UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of November 2017
Commission File Number: 001-37403
THE STARS GROUP INC.
(Translation of registrant’s name into English)
200 Bay Street
South Tower, Suite 3205
Toronto, Ontario, Canada
M5J 2J3
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☐ Form 40-F ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐
op
On November 9, 2017, The Stars Group Inc. (the “Company”) reported its financial results for the three and nine months ended September 30, 2017 and issued a news release regarding the same and other matters (the “Release”). On the same date, the Company filed on SEDAR at www.sedar.com its (i) Interim Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2017 (the “Q3 Financial Statements”), (ii) Management’s Discussion and Analysis for the three and nine months ended September 30, 2017 (the “Q3 MD&A”), (iii) Chief Executive Officer Certification of Interim Filings, dated November 9, 2017 (the “CEO Certification”), and (iv) Chief Financial Officer Certification of Interim Filings, dated November 9, 2017 (the “CFO Certification”). Copies of the Release, Q3 Financial Statements, Q3 MD&A, CEO Certification and CFO Certification are each attached hereto as Exhibits 99.1, 99.2, 99.3, 99.4 and 99.5, respectively, and are incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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The Stars Group Inc. |
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Date: November 9, 2017 |
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By: |
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/s/ Brian Kyle |
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Name: |
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Brian Kyle |
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Title: |
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Chief Financial Officer |
Exhibit No. |
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Description |
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99.1 |
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News Release, dated November 9, 2017 |
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99.2 |
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Interim Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2017 |
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99.3 |
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Management’s Discussion and Analysis for the three and nine months ended September 30, 2017 |
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99.4 |
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Chief Executive Officer Certification of Interim Filings, dated November 9, 2017 |
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99.5 |
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Chief Financial Officer Certification of Interim Filings, dated November 9, 2017 |
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Exhibit 99.1
The Stars Group Reports Third Quarter 2017 Results
TORONTO, Canada, November 9, 2017 – The Stars Group Inc. (NASDAQ: TSG; TSX: TSGI) today reported its financial results for the third quarter ended September 30, 2017, reconfirmed its full year 2017 financial guidance ranges and provided certain additional highlights and updates. Unless otherwise noted, all dollar ($) amounts are in U.S. dollars.
“Our operations and management continued to perform in the third quarter, delivering strong year-over-year growth bolstered by the launch of Stars Rewards,” said Rafi Ashkenazi, Chief Executive Officer. “Not only did we see improvement in our poker business, but our casino continues to grow with a significant active player base and our online sportsbook continues to see meaningful growth in turnover. To build upon these achievements, we plan to focus on reinvesting in our core products and increasing our investment in marketing for the remainder of 2017 and into 2018 while continuing to explore further growth opportunities.”
Third Quarter and Year-to-Date 2017 Financial Summary(1)
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Three Months Ended September 30, |
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Year-over-Year Change |
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Nine Months Ended September 30, |
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Year-over-Year Change |
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$000’s, except percentages and per share amounts |
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2017 |
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2016 |
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2017 |
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2016 |
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Total Revenue |
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329,443 |
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270,681 |
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21.7% |
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952,065 |
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844,961 |
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12.7% |
Adjusted EBITDA |
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155,767 |
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123,164 |
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26.5% |
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453,305 |
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376,489 |
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20.4% |
Net cash inflows from operating activities |
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144,870 |
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86,693 |
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67.1% |
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370,843 |
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201,641 |
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83.9% |
Adjusted Cash Flow from Operations |
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141,986 |
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84,976 |
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67.1% |
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393,241 |
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278,122 |
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41.4% |
Net earnings |
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75,874 |
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12,523 |
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505.9% |
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212,110 |
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90,511 |
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134.3% |
Adjusted Net Earnings |
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119,595 |
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84,979 |
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40.7% |
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346,990 |
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259,686 |
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33.6% |
Diluted earnings per common share |
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$ 0.37 |
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$ 0.06 |
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516.7% |
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$ 1.05 |
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$ 0.47 |
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123.4% |
Adjusted Net Earnings per Diluted Share |
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$ 0.58 |
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$ 0.42 |
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38.1% |
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$ 1.71 |
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$ 1.34 |
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27.6% |
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(1) For important information on The Stars Group’s non-IFRS measures, see below under “Non-IFRS and Non-U.S. GAAP Measures” and the tables under “Reconciliation of Non-IFRS Measures to Nearest IFRS Measures”.
Third Quarter 2017 and Subsequent Financial Highlights
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Revenues – Total revenues for the quarter increased approximately 21.7% year-over-year. Excluding the impact of year-over-year changes in foreign exchange rates, total revenues for the quarter would have increased by approximately 16.8%. Real-money online poker revenues and real-money online casino and sportsbook combined revenues represented approximately 67.2% and 28.9% of total revenues for the quarter, respectively, as compared to approximately 72.7% and 23.7% for the prior year period. |
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Poker Revenues – Real-money online poker revenues for the quarter were $221.4 million, or an increase of approximately 12.5% year-over-year. Excluding the impact of year-over-year changes in foreign exchange rates, real-money online poker revenues would have increased by approximately 7.5% for the quarter. The year-over-year increase was primarily driven by the implementation of the Stars Rewards loyalty program. |
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Casino & Sportsbook Revenues – Real-money online casino and sportsbook combined revenues for the quarter were $95.2 million, or an increase of approximately 48.3% year-over-year. Excluding the impact of year-over-year changes in foreign exchange rates, real-money online casino and sportsbook combined revenues would have increased by approximately 43.3% for the quarter. |
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using cash on its balance sheet and cash flow from operations. The principal balance of the second lien term loan as of the date hereof is $95 million. |
Third Quarter 2017 and Subsequent Operational Highlights
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Quarterly Real-Money Active Uniques (QAUs) – Total QAUs were approximately 2.1 million, an increase of 2.1% year-over-year led by the re-launch of PokerStars in Portugal in late 2016 and the growth and expansion of The Stars Group’s real-money online casino and sportsbook offerings. Approximately 2.0 million of such QAUs played online poker during the quarter, which remained virtually flat year-over-year. The Stars Group’s online casino offerings had approximately 553,000 QAUs, an increase of 20.1% year-over-year, which The Stars Group continues to estimate is one of the largest casino player bases among its competitors, while its emerging online sportsbook offerings had approximately 273,000 QAUs, a 14.8% increase year-over-year. |
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Quarterly Net Yield (QNY) – Total QNY was $150, an increase of 18.8% year-over-year, and QNY excluding the impact of year-over-year changes in foreign exchanges rates was $144, an increase of 13.9% year-over-year. QNY is a non-IFRS measure. |
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Customer Registrations – Customer Registrations increased by 2.0 million during the quarter to approximately 115 million. |
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Launch of Stars Rewards – In July, The Stars Group launched the Stars Rewards program, which is an integrated cross-vertical loyalty program focused on customer engagement, retention and experience. This 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. The Stars Group believes that Stars Rewards has enhanced and will continue to enhance the player experience as it introduces new ways of earning rewards that are intended to be more exciting for its recreational players and distributes the rewards based on, among other things, player contributions to the overall ecosystem. To date, approximately 85% of active customers have elected to participate in Stars Rewards and nearly $45 million in prizes have been awarded. The Stars Group believes the program has positively impacted the overall product ecosystem across verticals and continues to receive positive feedback from most players. |
Full Year Guidance
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Full Year Guidance – The Stars Group reconfirmed its 2017 full year financial guidance ranges as previously announced on September 15 and continues to expect the following: |
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Revenues of between $1,285 and $1,315 million; |
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Adjusted EBITDA of between $590 and $610 million; |
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Adjusted Net Earnings of between $445 and $469 million; and |
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Adjusted Net Earnings per Diluted Share of between $2.17 and $2.31. |
These estimates reflect management’s view of current and future market and business conditions, including assumptions of (i) negative operating conditions in Poland primarily related to constraints on processing payments in that jurisdiction, the cessation of real-money online poker in Australia on September 11, 2017, and the cessation of real-money online gaming in Colombia on July 17, 2017, (ii) the introduction of Stars Rewards, (iii) no other material adverse regulatory events and (iv) no material foreign currency exchange rate fluctuations, particularly against the Euro, which is the primary depositing currency of The Stars Group’s customers, that could impact customer purchasing power as it relates to The Stars Group’s U.S. dollar denominated product offerings. Such guidance is also based on a Euro to U.S. dollar exchange rate of 1.18 to 1.00 and all other currencies at their average exchange rate for the month of August, in each case for the remainder of 2017, unaudited expected results and certain accounting assumptions.
Financial Statements, Management’s Discussion and Analysis and Additional Information; Internal Control Over Financial Reporting
For an update regarding The Stars Group’s internal control over financial reporting, including its remediation efforts with respect to the same, see “Disclosure Controls and Procedures and Internal Control Over Financial Reporting” in The Stars Group’s management’s discussion and analysis for the year ended December 31, 2016 (the “2016 MD&A”) and in The Stars Group’s management’s discussion and analysis for the three and nine months ended September 30, 2017 (the “Q3 2017 MD&A”).
