, the
Corporation had interest savings of $16.58 million during the year. During the year ended December 31, 2017, the Corporation unwound and settled a
notional principal amount of $616.54 million of the Swap Agreements for a gain of $13.90 million. As a result of this unwinding and settlement,
approximately $1.16 billion of the USD First Lien Term Loan is covered under the Swap Agreements. The remaining $690.29 million USD First Lien Term
Loan is exposed to fluctuations in interest rates.
See also “Risk Factors and Uncertainties” below and in the 2017 Annual Information Form, particularly under the heading “Risk Factors and Uncertainties—
Risks Related to the Corporation’s Substantial Indebtedness”.
USD Second Lien Term Loan
During the year ended December 31, 2017 and during a portion of the year ended December 31, 2016, the Corporation designated a portion of the USD First
Lien Term Loan, the entire principal amount of the USD Second Lien Term Loan and its then-outstanding deferred consideration for the Stars Interactive
Group Acquisition as a foreign exchange hedge of its net investment in its foreign operations. Accordingly, the portion of the gains arising from the
translation of the USD-denominated liabilities that was determined to be an effective hedge during the period was recognized in other comprehensive income
and accumulated under the heading cumulative foreign currency translation reserve, counterbalancing a portion of the losses arising from translation of the
Corporation’s net investment in its foreign operations.
During each of the three months and year ended December 31, 2017, there was no ineffectiveness with respect to the net investment hedge. As at December
31, 2017, the Corporation had outstanding forward contracts to sell USD and purchase a notional amount of £67.5 million to hedge the Corporation’s
exposure to GBP expenses in 2018. These contracts have been designated as cashflow hedges. There were no equivalent contracts outstanding as at December
31, 2016.
For the three months and year ended December 31, 2017, the Corporation recorded an unrealized exchange loss on translation of $11.82 million and $134.72
million, respectively, as compared to a loss of $42.00 million and a loss of $48.29 million for each of the prior year periods, in the cumulative translation
adjustment in reserves related to the translation of a portion of the USD First Lien Term Loan, USD Second Lien Term Loan and the deferred purchase price
for the Stars Interactive Group Acquisition.
See note 31 in the 2017 Annual Financial Statements for further information in respect of financial instruments.
Comparison of the Three Months Ended December 31, 2017 and 2016
CASH FLOWS BY ACTIVITY
The table below outlines a summary of cash inflows and outflows by activity for the three months ended December 31, 2017 and 2016.
Net cash inflows from operating activities
Net cash outflows from financing activities
Net cash inflows from investing activities
Three Months Ended December 31,
2017
$000's
2016
$000's
123,756
(28,275)
184,958
148,295
(237,032)
147,441
28
Cash Inflows from Operating Activities
The Corporation generated cash inflows from operating activities for the three months ended December 31, 2017 and 2016. The Corporation’s cash inflows
from operating activities decreased for the three months ended December 31, 2017 as compared to the prior year period despite increased EBITDA primarily
due to realized gains on its completed dispositions of its retained ownership in NYX Gaming Group, the NYX Sub Preferred Shares and Jackpotjoy
securities.
Cash Outflows from Financing Activities
During the three months ended December 31, 2017, the primary expenditure affecting cash outflows from financing activities was the repayment of long-term
debt interest and principal related to the First Lien Term Loans and the repayment of interest on the USD Second Lien Term Loan. During the three months
ended December 31, 2016, the primary expenditures affecting cash outflows from financing activities were (i) the payment of $200 million on the deferred
purchase price for the Stars Interactive Group Acquisition in November 2016 and (ii) the repayment of long-term debt interest and principal related to the
First Lien Term Loans and the USD Second Lien Term Loan.
Cash Inflows from Investing Activities
During the three months ended December 31, 2017, the Corporation’s cash inflows from investing activities were primarily driven by (i) a change in the
securities underlying the customer deposits from those classified as investments to those classified as cash and cash equivalents and (ii) proceeds from the
completed dispositions of the Corporation’s retained ownership in NYX Gaming Group, the NYX Sub Preferred Shares and Jackpotjoy securities, all of
which were partially offset by capital expenditures. During the three months ended December 31, 2016, the Corporation’s cash inflows from investing
activities were primarily driven by the derestriction of certain required monthly excess cash flow deposits to partially fund the $200 million payment on the
deferred purchase price for the Stars Interactive Group Acquisition in November 2016, partially offset by capital expenditures, primarily consisting of
investments in online poker, casino and sportsbook development.