The Stars Group’s unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2017 (the “Q3 2017 Financial Statements”), Q3 2017 MD&A and 2016 MD&A, as well as additional information relating to The Stars Group and its business, can be found on SEDAR at www.sedar.com, Edgar at www.sec.gov and The Stars Group’s website at www.starsgroup.com.
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.
The Stars Group will host a conference call today, November 9, 2017 at 8:30 a.m. ET to discuss its financial results for the third quarter 2017 and related matters. To access via tele-conference, please dial +1 855-327-6837 or +1 631-891-4304 ten minutes prior to the scheduled start of the call. The playback will be made available two hours after the event at +1 844-512-2921 or +1 412-317-6671. The Conference ID number is 10003774. To access the webcast please use the following link: http://public.viavid.com/index.php?id=127063
Reconciliation of Non-IFRS Measures to Nearest IFRS Measures
The table below presents reconciliations of Adjusted EBITDA, Adjusted Net Earnings and Adjusted Net Earnings per Diluted Share to net earnings, which is the nearest IFRS measure:
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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$000's, except per share amounts |
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2017 |
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2016 |
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2017 |
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2016 |
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Net earnings |
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75,874 |
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12,523 |
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212,110 |
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90,511 |
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Financial expenses |
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41,040 |
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49,458 |
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123,326 |
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101,734 |
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Income taxes expense (recovery) |
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2,186 |
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(400 |
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856 |
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4,078 |
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Depreciation of property and equipment |
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2,178 |
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2,119 |
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6,555 |
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6,109 |
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Amortization of intangible and deferred development costs |
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34,453 |
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33,326 |
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102,411 |
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96,919 |
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EBITDA |
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155,731 |
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97,026 |
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445,258 |
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299,351 |
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Stock-based compensation |
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3,298 |
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1,978 |
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7,914 |
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8,396 |
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Termination of employment agreements |
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1,357 |
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3,047 |
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4,165 |
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11,365 |
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Termination of affiliate agreements |
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— |
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1,053 |
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407 |
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3,386 |
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Loss on disposal of assets |
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338 |
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246 |
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599 |
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562 |
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(Gain) loss from investments |
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(9,024 |
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10,589 |
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(14,236 |
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14,550 |
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Acquisition-related costs |
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— |
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— |
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— |
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199 |
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Net loss (earnings) from associates and (reversal of) impairment of assets held for sale, associates and intangible assets |
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1,451 |
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574 |
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(5,861 |
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6,641 |
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Other costs (see table below) |
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2,616 |
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8,651 |
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15,059 |
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32,039 |
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Adjusted EBITDA |
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155,767 |
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123,164 |
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453,305 |
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376,489 |
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Current income tax expense |
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(3,288 |
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(342 |
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(6,690 |
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(5,814 |
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Depreciation and amortization (excluding amortization of purchase price allocation intangibles) |
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(5,556 |
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(4,369 |
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(15,740 |
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(12,359 |
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Interest (excluding interest accretion and non-refundable late payment fees related to the unpaid balance of the deferred purchase price) |
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(27,328 |
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(33,474 |
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(83,885 |
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(98,630 |
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Adjusted Net Earnings |
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119,595 |
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84,979 |
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346,990 |
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259,686 |
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Diluted Shares |
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204,800,009 |
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200,016,913 |
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202,796,952 |
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193,866,395 |
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Adjusted Net Earnings per Diluted Share |
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$0.58 |
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$0.42 |
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$1.71 |
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$1.34 |
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The table below presents certain items comprising “Other costs” in the reconciliation table above:
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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$000's |
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$000's |
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$000's |
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$000's |
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Non-U.S. lobbying and legal expenses |
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797 |
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476 |
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2,622 |
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2,300 |
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U.S. lobbying and legal expenses |
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2,119 |
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2,336 |
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9,612 |
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9,163 |
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Strategic review professional fees |
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— |
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2,237 |
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125 |
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7,372 |
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Retention bonuses |
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41 |
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437 |
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1,271 |
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2,657 |
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Non-recurring professional fees |
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664 |
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413 |
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2,168 |
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4,833 |
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AMF and other investigation professional fees (net of insurance proceeds) |
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(1,265 |
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2,587 |
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3,888 |
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4,492 |
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Austria gaming duty |
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— |
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— |
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(5,000 |
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— |
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Office restructuring and legacy business unit shutdown costs |
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260 |
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165 |
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373 |
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1,222 |
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Other costs |
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2,616 |
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8,651 |
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15,059 |
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32,039 |
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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:
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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$000's |
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$000's |
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$000's |
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$000's |
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Net cash inflows from operating activities |
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144,870 |
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86,693 |
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370,843 |
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201,641 |
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Customer deposit liability movement |
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(2,884 |
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(1,717 |
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22,398 |
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76,481 |
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Adjusted Cash Flow from Operations |
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141,986 |
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84,976 |
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393,241 |
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278,122 |
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The table below presents a reconciliation of the numerator of QNY (i.e., real-money online poker revenue and real-money online casino and sportsbook combined revenue) to the nearest IFRS measure (i.e., total revenue) as reported for the applicable period. Unless otherwise noted, any deviation in the reconciliation below to measures presented herein may be the result of immaterial adjustments made in later periods due to certain accounting reallocations.
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Three Months Ended September, |
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2017 |
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2016 |
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$000's |
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$000's |
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Total revenue |
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329,443 |
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270,681 |
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Corporate revenue |
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(213 |
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— |
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Other gaming revenue |
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(12,675 |
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(9,632 |
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Real-money online poker revenue and real-money online casino and sportsbook combined revenue |
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316,555 |
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261,049 |
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The Stars Group has not provided a reconciliation of the non-IFRS measures to the nearest IFRS measures included in its full year 2017 financial guidance provided in this release, including Adjusted EBITDA, Adjusted Net Earnings and Adjusted Net Earnings per Diluted Share, because certain reconciling items necessary to accurately project such IFRS measures, particularly net earnings (loss), cannot be reasonably projected due to a number of factors, including variability from potential foreign exchange fluctuations impacting financial expenses, and the nature of other non-recurring or one-time costs (which are excluded from non-IFRS measures but included in net earnings (loss)), as well as the typical variability arising from the audit of annual financial statements, including, without limitation, certain income tax provision accounting, and related accounting matters.
For additional information on The Stars Group’s non-IFRS measures, see below and the Q3 2017 MD&A, including under the headings “Management’s Discussion and Analysis” and “Selected Financial Information—Other Financial Information”.
About The Stars Group
The Stars Group is a leading provider of technology-based products and services in the global gaming and interactive entertainment industries. Through its Stars Interactive Group division, The Stars Group ultimately owns gaming and related consumer businesses and brands, including PokerStars, PokerStars Casino, BetStars, Full Tilt, StarsDraft, and the PokerStars Championship, PokerStars Festival and PokerStars Megastack live poker tour brands (incorporating aspects of the European Poker Tour, PokerStars Caribbean Adventure, Latin American Poker Tour and the Asia Pacific Poker Tour). These brands together have more than 115 million 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, through certain of these brands, also offers non-poker gaming products, including casino, sportsbook and daily fantasy sports. 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, the Americas and elsewhere. In particular, PokerStars is the world’s most licensed online gaming brand, holding licenses or related operating approvals in 17 jurisdictions.
Cautionary Note Regarding Forward Looking Statements
This news release contains forward-looking statements and information within the meaning of the Private Securities Litigation Reform Act of 1995 and applicable securities laws, including, without limitation, certain financial and operational expectations and projections, such as full year 2017 financial guidance, and certain future operational and growth plans and strategies. Forward-looking statements and information can, but may not always, be identified by the use of words such as “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “would”, “should”, “believe”, “objective”, “ongoing”, “imply” and similar references to future periods or the negatives of these words and expressions. These statements and information, 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 us, our subsidiaries, and our and their customers and industries. Although The Stars Group and management believe the expectations reflected in such forward-looking statements and information 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 and information 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. Specific risks and uncertainties include, but are not limited to: the heavily regulated industry in which The Stars Group carries on business; interactive entertainment and online and mobile gaming generally; current and future laws or regulations and new interpretations of existing laws or regulations with respect to interactive entertainment or online and mobile 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 distribute and market its products and services, including difficulties or delays in the same; significant barriers to entry; competition and the competitive environment within The Stars Group’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 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 Stars Group’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 Stars Group in the jurisdictions where it is currently doing business or intends to do business; 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. Other applicable risks and uncertainties include, but are not limited to, those identified in The Stars Group’s Annual Information Form for
the year ended December 31, 2016, including under the heading “Risk Factors and Uncertainties”, and in the Q3 2017 MD&A, including under the headings “Risk Factors and Uncertainties”, “Limitations of Key Metrics and Other Data” and “Key Metrics”, each available on SEDAR at www.sedar.com, EDGAR at www.sec.gov and The Stars Group’s website at www.starsgroup.com, and in other filings that The Stars Group has made and may make with applicable securities authorities in the future. Investors are cautioned not to put undue reliance on forward-looking statements or information. Any forward-looking statement or information 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.
Non-IFRS and Non-U.S. GAAP Measures
This news release references non-IFRS and non-U.S. GAAP financial measures, including QNY, Adjusted EBITDA, Adjusted Cash Flow from Operations, Adjusted Net Earnings, Adjusted Net Earnings per Diluted Share, and the foreign exchange impact on revenues (i.e., constant currency). The Stars Group 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. Although management believes these financial measures are important in evaluating The Stars Group, 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 year-over-year comparison purposes, and investors should be cautioned that the effect of the adjustments thereto provided herein have an actual effect on The Stars Group’s operating results. In addition to QNY, which is defined below under “Key Metrics and Other Data”, The Stars Group uses the following non-IFRS and non-U.S. GAAP measures in this release:
Adjusted EBITDA means net earnings (loss) before interest and financing costs, income taxes, depreciation and amortization, stock-based compensation, restructuring and certain other items.
Adjusted Cash Flow from Operations means net cash inflows (outflows) from operating activities net of customer deposit liability movements, and which The Stars Group first introduced for the quarter ended June 30, 2017.
Adjusted Net Earnings means net earnings (loss) 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.
Adjusted Net Earnings per Diluted Share 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 convertible preferred shares. The effects of anti-dilutive potential common shares are ignored in calculating Diluted Shares. See note 6 to the Q3 2017 Financial Statements. For the three and nine months ended September 30, 2017, Diluted Shares equaled 204,800,009 and 202,796,952, respectively. For the purposes of the full year 2017 financial guidance provided in this release, Diluted Shares equals between 203,000,000 and 205,000,000 for the high and low ends of the Adjusted Net Earnings per Diluted Share range, respectively.
To calculate revenue on a constant currency basis, The Stars Group translated revenue for the three months ended September 30, 2017 using the prior year's monthly exchange rates for its local currencies other than the U.S. dollar, which The Stars Group believes is a useful metric that facilitates comparison to its historical performance.
For additional information on The Stars Group’s non-IFRS measures, see the Q3 2017 MD&A, including under the headings “Management’s Discussion and Analysis” and “Selected Financial Information—Other Financial Information”.
Key Metrics and Other Data
The Stars Group 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 Stars Group at any time, and (ii) generated real-money rake or placed a real-money bet or wager on or through one of its real-money online poker, casino or sportsbook offerings during the applicable quarterly period. The Stars Group 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 (e.g., both poker and casino). 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 Stars Group into such customers’ previously funded accounts as promotions to increase their lifetime value.
The Stars Group 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 business lines (i.e., real-money online poker and real-money online casino and 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. The Stars Group provides QNY on a U.S. dollar and constant currency basis. QNY is a non-IFRS measure.
The Stars Group defines Customer Registrations as the cumulative number of online real-money and play-money customer registrations on The Stars Group’s brands.
For additional information on The Stars Group’s key metrics and other data, see the Q3 2017 MD&A, including under the headings “Limitations of Key Metrics and Other Data” and “Key Metrics”.
For investor relations, please contact:
Tim Foran
Tel: +1 437-371-5730
ir@starsgroup.com
For media inquiries, please contact:
Eric Hollreiser
Press@starsgroup.com
Exhibit 99.2
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017
November 9, 2017
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
U.S. dollars |
|
Note |
|
2017 $000’s (except per share amounts) |
|
|
2016 $000’s (except per share amounts) (As reclassified *) |
|
|
2017 $000’s (except per share amounts) |
|
|
2016 $000’s (except per share amounts) (As reclassified *) |
|
||||
Revenues |
|
4 |
|
|
329,443 |
|
|
|
270,681 |
|
|
|
952,065 |
|
|
|
844,961 |
|
Expenses |
|
4, 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
|
|
42,587 |
|
|
|
35,502 |
|
|
|
125,458 |
|
|
|
117,280 |
|
General and administrative |
|
|
|
|
140,815 |
|
|
|
136,133 |
|
|
|
408,398 |
|
|
|
433,571 |
|
Financial |
|
|
|
|
41,040 |
|
|
|
49,458 |
|
|
|
123,326 |
|
|
|
101,734 |
|
Gaming duty |
|
|
|
|
33,396 |
|
|
|
26,829 |
|
|
|
93,583 |
|
|
|
83,682 |
|
Acquisition-related costs |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
199 |
|
Total expenses |
|
|
|
|
257,838 |
|
|
|
247,922 |
|
|
|
750,765 |
|
|
|
736,466 |
|
Gain (loss) from investments |
|
|
|
|
9,024 |
|
|
|
(10,589 |
) |
|
|
14,235 |
|
|
|
(14,550 |
) |
Net (loss) earnings from associates |
|
|
|
|
(2,569 |
) |
|
|
(47 |
) |
|
|
(2,569 |
) |
|
|
644 |
|
Net earnings before income taxes |
|
|
|
|
78,060 |
|
|
|
12,123 |
|
|
|
212,966 |
|
|
|
94,589 |
|
Income taxes expense (recovery) |
|
|
|
|
2,186 |
|
|
|
(400 |
) |
|
|
856 |
|
|
|
4,078 |
|
Net earnings |
|
|
|
|
75,874 |
|
|
|
12,523 |
|
|
|
212,110 |
|
|
|
90,511 |
|
Net earnings (loss) attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders of The Stars Group Inc. |
|
|
|
|
76,082 |
|
|
|
12,675 |
|
|
|
211,987 |
|
|
|
90,953 |
|
Non-controlling interest |
|
|
|
|
(208 |
) |
|
|
(152 |
) |
|
|
123 |
|
|
|
(442 |
) |
Net earnings |
|
|
|
|
75,874 |
|
|
|
12,523 |
|
|
|
212,110 |
|
|
|
90,511 |
|
Basic earnings per Common Share |
|
6 |
|
$ |
0.52 |
|
|
$ |
0.09 |
|
|
$ |
1.45 |
|
|
$ |
0.65 |
|
Diluted earnings per Common Share |
|
6 |
|
$ |
0.37 |
|
|
$ |
0.06 |
|
|
$ |
1.05 |
|
|
$ |
0.47 |
|
* See notes 4 and 5 for further details on reclassifications.
See accompanying notes.
2
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
U.S. dollars |
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||
Net earnings |
|
|
75,874 |
|
|
|
12,523 |
|
|
|
212,110 |
|
|
|
90,511 |
|
Items that are or may be reclassified to net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments – gain in fair value * |
|
|
16,261 |
|
|
|
3,825 |
|
|
|
32,599 |
|
|
|
9,083 |
|
Available-for-sale investments – reclassified to net earnings |
|
|
(1,593 |
) |
|
|
2,181 |
|
|
|
(5,216 |
) |
|
|
2,181 |
|
Foreign continuing operations – unrealized foreign currency translation differences |
|
|
(55,279 |
) |
|
|
(25,772 |
) |
|
|
(168,064 |
) |
|
|
(106,114 |
) |
Cash flow hedges – effective portion of changes in fair value † |
|
|
(41,766 |
) |
|
|
(26,888 |
) |
|
|
(135,065 |
) |
|
|
(75,012 |
) |
Cash flow hedges – reclassified to net earnings † |
|
|
48,083 |
|
|
|
23,962 |
|
|
|
141,604 |
|
|
|
69,620 |
|
Other comprehensive loss |
|
|
(34,294 |
) |
|
|
(22,692 |
) |
|
|
(134,142 |
) |
|
|
(100,242 |
) |
Total comprehensive income (loss) |
|
|
41,580 |
|
|
|
(10,169 |
) |
|
|
77,968 |
|
|
|
(9,731 |
) |
Total comprehensive income (loss) attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders of The Stars Group Inc. |
|
|
41,788 |
|
|
|
(10,017 |
) |
|
|
77,845 |
|
|
|
(9,289 |
) |
Non-controlling interest |
|
|
(208 |
) |
|
|
(152 |
) |
|
|
123 |
|
|
|
(442 |
) |
Total comprehensive income (loss) |
|
|
41,580 |
|
|
|
(10,169 |
) |
|
|
77,968 |
|
|
|
(9,731 |
) |
* net of income tax expense of $nil and income tax recovery of $146,000 for the 2017 periods, respectively (2016 - net of income tax expense of $569,000 for both periods).
† net of income tax of $nil for the 2017 periods (2016 - $nil for both periods).
See accompanying notes.