Comparison of the Years Ended December 31, 2017 and 2016
The table below outlines a summary of cash inflows and outflows by activity for the years ended December 31, 2017 and 2016.
Net cash inflows from operating activities
Net cash outflows from financing activities
Net cash inflows from investing activities
Cash Inflows from Operating Activities
Year Ended December 31,
2017
$000's
2016
$000's
494,600
(443,802)
174,850
349,936
(375,586)
28,871
The Corporation generated cash inflows from operating activities for the years ended December 31, 2017 and 2016. The Corporation’s cash inflows from
operating activities increased for the year ended December 31, 2017 as compared to the prior year period primarily as a result of increased EBITDA generated
from the Corporation’s underlying operations.
Cash Outflows from Financing Activities
During the year ended December 31, 2017, the primary expenditures affecting cash outflows from financing activities were (i) the payment of $197.5 million
on the deferred purchase price for the Stars Interactive Group Acquisition during the period and (ii) the repayment of long-term debt interest and principal
related to the First Lien Term Loans and the repayment of interest on the USD Second Lien Term Loan, including the Prepayments, both partially offset by
proceeds from exercised employee stock options. During the year ended December 31, 2016, the primary expenditures affecting the cash outflows from
financing activities were (i) the payment of $200 million on
29
the deferred purchase price for the Stars Interactive Group Acquisition in November 2016 and (ii) the repayment of long-term debt interest and principal
related to the First Lien Term Loans and the USD Second Lien Term Loan.
Cash Inflows from Investing Activities
During the year ended December 31, 2017, the Corporation’s cash inflows from investing activities were primarily driven by (i) a change in the securities
underlying the customer deposits from those classified as investments to those classified as cash and cash equivalents and (ii) proceeds from the completed
dispositions of the Corporation’s retained ownership in NYX Gaming Group, the NYX Sub Preferred Shares and Jackpotjoy securities, all of which were
partially offset by capital expenditures, primarily consisting of investments in online poker, casino and sportsbook development. During the year ended
December 31, 2016, cash inflows from investing activities primarily consisted of the derestriction of certain required monthly excess cash flow deposits to
partially fund the $200 million payment on the deferred purchase price, partially offset by (i) the required monthly excess cash flow deposits for the deferred
purchase price for the Stars Interactive Group Acquisition, (ii) the cash collateral delivered as part of the Kentucky Bond Collateral, (iii) capital expenditures,
primarily consisting of investments in online poker, casino and sportsbook development, and (iv) the payment of certain minimum revenue guarantees in
connection with the Corporation’s divestiture of certain former businesses.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For a description of the Corporation’s significant accounting policies, critical accounting estimates and judgments, and related information, see note 2 to the
2017 Annual Financial Statements. Other than as set forth below, there have been no changes to the Corporation’s significant accounting policies or critical
accounting estimates or judgments during the year ended December 31, 2017.
Change in Critical Accounting Estimates
During the year ended December 31, 2017, the Corporation made the following changes to its critical accounting estimates or judgments:
Tax provision in respect of prior years
Determining the Corporation’s income tax and its provisions for income taxes involves a significant degree of estimation and judgement, particularly in
respect of open tax returns relating to prior years where the liabilities remain to be agreed with the local tax authorities. Provisions for income taxes are
recognized based on management’s best estimate of the outcome after taking into consideration all available evidence, and where appropriate, after taking
external advice into consideration. The tax provision recorded in the Corporation’s 2017 consolidated financial statements in respect of prior years relate to
intercompany trading arrangements entered into in the normal course of business. Due to the uncertainty associated with such tax items it is possible that at a
future date, on resolution of the open tax matters, the final outcome may vary significantly and there is the potential for a material adjustment to the carrying
amounts of the liability recorded as a result of this estimation and uncertainty.
30
RECENT ACCOUNTING PRONOUNCEMENTS
Changes in Accounting Policies Adopted
During the year ended December 31, 2017, there were no changes to the Corporation’s accounting policies adopted.
New Accounting Pronouncements – Not Yet Effective
For a list of the new and revised accounting standards under IFRS that the Corporation has not yet applied, see the 2017 Annual Financial Statements. Subject
to full analysis the Corporation does not currently expect that the adoption of such new and revised standards will have a material impact on the financial
statements of The Stars Group in future periods, except as noted below:
IFRS 9, Financial Instruments
The IASB issued IFRS 9 relating to the classification and measurement of financial instruments. IFRS 9 uses a single approach to determine whether a
financial asset is measured at amortized cost or fair value, and this approach replaces the previous requirements of IAS 39, Financial Instruments:
Recognition and Measurement. The approach in IFRS 9 is based on how an entity manages its financial assets (i.e., its business model) and the contractual
cash flow characteristics of those financial assets. IFRS 9 also amends the impairment criteria by introducing a new expected credit losses model for
calculating impairment on financial assets and commitments to extend credit. The standard also introduces minor changes applicable to financial liabilities.
Further, IFRS 9 includes new hedge accounting requirements that align hedge accounting more closely with risk management. These new requirements do not
fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness, but do allow more hedging strategies
that are used for risk management to qualify for hedge accounting and for more judgment by management in assessing the effectiveness of those hedging
relationships, replacing the rules-based approach to assessing hedge effectiveness under IAS 39. Extended disclosures in respect of risk management activity
will also be required under the new standard.
Based on the analysis undertaken to date, the Corporation expects the following impact on its consolidated financial statements and disclosures as a result of
the adoption of the new standard on January 1, 2018:
Certain equity investments that are currently classified as available-for-sale ($7.0 million as at December 31, 2017) will be reclassified to financial assets at
fair value through profit or loss on January 1, 2018. Related fair value gains of $nil will be transferred from the available-for-sale financial assets reserve to
retained earnings on January 1, 2018 and fair value gains related to these investments amounting to $nil were recognized in profit or loss in the 2017 financial
year as these investments are currently held at cost.
Investment in debt instruments held by the Corporation (i.e., bonds) that are currently classified as available-for-sale will satisfy the conditions for
classification as at fair value through other comprehensive income and hence there will be no change to the accounting for these assets. Related fair value
gains of $nil will be transferred from the available-for-sale financial assets reserve to the financial assets at fair value through other comprehensive income
reserve on January 1, 2018.
The other financial assets held by the Corporation include debt instruments currently measured at amortized cost which continue to meet the conditions for
classification at amortized cost under IFRS 9. Accordingly, the Corporation does not expect the new guidance to affect the classification and measurement of
these financial assets.
The new impairment model requires the recognition of impairment provisions based on expected credit losses rather than only incurred credit losses as is the
case under IAS 39. It applies to financial assets classified at amortized cost, debt instruments measured at fair value through other comprehensive income,
contract assets under IFRS 15, Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee contracts. Based
on the assessments undertaken to date, the Corporation does not expect a material increase in the loss allowance against these assets.
The impact of historic modifications arising on the Corporation’s existing long-term debt are required to be recognized on transition to the new standard. This
will result in an adjustment to the carrying amount of long-term debt and a corresponding adjustment in the opening balance of retained earnings on January
1, 2018. The de-recognition rules remain unchanged from IAS 39 Financial Instruments: Recognition and Measurement.
31
As permitted by IFRS 9, the Corporation intends to elect to continue to apply the hedge accounting requirements of IAS 39 to all of its hedging relationships,
rather than apply the new requirements of IFRS 9 upon adoption of the new standard on January 1, 2018.
The new standard also introduces requirements for expanded disclosure and changes in presentation. These requirements are expected to change the nature
and extent of the Corporation’s disclosures about its financial instruments, particularly in the year of adoption.
The Corporation will apply the new rules retrospectively from January 1, 2018, with the practical expedients permitted under the standard. Comparative
information for 2017 will not be restated.
IFRS 15, Revenues from Contracts with Customers
The Financial Accounting Standards Board and IASB issued converged standards in respect of revenue recognition. IFRS 15 affects any entity entering into
contracts with customers, unless those contracts fall within the scope of other standards such as insurance contracts, financial instruments or lease contracts.