3
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
|
|
|
As at September 30, |
|
|
As at December 31, |
|
||
|
|
|
|
2017 |
|
|
2016 |
|
||
U.S. dollars |
|
Note |
|
$000’s |
|
|
$000’s |
|
||
ASSETS |
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - operational |
|
|
|
|
109,578 |
|
|
|
129,459 |
|
Cash and cash equivalents - customer deposits |
|
|
|
|
117,612 |
|
|
|
138,225 |
|
Total cash and cash equivalents |
|
|
|
|
227,190 |
|
|
|
267,684 |
|
Restricted cash advances and collateral |
|
|
|
|
7,067 |
|
|
|
5,767 |
|
Current investments |
|
7 |
|
|
88,641 |
|
|
|
59,977 |
|
Current investments - customer deposits |
|
|
|
|
234,900 |
|
|
|
228,510 |
|
Total current investments |
|
|
|
|
323,541 |
|
|
|
288,487 |
|
Accounts receivable |
|
|
|
|
79,403 |
|
|
|
81,557 |
|
Inventories |
|
|
|
|
447 |
|
|
|
515 |
|
Prepaid expenses and deposits |
|
|
|
|
36,552 |
|
|
|
22,567 |
|
Assets held for sale |
|
8 |
|
|
— |
|
|
|
6,972 |
|
Income tax receivable |
|
|
|
|
19,001 |
|
|
|
16,838 |
|
Derivatives |
|
10 |
|
|
961 |
|
|
|
— |
|
Total current assets |
|
|
|
|
694,162 |
|
|
|
690,387 |
|
Non-current assets |
|
|
|
|
|
|
|
|
|
|
Restricted cash advances and collateral |
|
|
|
|
45,742 |
|
|
|
45,728 |
|
Prepaid expenses and deposits |
|
|
|
|
20,183 |
|
|
|
20,798 |
|
Long-term accounts receivable |
|
|
|
|
11,581 |
|
|
|
9,458 |
|
Long-term investments |
|
|
|
|
6,973 |
|
|
|
6,921 |
|
Promissory note |
|
|
|
|
— |
|
|
|
4,827 |
|
Property and equipment |
|
|
|
|
41,383 |
|
|
|
40,800 |
|
Investment tax credits receivable |
|
|
|
|
2,897 |
|
|
|
1,892 |
|
Income tax receivable |
|
|
|
|
20,890 |
|
|
|
— |
|
Deferred income taxes |
|
|
|
|
3,418 |
|
|
|
1,054 |
|
Derivatives |
|
10 |
|
|
— |
|
|
|
52,038 |
|
Goodwill and intangible assets |
|
|
|
|
4,506,156 |
|
|
|
4,588,572 |
|
Total non-current assets |
|
|
|
|
4,659,223 |
|
|
|
4,772,088 |
|
Total assets |
|
|
|
|
5,353,385 |
|
|
|
5,462,475 |
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
|
127,337 |
|
|
|
135,777 |
|
Other payables |
|
|
|
|
45,067 |
|
|
|
56,588 |
|
Provisions |
|
11 |
|
|
21,512 |
|
|
|
212,780 |
|
Customer deposits |
|
|
|
|
352,512 |
|
|
|
366,735 |
|
Income tax payable |
|
|
|
|
15,966 |
|
|
|
23,616 |
|
Current maturity of long-term debt |
|
9 |
|
|
5,420 |
|
|
|
47,750 |
|
Derivatives |
|
10 |
|
|
— |
|
|
|
4,922 |
|
Total current liabilities |
|
|
|
|
567,814 |
|
|
|
848,168 |
|
Non-current liabilities |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
9 |
|
|
2,347,564 |
|
|
|
2,380,829 |
|
Provisions |
|
11 |
|
|
3,091 |
|
|
|
8,942 |
|
Derivatives |
|
10 |
|
|
95,630 |
|
|
|
5,594 |
|
Income taxes payable |
|
|
|
|
25,232 |
|
|
|
— |
|
Deferred income taxes |
|
|
|
|
16,882 |
|
|
|
17,214 |
|
Total non-current liabilities |
|
|
|
|
2,488,399 |
|
|
|
2,412,579 |
|
Total liabilities |
|
|
|
|
3,056,213 |
|
|
|
3,260,747 |
|
EQUITY |
|
|
|
|
|
|
|
|
|
|
Share capital |
|
12 |
|
|
1,875,428 |
|
|
|
1,862,789 |
|
Reserves |
|
13 |
|
|
(92,632 |
) |
|
|
35,847 |
|
Retained earnings |
|
|
|
|
514,275 |
|
|
|
302,288 |
|
Equity attributable to the owners of The Stars Group Inc. |
|
|
|
|
2,297,071 |
|
|
|
2,200,924 |
|
Non-controlling interest |
|
|
|
|
101 |
|
|
|
804 |
|
Total equity |
|
|
|
|
2,297,172 |
|
|
|
2,201,728 |
|
Total liabilities and equity |
|
|
|
|
5,353,385 |
|
|
|
5,462,475 |
|
See accompanying notes.
Approved and authorized for issue on behalf of the Board on November 9, 2017.
(Signed) “Divyesh (Dave) Gadhia”, Director Divyesh (Dave) Gadhia, Chairman of the Board |
(Signed) “David Lazzarato”, Director David Lazzarato, Chairman of the Audit Committee |
4
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the nine months ended September 30, 2017 and 2016:
|
|
Share Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
U.S. dollars |
|
Common Shares Number |
|
|
Convertible Preferred Shares Number |
|
|
Common Shares amount $000’s |
|
|
Convertible Preferred Shares amount $000’s |
|
|
Reserves (note 13) $000’s |
|
|
Retained Earnings $000’s |
|
|
Equity attributable to the owners of The Stars Group Inc. $000's |
|
|
Non-controlling interest $000’s |
|
|
Total equity $000’s |
|
|||||||||
Balance – January 1, 2016 |
|
|
133,426,193 |
|
|
|
1,139,249 |
|
|
|
887,014 |
|
|
|
684,386 |
|
|
|
280,964 |
|
|
|
166,144 |
|
|
|
2,018,508 |
|
|
|
1,398 |
|
|
|
2,019,906 |
|
Net earnings (loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
90,953 |
|
|
|
90,953 |
|
|
|
(442 |
) |
|
|
90,511 |
|
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(100,242 |
) |
|
|
— |
|
|
|
(100,242 |
) |
|
|
— |
|
|
|
(100,242 |
) |
Total comprehensive (loss) income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(100,242 |
) |
|
|
90,953 |
|
|
|
(9,289 |
) |
|
|
(442 |
) |
|
|
(9,731 |
) |
Issue of Common Shares in relation to exercised warrants |
|
|
11,266,575 |
|
|
|
— |
|
|
|
290,175 |
|
|
|
— |
|
|
|
(288,981 |
) |
|
|
— |
|
|
|
1,194 |
|
|
|
— |
|
|
|
1,194 |
|
Issue of Common Shares in relation to exercised employee stock options |
|
|
267,909 |
|
|
|
— |
|
|
|
854 |
|
|
|
— |
|
|
|
(209 |
) |
|
|
— |
|
|
|
645 |
|
|
|
— |
|
|
|
645 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,396 |
|
|
|
— |
|
|
|
8,396 |
|
|
|
— |
|
|
|
8,396 |
|
Balance – September 30, 2016 |
|
|
144,960,677 |
|
|
|
1,139,249 |
|
|
|
1,178,043 |
|
|
|
684,386 |
|
|
|
(100,072 |
) |
|
|
257,097 |
|
|
|
2,019,454 |
|
|
|
956 |
|
|
|
2,020,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance – January 1, 2017 |
|
|
145,101,127 |
|
|
|
1,139,249 |
|
|
|
1,178,404 |
|
|
|
684,385 |
|
|
|
35,847 |
|
|
|
302,288 |
|
|
|
2,200,924 |
|
|
|
804 |
|
|
|
2,201,728 |
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
211,987 |
|
|
|
211,987 |
|
|
|
123 |
|
|
|
212,110 |
|
Other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(134,142 |
) |
|
|
— |
|
|
|
(134,142 |
) |
|
|
— |
|
|
|
(134,142 |
) |
Total comprehensive (loss) income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(134,142 |
) |
|
|
211,987 |
|
|
|
77,845 |
|
|
|
123 |
|
|
|
77,968 |
|
Issue of Common Shares in relation to Equity awards |
|
|
2,426,150 |
|
|
|
— |
|
|
|
13,132 |
|
|
|
— |
|
|
|
(3,211 |
) |
|
|
— |
|
|
|
9,921 |
|
|
|
— |
|
|
|
9,921 |
|
Share cancellation |
|
|
(76,437 |
) |
|
|
— |
|
|
|
(493 |
) |
|
|
— |
|
|
|
493 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,914 |
|
|
|
— |
|
|
|
7,914 |
|
|
|
— |
|
|
|
7,914 |
|
Acquisition of non-controlling interest (Note 10) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
467 |
|
|
|
— |
|
|
|
467 |
|
|
|
(826 |
) |
|
|
(359 |
) |
Balance – September 30, 2017 |
|
|
147,450,840 |
|
|
|
1,139,249 |
|
|
|
1,191,043 |
|
|
|
684,385 |
|
|
|
(92,632 |
) |
|
|
514,275 |
|
|
|
2,297,071 |
|
|
|
101 |
|
|
|
2,297,172 |
|
See accompanying notes.
5
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
U.S. dollars |
|
$000’s |
|
|
$000’s |
|
||
Operating activities |
|
|
|
|
|
|
|
|
Net earnings |
|
|
212,110 |
|
|
|
90,511 |
|
Dormant accounts recognized as revenue |
|
|
(2,670 |
) |
|
|
(3,160 |
) |
Stock-based compensation |
|
|
7,914 |
|
|
|
8,396 |
|
Interest accretion |
|
|
28,072 |
|
|
|
26,574 |
|
Interest expense |
|
|
90,752 |
|
|
|
99,085 |
|
Income tax expense recognized in net earnings |
|
|
856 |
|
|
|
4,078 |
|
Depreciation of property and equipment |
|
|
6,555 |
|
|
|
6,109 |
|
Amortization of intangible assets |
|
|
95,838 |
|
|
|
93,573 |
|
Amortization of deferred development costs |
|
|
6,573 |
|
|
|
3,346 |
|
Unrealized gain on foreign exchange |
|
|
(9,891 |
) |
|
|
(21,103 |
) |
Unrealized (gain) loss on investments |
|
|
(9,332 |
) |
|
|
7,233 |
|
(Reversal of) Impairment of assets held for sale, associates and intangible assets |
|
|
(8,430 |
) |
|
|
7,285 |
|
Net loss (earnings) from associates |
|
|
2,569 |
|
|
|
(644 |
) |
Gain on settlement of deferred consideration |
|
|
(44 |
) |
|
|
— |
|
Realized gain on investments |
|
|
(9,155 |
) |
|
|
(634 |
) |
Income taxes paid |
|
|
(8,941 |
) |
|
|
(9,164 |
) |
Changes in non-cash operating elements of working capital |
|
|
(10,284 |
) |
|
|
(33,924 |
) |
Customer deposit liability movement |
|
|
(22,398 |
) |
|
|
(76,481 |
) |
Other |
|
|
749 |
|
|
|
561 |
|
Net cash inflows from operating activities |
|
|
370,843 |
|
|
|
201,641 |
|
Financing activities |
|
|
|
|
|
|
|
|
Issuance of capital stock in relation with exercised warrants |
|
|
— |
|
|
|
1,194 |
|
Issuance of capital stock in relation with exercised employee stock options |
|
|
9,921 |
|
|
|
645 |
|
Interest paid |
|
|
(95,620 |
) |
|
|
(99,938 |
) |
Settlement of margin |
|
|
(7,602 |
) |
|
|
— |
|
Gain on settlement of derivative |
|
|
13,904 |
|
|
|
— |
|
Transaction costs on repricing of long-term debt |
|
|
(4,719 |
) |
|
|
— |
|
Payment of deferred consideration |
|
|
(197,510 |
) |
|
|
— |
|
Repayment of long-term debt |
|
|
(133,901 |
) |
|
|
(40,455 |
) |
Net cash outflows from financing activities |
|
|
(415,527 |
) |
|
|
(138,554 |
) |
Investing activities |
|
|
|
|
|
|
|
|
Additions in deferred development costs |
|
|
(16,701 |
) |
|
|
(14,916 |
) |
Purchase of property and equipment |
|
|
(5,507 |
) |
|
|
(5,265 |
) |
Acquired intangible assets |
|
|
(1,484 |
) |
|
|
(6,623 |
) |
Sale (purchase) of investments |
|
|
1,236 |
|
|
|
(6,631 |
) |
Cash movement into restricted cash advances and collateral |
|
|
(527 |
) |
|
|
(80,231 |
) |
Settlement of minimum revenue guarantee |
|
|
(7,286 |
) |
|
|
(14,230 |
) |
Settlement of promissory note |
|
|
8,084 |
|
|
|
— |
|
Net sale of investments utilizing customer deposits |
|
|
4,466 |
|
|
|
14,623 |
|
Acquisition of further interests in subsidiary |
|
|
(6,516 |
) |
|
|
(5,297 |
) |
Investment in associate |
|
|
(2,000 |
) |
|
|
— |
|
Proceeds on disposal of interest in associate classified as held for sale |
|
|
16,127 |
|
|
|
— |
|
Net cash outflows from investing activities |
|
|
(10,108 |
) |
|
|
(118,570 |
) |
Decrease in cash and cash equivalents |
|
|
(54,792 |
) |
|
|
(55,483 |
) |
Cash and cash equivalents – beginning of period |
|
|
267,684 |
|
|
|
274,359 |
|
Unrealized foreign exchange difference on cash and cash equivalents |
|
|
14,298 |
|
|
|
4,030 |
|
Cash and cash equivalents - end of period |
|
|
227,190 |
|
|
|
222,906 |
|
See accompanying notes.
6
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 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 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, StarsDraft, and the PokerStars Championship, PokerStars Festival and PokerStars Megastack live poker tour brands (incorporating aspects of the European Poker Tour, PokerStars Caribbean Adventure, Latin American Poker Tour and Asia Pacific Poker Tour).
The Stars Group’s registered head office is located at 200 Bay Street, South Tower, Suite 3250, 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 under the symbol “TSG”.
Basis of accounting
These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34—Interim Financial Reporting as issued by the International Accounting Standards Board, and do not include all of the information required for full annual consolidated financial statements. The accounting policies and methods of computation applied in these unaudited interim condensed consolidated financial statements and related notes contained therein are consistent with those applied by the Corporation in its audited consolidated financial statements as at and for the year ended December 31, 2016 (the “2016 Financial Statements”). These unaudited interim condensed consolidated financial statements should be read in conjunction with the 2016 Financial Statements.
For reporting purposes, the Corporation prepares its financial statements in U.S. dollars. Unless otherwise indicated, all dollar (“$”) amounts and references to “USD” or “USD $” in these unaudited interim condensed consolidated financial statements are expressed in U.S. dollars. References to ‘‘EUR’’ or “€” are to European Euros, references to ‘‘CDN’’ or “CDN $” are to Canadian dollars and references to “GBP” are to Great British Pounds Sterling. Unless otherwise indicated, all references to a specific “note” refer to these notes to the unaudited interim condensed consolidated financial statements of the Corporation for the three and nine months ended September 30, 2017. References to “IFRS” and “IASB” are to International Financial Reporting Standards and the International Accounting Standards Board, respectively.
New significant accounting policies
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 unaudited interim condensed statement of earnings immediately.
Cash flow hedges
Hedge accounting is discontinued on a prospective basis when the hedge no longer meets the hedge accounting criteria (including when it becomes ineffective), when the hedge instrument is sold, terminated or exercised and when, for cash flow hedges, the designation is revoked and the forecast transaction is no longer expected to occur. The cumulative gain or loss deferred in the unaudited interim condensed statement of Other comprehensive income should be classified to the unaudited interim condensed statement of earnings in the same period during which the hedged forecast cash flows affect net earnings. Where the forecast
7
transaction is no longer expected to occur, the cumulative gain or loss deferred in Other comprehensive income is transferred immediately to net earnings.
New Accounting Pronouncements – Not Yet Effective
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. 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. 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. Extended disclosures in respect of risk management activity for those choosing to apply the new hedge accounting requirements will also be required under the new standard.
The Corporation intends to adopt IFRS 9 from its effective date of January 1, 2018 but is still finalizing its analysis of the expected impact on its consolidated financial statements, disclosures and related controls, specifically as applied to the classification and measurement of its currently designated available-for-sale investments, as well as the expected impact of adopting or delaying the adoption to a later date of the new hedge accounting requirements. Notwithstanding, the Corporation does not currently expect any such adoption to have a material impact on its future consolidated financial statements.
IFRS 15, Revenues from Contracts with Customers
The Financial Accounting Standards Board and IASB have 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 Programmes, 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: 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 intends to adopt IFRS 15 from its effective date of January 1, 2018 but is still finalizing its analysis of the expected impact on its consolidated financial statements, disclosures and related controls. The Corporation does not currently expect such adoption to have a material impact on its future consolidated financial statements.
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.
8
For the three and nine months ended September 30, 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 business lines. The chief operating decision makers receive business line 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”.