IFRS 15 supersedes the revenue recognition requirements in IAS 18, Revenue, IFRIC 13, Customer Loyalty Programs, and the majority of other industry-
specific guidance.
The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue, i.e., at a point in time or over time.
The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and
judgmental thresholds have been introduced, which may affect the amount or timing of revenue recognized.
The Corporation has completed its analysis and expects the following impact on its consolidated financial statements and disclosures as a result of the
adoption of the new standard on January 1, 2018:
The timing and amount of revenue recognized is not expected to be materially affected as a result of adoption, but the Corporation does expect an impact on
presentation and disclosure due to the requirement to present revenue from contracts with customers separately from other sources of income.
The Corporation does not believe contract assets and liabilities as of January 1, 2018 will be material such that they require separate disclosure in the
consolidated statement of financial position or in the notes to the consolidated financial statements.
The new standard will be applied using the modified retrospective approach, whereby the cumulative impact of adoption will be recognized in retained
earnings as of January 1, 2018 and comparative information for 2017 will not be restated. The Corporation does not believe this approach will result in an
adjustment to the opening balance of retained earnings on adoption.
IFRS 16, Leases
The IASB recently issued IFRS 16 to replace IAS 17, Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize
assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-
use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments.
This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors.
The Corporation intends to adopt IFRS 16 from its effective date of January 1, 2019. The Corporation is currently evaluating the impact of this standard, and
does not anticipate applying it prior to its effective date.
32
As at December 31, 2017, the Corporation had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the
Corporation’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
OFF BALANCE SHEET ARRANGEMENTS
OUTSTANDING SHARE DATA
Common Shares issued and outstanding
Common Shares issuable upon conversion of 1,138,978 Preferred Shares
Common Shares issuable upon exercise of options
Common Shares issuable upon exercise of warrants
Common Shares issuable upon settlement of other equity-based awards
Total Common Shares on a fully-diluted basis
33
As at March 12, 2018
148,270,626
58,763,272
6,496,451
4,000,000
739,543
218,269,892
LEGAL PROCEEDINGS AND REGULATORY ACTIONS
Other than as set forth in the 2017 Annual Information Form, there were no material changes or updates to the Corporation’s material legal proceedings or
regulatory actions during the three months ended December 31, 2017. For additional information regarding the Corporation’s material legal proceedings and
regulatory actions, see the 2017 Annual Reports, particularly under the heading “Legal Proceedings and Regulatory Actions” in the 2017 Annual Information
Form and note 30 to the 2017 Annual Financial Statements.
Kentucky Proceeding
For information regarding the previously reported proceeding in Kentucky, see above under “Liquidity and Capital Resources—Credit Facility”, the 2017
Annual Information Form, including under the heading “Legal Proceedings and Regulatory Actions” therein, and note 30 to the 2017 Annual Financial
Statements.
The AMF Investigation and Foreign Payments Matter
For information regarding the previously reported AMF investigation and related matters and foreign payments matter, see the 2017 Annual Information
Form.
Class Actions
For information regarding the previously reported class action lawsuits, see the 2017 Annual Information Form.
DISCLOSURE CONTROLS AND PROCEDURES AND
INTERNAL CONTROL OVER FINANCIAL REPORTING
The applicable rules of the U.S. Securities and Exchange Commission and the Canadian Securities Administrators require The Stars Group’s certifying
officers, the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), to establish and maintain disclosure controls and procedures
(“DC&P”) and internal control over financial reporting (“ICFR”), as those terms are defined in such rules. In compliance with these rules, the Corporation has
filed applicable certifications signed by the CEO and the CFO that, among other things, report on the design of each of DC&P and ICFR.
Disclosure Controls and Procedures
The CEO and CFO have designed DC&P, or have caused them to be designed under their supervision, to provide reasonable assurance that:
•
•
material information relating to the Corporation is made known to them by others, particularly during the period in which the annual and interim
filings are being prepared; and
information required to be disclosed in the annual filings, interim filings or other reports filed or submitted under securities legislation is recorded,
processed, summarized and reported within the time periods specified in applicable securities legislation.
The CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Corporation’s DC&P at the financial year end
December 31, 2017. Based on that evaluation, the CEO and CFO concluded that the Corporation’s DC&P are effective.
Management’s Annual Report on Internal Control Over Financial Reporting
The CEO and CFO have designed ICFR, or have caused it to be designed under their supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with the Corporation’s accounting and reporting standards.
The CEO and CFO have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Corporation’s ICFR at the financial year end
December 31, 2017, based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013
34
framework). Based on that evaluation, the CEO and CFO concluded that the Corporation’s ICFR are effective as of December 31, 2017.
Changes to Internal Control Over Financial Reporting
Except as noted below, there has been no change in the Corporation’s ICFR that occurred during the three months ended December 31, 2017 that has
materially affected, or is reasonably likely to materially affect, the Corporation’s ICFR.
In the Corporation’s management’s discussion and analysis for the three months and year ended December 31, 2016 and for each of the first three quarters of
2017, the Corporation’s management disclosed two material weaknesses in the Corporation’s ICFR that it had identified in its evaluation of the effectiveness
of the Corporation’s ICFR at the financial year end December 31, 2016.
The first material weakness in the Corporation’s ICFR related to derivative valuations and hedge accounting. In particular, management identified
deficiencies related to the operating effectiveness of controls over derivative valuations and hedge accounting, including specifically as it related to
management’s review of internal calculations of fair value of derivatives and its review of the designation of such derivatives in hedge relationships. To
remediate this material weakness, the Corporation engaged an external service provider that specializes in derivative valuations and provides a Type 1 report
in accordance with Statement on Standards for Attestation Engagements (SSAE) No. 16, Reporting on Controls at a Service Organization (a “SOC1 Report”)
to provide applicable valuations for comparison to management’s internal valuations and to assist with hedge documentation and technical assessments
related to any significant changes to existing hedge relationships or new hedge relationships. During the fourth quarter of fiscal year ended December 31,
2017, the Corporation successfully completed the testing necessary for management to conclude that this material weakness had been remediated.
The second material weakness in the Corporation’s ICFR related to foreign exchange rate information. Specifically, management identified deficiencies
related to the design of controls over the foreign exchange rates used by the Corporation to determine the impact of foreign exchange fluctuations and for
financial reporting purposes. Such information was being obtained from a single source that did not provide management with a SOC1 Report and
management did not validate such data. To remediate this material weakness, the Corporation now obtains foreign exchange rate information from an
additional reputable source in order to compare such information against that provided by its previous sole information source. During the fourth quarter of
fiscal year ended December 31, 2017, the Corporation successfully completed the testing necessary for management to conclude that this material weakness
had been remediated.
Limitations on Effectiveness of DC&P and ICFR
In designing and evaluating DC&P and ICFR, management recognizes that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives. In addition, the design of DC&P and ICFR must reflect the fact that there are
resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
See also “Risk Factors and Uncertainties—Risks Related to the Corporation’s Business—If the Corporation’s internal controls are ineffective, its operating
results and market confidence in its reported financial information could be adversely affected” in the 2017 Annual Information Form.
35
RISK FACTORS AND UNCERTAINTIES
Certain factors may have a material adverse effect on the Corporation’s business, financial condition and results of operations. Current and prospective
investors should carefully consider the risks and uncertainties and other information contained in this MD&A, the 2017 Annual Reports, particularly under
the heading “Risk Factors and Uncertainties” in the 2017 Annual Information Form, and in other filings that the Corporation has made and may make in the
future with applicable securities authorities, including those available on SEDAR at www.sedar.com, EDGAR at www.sec.gov or The Stars Group’s website
at www.starsgroup.com. The risks and uncertainties described herein and therein are not the only ones the Corporation may face. Additional risks and
uncertainties that the Corporation is unaware of, or that the Corporation currently believes are not material, may also become important factors that could
adversely affect the Corporation’s business. If any of such risks actually occur, the Corporation’s business, financial condition, results of operations, and
future prospects could be materially and adversely affected. In that event, the trading price of the Common Shares (or the value of any other securities of the
Corporation) could decline, and the Corporation’s securityholders could lose part or all of their investment.