Segmented net earnings for the three months ended September 30, 2017:
|
|
Three Months Ended September 30, 2017 |
|
|||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Revenue |
|
|
221,393 |
|
|
|
95,162 |
|
|
|
12,675 |
|
|
|
329,230 |
|
|
|
213 |
|
|
|
329,443 |
|
Selling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,430 |
) |
|
|
(157 |
) |
|
|
(42,587 |
) |
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131,216 |
) |
|
|
(9,599 |
) |
|
|
(140,815 |
) |
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,687 |
) |
|
|
(353 |
) |
|
|
(41,040 |
) |
Gaming duty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,396 |
) |
|
|
— |
|
|
|
(33,396 |
) |
Gain (loss) from investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,404 |
|
|
|
(380 |
) |
|
|
9,024 |
|
Net loss from associates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,569 |
) |
|
|
— |
|
|
|
(2,569 |
) |
Net earnings (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,336 |
|
|
|
(10,276 |
) |
|
|
78,060 |
|
Income tax expense (recovery) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,789 |
|
|
|
(603 |
) |
|
|
2,186 |
|
Net earnings (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,547 |
|
|
|
(9,673 |
) |
|
|
75,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other segmented information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,626 |
|
|
|
5 |
|
|
|
36,631 |
|
Bad debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,977 |
|
|
|
— |
|
|
|
1,977 |
|
Total Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,333,937 |
|
|
|
19,448 |
|
|
|
5,353,385 |
|
Total Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,038,007 |
|
|
|
18,206 |
|
|
|
3,056,213 |
|
Segmented net earnings for the three months ended September 30, 2016:
|
|
Three Months Ended September 30, 2016 (As reclassified) |
|
|||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Revenue |
|
|
196,849 |
|
|
|
64,200 |
|
|
|
9,632 |
|
|
|
270,681 |
|
|
|
— |
|
|
|
270,681 |
|
Selling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,433 |
) |
|
|
(69 |
) |
|
|
(35,502 |
) |
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,778 |
) |
|
|
(13,355 |
) |
|
|
(136,133 |
) |
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,271 |
) |
|
|
(2,187 |
) |
|
|
(49,458 |
) |
Gaming duty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,829 |
) |
|
|
— |
|
|
|
(26,829 |
) |
Gain (loss) from investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
670 |
|
|
|
(11,259 |
) |
|
|
(10,589 |
) |
Net loss from associates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
(47 |
) |
|
|
(47 |
) |
Net earnings (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,040 |
|
|
|
(26,917 |
) |
|
|
12,123 |
|
Income taxes recovered |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(385 |
) |
|
|
(15 |
) |
|
|
(400 |
) |
Net earnings (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,425 |
|
|
|
(26,902 |
) |
|
|
12,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other segmented information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,299 |
|
|
|
146 |
|
|
|
35,445 |
|
Bad debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
683 |
|
|
|
— |
|
|
|
683 |
|
Total Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,508,810 |
|
|
|
73,987 |
|
|
|
5,582,797 |
|
Total Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,529,888 |
|
|
|
32,499 |
|
|
|
3,562,387 |
|
9
Segmented net earnings for the nine months ended September 30, 2017:
|
|
Nine Months Ended September 30, 2017 |
|
|||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Revenue |
|
|
642,946 |
|
|
|
271,504 |
|
|
|
37,291 |
|
|
|
951,741 |
|
|
|
324 |
|
|
|
952,065 |
|
Selling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,196 |
) |
|
|
(262 |
) |
|
|
(125,458 |
) |
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(374,406 |
) |
|
|
(33,992 |
) |
|
|
(408,398 |
) |
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,192 |
) |
|
|
(1,134 |
) |
|
|
(123,326 |
) |
Gaming duty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(93,583 |
) |
|
|
— |
|
|
|
(93,583 |
) |
Gain from investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,275 |
|
|
|
4,960 |
|
|
|
14,235 |
|
Net loss from associates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,569 |
) |
|
|
— |
|
|
|
(2,569 |
) |
Net earnings (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,070 |
|
|
|
(30,104 |
) |
|
|
212,966 |
|
Income tax expense (recovery) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,063 |
|
|
|
(207 |
) |
|
|
856 |
|
Net earnings (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,007 |
|
|
|
(29,897 |
) |
|
|
212,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other segmented information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,814 |
|
|
|
152 |
|
|
|
108,966 |
|
Bad debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,316 |
|
|
|
— |
|
|
|
5,316 |
|
Total Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,333,937 |
|
|
|
19,448 |
|
|
|
5,353,385 |
|
Total Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,038,007 |
|
|
|
18,206 |
|
|
|
3,056,213 |
|
Segmented net earnings for the nine months ended September 30, 2016:
|
|
Nine Months Ended September 30, 2016 (As reclassified) |
|
|||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Revenue |
|
|
628,845 |
|
|
|
183,929 |
|
|
|
32,082 |
|
|
|
844,856 |
|
|
|
105 |
|
|
|
844,961 |
|
Selling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117,062 |
) |
|
|
(218 |
) |
|
|
(117,280 |
) |
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(385,388 |
) |
|
|
(48,183 |
) |
|
|
(433,571 |
) |
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(106,082 |
) |
|
|
4,348 |
|
|
|
(101,734 |
) |
Gaming duty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,682 |
) |
|
|
— |
|
|
|
(83,682 |
) |
Acquisition-related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199 |
) |
|
|
— |
|
|
|
(199 |
) |
Loss from investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,535 |
) |
|
|
(13,015 |
) |
|
|
(14,550 |
) |
Net earnings from associates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
644 |
|
|
|
644 |
|
Net earnings (loss) before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,908 |
|
|
|
(56,319 |
) |
|
|
94,589 |
|
Income taxes expense (recovery) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,120 |
|
|
|
(42 |
) |
|
|
4,078 |
|
Net earnings (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,788 |
|
|
|
(56,277 |
) |
|
|
90,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other segmented information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,589 |
|
|
|
439 |
|
|
|
103,028 |
|
Bad debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,950 |
|
|
|
169 |
|
|
|
3,119 |
|
Total Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,508,810 |
|
|
|
73,987 |
|
|
|
5,582,797 |
|
Total Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,529,888 |
|
|
|
32,499 |
|
|
|
3,562,387 |
|
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 three or nine months ended September 30, 2017 or 2016, as applicable, or that the Corporation otherwise deems relevant based on its historical reporting of the same or otherwise.
10
|
|
Three Months Ended September 30, 2017 |
|
|||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Geographic Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Isle of Man |
|
|
84,606 |
|
|
|
4,443 |
|
|
|
— |
|
|
|
89,049 |
|
|
|
— |
|
|
|
89,049 |
|
Malta |
|
|
54,733 |
|
|
|
57,063 |
|
|
|
1 |
|
|
|
111,797 |
|
|
|
— |
|
|
|
111,797 |
|
Italy |
|
|
20,363 |
|
|
|
13,289 |
|
|
|
142 |
|
|
|
33,794 |
|
|
|
— |
|
|
|
33,794 |
|
United Kingdom |
|
|
14,602 |
|
|
|
4,302 |
|
|
|
67 |
|
|
|
18,971 |
|
|
|
— |
|
|
|
18,971 |
|
Spain |
|
|
13,046 |
|
|
|
9,087 |
|
|
|
164 |
|
|
|
22,297 |
|
|
|
— |
|
|
|
22,297 |
|
France |
|
|
13,220 |
|
|
|
2,491 |
|
|
|
127 |
|
|
|
15,838 |
|
|
|
— |
|
|
|
15,838 |
|
Other licensed or approved jurisdictions |
|
|
20,823 |
|
|
|
4,487 |
|
|
|
12,174 |
|
|
|
37,484 |
|
|
|
213 |
|
|
|
37,697 |
|
|
|
|
221,393 |
|
|
|
95,162 |
|
|
|
12,675 |
|
|
|
329,230 |
|
|
|
213 |
|
|
|
329,443 |
|
|
|
Three Months Ended September 30, 2016 (As reclassified) |
|
|||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Geographic Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Isle of Man |
|
|
79,749 |
|
|
|
4,450 |
|
|
|
2 |
|
|
|
84,201 |
|
|
|
— |
|
|
|
84,201 |
|
Malta |
|
|
52,959 |
|
|
|
40,031 |
|
|
|
3 |
|
|
|
92,993 |
|
|
|
— |
|
|
|
92,993 |
|
Italy |
|
|
17,668 |
|
|
|
8,519 |
|
|
|
146 |
|
|
|
26,333 |
|
|
|
— |
|
|
|
26,333 |
|
United Kingdom |
|
|
13,261 |
|
|
|
2,799 |
|
|
|
86 |
|
|
|
16,146 |
|
|
|
— |
|
|
|
16,146 |
|
Spain |
|
|
10,826 |
|
|
|
5,825 |
|
|
|
153 |
|
|
|
16,804 |
|
|
|
— |
|
|
|
16,804 |
|
France |
|
|
10,016 |
|
|
|
886 |
|
|
|
133 |
|
|
|
11,035 |
|
|
|
— |
|
|
|
11,035 |
|
Other licensed or approved jurisdictions |
|
|
12,370 |
|
|
|
1,690 |
|
|
|
9,109 |
|
|
|
23,169 |
|
|
|
— |
|
|
|
23,169 |
|
|
|
|
196,849 |
|
|
|
64,200 |
|
|
|
9,632 |
|
|
|
270,681 |
|
|
|
— |
|
|
|
270,681 |
|
|
|
Nine Months Ended September 30, 2017 |
|
|||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Geographic Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Isle of Man |
|
|
255,960 |
|
|
|
22,577 |
|
|
|
— |
|
|
|
278,537 |
|
|
|
— |
|
|
|
278,537 |
|
Malta |
|
|
155,895 |
|
|
|
159,339 |
|
|
|
1 |
|
|
|
315,235 |
|
|
|
— |
|
|
|
315,235 |
|
Italy |
|
|
60,097 |
|
|
|
35,817 |
|
|
|
442 |
|
|
|
96,356 |
|
|
|
— |
|
|
|
96,356 |
|
United Kingdom |
|
|
40,962 |
|
|
|
10,541 |
|
|
|
200 |
|
|
|
51,703 |
|
|
|
— |
|
|
|
51,703 |
|
Spain |
|
|
34,116 |
|
|
|
24,163 |
|
|
|
502 |
|
|
|
58,781 |
|
|
|
— |
|
|
|
58,781 |
|
France |
|
|
36,359 |
|
|
|
6,027 |
|
|
|
385 |
|
|
|
42,771 |
|
|
|
— |
|
|
|
42,771 |
|
Other licensed or approved jurisdictions |
|
|
59,557 |
|
|
|
13,040 |
|
|
|
35,761 |
|
|
|
108,358 |
|
|
|
324 |
|
|
|
108,682 |
|
|
|
|
642,946 |
|
|
|
271,504 |
|
|
|
37,291 |
|
|
|
951,741 |
|
|
|
324 |
|
|
|
952,065 |
|
11
|
Nine Months Ended September 30, 2016 (As reclassified) |
|
||||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Geographic Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Isle of Man |
|
|
251,190 |
|
|
|
10,666 |
|
|
|
2 |
|
|
|
261,858 |
|
|
|
— |
|
|
|
261,858 |
|
Malta |
|
|
173,247 |
|
|
|
119,931 |
|
|
|
3 |
|
|
|
293,181 |
|
|
|
— |
|
|
|
293,181 |
|
Italy |
|
|
57,699 |
|
|
|
21,346 |
|
|
|
447 |
|
|
|
79,492 |
|
|
|
— |
|
|
|
79,492 |
|
United Kingdom |
|
|
43,319 |
|
|
|
9,932 |
|
|
|
283 |
|
|
|
53,534 |
|
|
|
— |
|
|
|
53,534 |
|
Spain |
|
|
30,456 |
|
|
|
17,453 |
|
|
|
468 |
|
|
|
48,377 |
|
|
|
— |
|
|
|
48,377 |
|
France |
|
|
38,182 |
|
|
|
1,212 |
|
|
|
413 |
|
|
|
39,807 |
|
|
|
— |
|
|
|
39,807 |
|
Other licensed or approved jurisdictions |
|
|
34,752 |
|
|
|
3,389 |
|
|
|
30,466 |
|
|
|
68,607 |
|
|
|
105 |
|
|
|
68,712 |
|
|
|
|
628,845 |
|
|
|
183,929 |
|
|
|
32,082 |
|
|
|
844,856 |
|
|
|
105 |
|
|
|
844,961 |
|
The Corporation reclassified interest revenue previously included within “Revenue”, to “Gain from investments” totaling $0.16 million and $0.49 million for the three months and nine months ended September 30, 2016, respectively. The Corporation has determined that the impact of these corrections is immaterial.
The Corporation’s effective corporate income tax rate for the three and nine months ended September 30, 2017, excluding prior year adjustments, was 2.8% and 2.6%, respectively, as the Corporation primarily operates from the Isle of Man and Malta, which are low tax jurisdictions. In addition to corporate income tax, the Corporation also pays significant amounts of gaming duty, VAT and employment taxes.
The distribution of some of the Corporation’s non-current assets (goodwill, intangible assets and property and equipment) by geographic region is as follows:
|
|
As at September 30, |
|
|
As at December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
|
|
$000’s |
|
|
$000’s |
|
||
Geographic Area |
|
|
|
|
|
|
|
|
Canada |
|
|
48,757 |
|
|
|
39,993 |
|
Isle of Man |
|
|
4,476,806 |
|
|
|
4,567,314 |
|
Malta |
|
|
— |
|
|
|
— |
|
Italy |
|
|
37 |
|
|
|
47 |
|
United Kingdom |
|
|
7,528 |
|
|
|
6,380 |
|
Other licensed or approved jurisdictions |
|
|
14,411 |
|
|
|
15,638 |
|
|
|
|
4,547,539 |
|
|
|
4,629,372 |
|
12
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2017 $000’s |
|
|
2016 $000’s (As reclassified) |
|
|
2017 $000’s |
|
|
2016 $000’s (As reclassified) |
|
||||
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and bank charges |
|
|
38,432 |
|
|
|
43,909 |
|
|
|
120,999 |
|
|
|
126,288 |
|
Foreign exchange loss (gain) |
|
|
2,608 |
|
|
|
5,549 |
|
|
|
2,327 |
|
|
|
(24,554 |
) |
|
|
|
41,040 |
|
|
|
49,458 |
|
|
|
123,326 |
|
|
|
101,734 |
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Processor costs |
|
|
17,446 |
|
|
|
13,826 |
|
|
|
50,784 |
|
|
|
40,938 |
|
Office |
|
|
20,631 |
|
|
|
16,885 |
|
|
|
57,709 |
|
|
|
54,423 |
|
Salaries and fringe benefits |
|
|
45,101 |
|
|
|
43,552 |
|
|
|
122,719 |
|
|
|
139,842 |
|
Research and development salaries |
|
|
6,030 |
|
|
|
6,441 |
|
|
|
18,513 |
|
|
|
22,160 |
|
Stock-based compensation |
|
|
3,298 |
|
|
|
1,978 |
|
|
|
7,914 |
|
|
|
8,396 |
|
Depreciation of property and equipment |
|
|
2,178 |
|
|
|
2,119 |
|
|
|
6,555 |
|
|
|
6,109 |
|
Amortization of deferred development costs |
|
|
2,397 |
|
|
|
1,207 |
|
|
|
6,573 |
|
|
|
3,346 |
|
Amortization of intangible assets |
|
|
32,056 |
|
|
|
32,119 |
|
|
|
95,838 |
|
|
|
93,573 |
|
Professional fees |
|
|
10,481 |
|
|
|
16,550 |
|
|
|
44,308 |
|
|
|
53,818 |
|
(Reversal of) Impairment of assets held for sale, associates and intangible assets |
|
|
(1,118 |
) |
|
|
527 |
|
|
|
(8,430 |
) |
|
|
7,285 |
|
Bad debt |
|
|
1,977 |
|
|
|
683 |
|
|
|
5,316 |
|
|
|
3,119 |
|
Loss on disposal of assets |
|
|
338 |
|
|
|
246 |
|
|
|
599 |
|
|
|
562 |
|
|
|
|
140,815 |
|
|
|
136,133 |
|
|
|
408,398 |
|
|
|
433,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
34,754 |
|
|
|
30,845 |
|
|
|
103,528 |
|
|
|
103,247 |
|
Royalties |
|
|
7,833 |
|
|
|
4,657 |
|
|
|
21,930 |
|
|
|
14,033 |
|
|
|
|
42,587 |
|
|
|
35,502 |
|
|
|
125,458 |
|
|
|
117,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming duty |
|
|
33,396 |
|
|
|
26,829 |
|
|
|
93,583 |
|
|
|
83,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
199 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
199 |
|
The Corporation changed the presentation of certain items within its unaudited interim condensed consolidated statement of earnings for the comparative period to conform to the current year’s presentation. The Corporation reclassified travel and entertainment costs previously included within “Selling” expenses to “Office” expenses. The Corporation has determined that the impact of this correction is 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 unaudited interim condensed consolidated statement of earnings.
During the nine months ended September 30, 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 Corporation’s acquisition of Stars Interactive Group on August 1, 2014 (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.