36
FURTHER INFORMATION
Additional information relating to The Stars Group and its business, including, without limitation, the 2017 Annual Reports and other filings that The Stars
Group has made and may make in the future with applicable securities authorities, may be found on or through SEDAR at www.sedar.com, EDGAR at
www.sec.gov or The Stars Group’s website at www.starsgroup.com. Additional information, including directors’ and officers’ remuneration and indebtedness,
principal holders of The Stars Group securities and securities authorized for issuance under equity compensation plans, is also contained in the Corporation’s
most recent management information circular for the most recent annual meeting of shareholders of the Corporation.
In addition to press releases, securities filings and public conference calls and webcasts, The Stars Group intends to use its investor relations page on its
website as a means of disclosing material information to its investors and others and for complying with its disclosure obligations under applicable securities
laws. Accordingly, investors and others should monitor the website in addition to following The Stars Group’s press releases, securities filings, and public
conference calls and webcasts. This list may be updated from time to time.
Toronto, Ontario
March 14, 2018
(Signed) “Brian Kyle”
_____________________
Brian Kyle
Chief Financial Officer
37
I, Rafael (Rafi) Ashkenazi, certify that:
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 99.4
1.
2.
3.
4.
I have reviewed this annual report on Form 40-F of The Stars Group Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the issuer and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered
by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over
financial reporting; and
5.
The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s
internal control over financial reporting.
Date: March 14, 2018
/s/ Rafael (Rafi) Ashkenazi
Name: Rafael (Rafi) Ashkenazi
Title: Chief Executive Officer
I, Brian Kyle, certify that:
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 99.5
1.
2.
3.
4.
I have reviewed this annual report on Form 40-F of The Stars Group Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the issuer and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered
by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over
financial reporting; and
5.
The issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s
internal control over financial reporting.
Date: March 14, 2018
/s/ Brian Kyle
Name: Brian Kyle
Title: Chief Financial Officer
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of The Stars Group Inc. (the “Registrant”) on Form 40-F for the year ended December 31, 2017, as filed with the
Commission on the date hereof (the “Report”), Rafael (Rafi) Ashkenazi, as Chief Executive Officer of the Registrant, hereby certifies, pursuant to 18 U.S.C.
§ 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Exhibit 99.6
/s/ Rafael (Rafi) Ashkenazi
Name: Rafael (Rafi) Ashkenazi
Title: Chief Executive Officer
Date: March 14, 2018
This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-
Oxley Act of 2002, be deemed filed by the Registrant for purposes of §18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or
otherwise subject to the liability of that section. This certification is not, and shall not be deemed, incorporated by reference in the Report or any other filing
of the Registrant under the Securities Act of 1933, as amended, or the Exchange Act.
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of The Stars Group Inc. (the “Registrant”) on Form 40-F for the year ended December 31, 2017, as filed with the
Commission on the date hereof (the “Report”), Brian Kyle, as Chief Financial Officer of the Registrant, hereby certifies, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Exhibit 99.7
/s/ Brian Kyle
Name: Brian Kyle
Title: Chief Financial Officer
Date: March 14, 2018
This certification accompanies the Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-
Oxley Act of 2002, be deemed filed by the Registrant for purposes of §18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or
otherwise subject to the liability of that section. This certification is not, and shall not be deemed, incorporated by reference in the Report or any other filing
of the Registrant under the Securities Act of 1933, as amended, or the Exchange Act.
Deloitte LLP
2 New Street Square
London
EC4A 3BZ
Phone: +44 (0)20 7936 3000
Fax: +44 (0)20 7583 1198
www.deloitte.co.uk
Exhibit 99.8
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements No. 333-207925 and No. 333-219986 on Form S-8 and Registration
Statement No. 333-221875 on Form F-10 and to the use of our reports dated March 14, 2018, relating to the consolidated financial statements
of The Stars Group Inc. and subsidiaries (the “Company”) and the effectiveness of the Company’s internal control over financial reporting
appearing in this Annual Report on Form 40-F of The Stars Group Inc. for the year ended December 31, 2017.
/s/ Deloitte LLP
Deloitte LLP
London, United Kingdom
March 14, 2018
Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London, EC4A 3BZ, United Kingdom.
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