13
The following table sets forth the computation of basic and diluted earnings per Common Share for the following periods:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Numerator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per Common Share – net earnings |
|
$ |
76,082,000 |
|
|
$ |
12,675,000 |
|
|
$ |
211,987,000 |
|
|
$ |
90,953,000 |
|
Denominator |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per Common Share – weighted average number of Common Shares |
|
|
147,350,920 |
|
|
|
144,913,919 |
|
|
|
146,537,015 |
|
|
|
140,269,005 |
|
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
633,675 |
|
|
|
1,992,867 |
|
|
|
551,799 |
|
|
|
1,562,738 |
|
Performance share units |
|
|
51,709 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Deferred stock units |
|
|
29,664 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Restricted share units |
|
|
30,017 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Warrants |
|
|
598,121 |
|
|
|
224,933 |
|
|
|
503,937 |
|
|
|
— |
|
Convertible Preferred Shares |
|
|
56,105,903 |
|
|
|
52,885,194 |
|
|
|
55,204,201 |
|
|
|
52,034,652 |
|
Effect of dilutive securities |
|
|
57,449,089 |
|
|
|
55,102,994 |
|
|
|
56,259,937 |
|
|
|
53,597,390 |
|
Dilutive potential for diluted earnings per Common Share |
|
|
204,800,009 |
|
|
|
200,016,913 |
|
|
|
202,796,952 |
|
|
|
193,866,395 |
|
Basic earnings per Common Share |
|
$ |
0.52 |
|
|
$ |
0.09 |
|
|
$ |
1.45 |
|
|
$ |
0.65 |
|
Diluted earnings per Common Share |
|
$ |
0.37 |
|
|
$ |
0.06 |
|
|
$ |
1.05 |
|
|
$ |
0.47 |
|
As at September 30, 2017, the Corporation had beneficial ownership of 5,617,716 ordinary shares (the “NYX Ordinary Shares”) of NYX Gaming Group Limited (TSXV: NYX) (“NYX Gaming Group”), 40,000 exchangeable preferred shares (the “NYX Sub Preferred Shares”) of NYX Digital Gaming (Canada) ULC, a subsidiary of NYX Gaming Group (the “NYX Sub”), and 1,363,636 NYX Ordinary Share purchase warrants (the “NYX Warrants”). The NYX Sub Preferred Shares are exchangeable into NYX Ordinary Shares with the exchange ratio subject to adjustment every six months. Each NYX Warrant has an exercise price of $3.50 and is exercisable into the same number of NYX Ordinary Shares.
During the three months ended September 30, 2017, a wholly-owned subsidiary of the Corporation entered into a support agreement (the “Support Agreement”) with Scientific Games Corporation (“Scientific Games”) relating to the proposed acquisition by Scientific Games of all outstanding NYX Ordinary Shares. Pursuant to the Support Agreement, the subsidiary has agreed, among other things, to vote all of the NYX Ordinary Shares held by it in favor of the approval of the proposed acquisition by Scientific Games and against any competing acquisition proposal and not to sell or dispose of its securities of NYX Gaming Group until the completion of the same or the termination of the Support Agreement. The ownership interests continue to be treated as current investments.
Refer to note 14 with respect to the valuation of these current investments.
In connection with the Corporation’s ownership of approximately 40% of the issued and outstanding common shares of Innova Gaming Group Inc. (TSX: IGG) (“Innova”), senior management committed to a plan to sell its ownership in Innova and classified the investment as assets held for sale during the three months ended December 31, 2016. During the three months ended September 30, 2017, the Corporation completed the sale of all of its ownership of the issued and outstanding common shares in Innova for an amount of CDN $20.5 million ($16.1 million).
14
The following is a summary of long-term debt outstanding at September 30, 2017 and December 31, 2016 (all capitalized terms used in the table below relating to such long-term debt are defined below in this note):
|
|
Interest rate |
|
|
September 30, 2017, Principal outstanding balance in local denominated currency |
|
|
September 30, 2017 Carrying amount |
|
|
December 31, 2016, Principal outstanding balance in local denominated currency |
|
|
December 31, 2016 Carrying amount |
|
|||||
|
|
|
|
|
|
000’s |
|
|
$000’s |
|
|
000’s |
|
|
$000’s |
|
||||
USD First Lien Term Loan |
|
|
4.80% |
|
|
|
1,900,515 |
|
|
|
1,850,252 |
|
|
|
2,021,097 |
|
|
|
1,965,929 |
|
EUR First Lien Term Loan |
|
|
3.75% |
|
|
|
383,202 |
|
|
|
447,264 |
|
|
|
286,143 |
|
|
|
296,197 |
|
USD Second Lien Term Loan |
|
|
8.30% |
|
|
|
95,000 |
|
|
|
55,468 |
|
|
|
210,000 |
|
|
|
166,453 |
|
Total long-term debt |
|
|
|
|
|
|
|
|
|
|
2,352,984 |
|
|
|
|
|
|
|
2,428,579 |
|
Current portion |
|
|
|
|
|
|
|
|
|
|
5,420 |
|
|
|
|
|
|
|
47,750 |
|
Non-current portion |
|
|
|
|
|
|
|
|
|
|
2,347,564 |
|
|
|
|
|
|
|
2,380,829 |
|
During the three months ended September 30, 2017, the Corporation incurred the following interest on its then-outstanding long-term debt:
|
|
Effective interest rate |
|
|
Interest $000's |
|
|
Interest Accretion $000's |
|
|
Total Interest $000's |
|
||||
USD First Lien Term Loan |
|
|
5.57% |
|
|
|
18,737 |
|
|
|
2,975 |
|
|
|
21,712 |
|
EUR First Lien Term Loan |
|
|
4.09% |
|
|
|
4,396 |
|
|
|
335 |
|
|
|
4,731 |
|
USD Second Lien Term Loan |
|
|
15.19% |
|
|
|
3,791 |
|
|
|
1,373 |
|
|
|
5,164 |
|
Total |
|
|
|
|
|
|
26,924 |
|
|
|
4,683 |
|
|
|
31,607 |
|
During the three months ended September 30, 2016, the Corporation incurred the following interest on its then-outstanding long-term debt:
|
|
Effective interest rate |
|
|
Interest $000's |
|
|
Interest Accretion $000's |
|
|
Total Interest $000's |
|
||||
USD First Lien Term Loan |
|
|
5.71% |
|
|
|
24,365 |
|
|
|
2,824 |
|
|
|
27,189 |
|
EUR First Lien Term Loan |
|
|
5.68% |
|
|
|
4,329 |
|
|
|
269 |
|
|
|
4,598 |
|
USD Second Lien Term Loan |
|
|
13.26% |
|
|
|
4,293 |
|
|
|
1,262 |
|
|
|
5,555 |
|
Total |
|
|
|
|
|
|
32,987 |
|
|
|
4,355 |
|
|
|
37,342 |
|
During the nine months ended September 30, 2017, the Corporation incurred the following interest on its then-outstanding long-term debt:
|
|
Effective interest rate |
|
|
Interest $000's |
|
|
Interest Accretion $000's |
|
|
Total Interest $000's |
|
||||
USD First Lien Term Loan |
|
|
5.52% |
|
|
|
57,862 |
|
|
|
8,812 |
|
|
|
66,674 |
|
EUR First Lien Term Loan |
|
|
4.46% |
|
|
|
12,506 |
|
|
|
927 |
|
|
|
13,433 |
|
USD Second Lien Term Loan |
|
|
13.90% |
|
|
|
12,315 |
|
|
|
4,015 |
|
|
|
16,330 |
|
Total |
|
|
|
|
|
|
82,683 |
|
|
|
13,754 |
|
|
|
96,437 |
|
15
During the nine months ended September 30, 2016, the Corporation incurred the following interest on its then-outstanding long-term debt:
|
|
Effective interest rate |
|
|
Interest $000's |
|
|
Interest Accretion $000's |
|
|
Total Interest $000's |
|
||||
USD First Lien Term Loan |
|
|
5.71% |
|
|
|
72,358 |
|
|
|
5,266 |
|
|
|
77,624 |
|
EUR First Lien Term Loan |
|
|
5.68% |
|
|
|
12,881 |
|
|
|
1,021 |
|
|
|
13,902 |
|
USD Second Lien Term Loan |
|
|
13.26% |
|
|
|
12,788 |
|
|
|
3,638 |
|
|
|
16,426 |
|
CDN 2013 Debentures |
|
|
14.10% |
|
|
|
— |
|
|
|
125 |
|
|
|
125 |
|
Total |
|
|
|
|
|
|
98,027 |
|
|
|
10,050 |
|
|
|
108,077 |
|
The Corporation’s debt balance as at September 30, 2017 was as follows:
|
|
|
|
|
|
Cash |
|
|
Non-cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Opening Balance $000's |
|
|
Principal Movements $000's |
|
|
Transaction costs $000's |
|
|
Accretion $000's |
|
|
Translation $000's |
|
|
Total $000's |
|
|
Current $000's |
|
|
Long-term $000's |
|
||||||||
USD First Lien Term Loan |
|
|
1,965,928 |
|
|
|
(120,582 |
) |
|
|
(3,906 |
) |
|
|
8,812 |
|
|
|
— |
|
|
|
1,850,252 |
|
|
|
7,222 |
|
|
|
1,843,030 |
|
EUR First Lien Term Loan |
|
|
296,198 |
|
|
|
101,681 |
|
|
|
(829 |
) |
|
|
927 |
|
|
|
49,287 |
|
|
|
447,264 |
|
|
|
3,268 |
|
|
|
443,996 |
|
USD Second Lien Term Loan |
|
|
166,453 |
|
|
|
(115,000 |
) |
|
|
— |
|
|
|
4,015 |
|
|
|
— |
|
|
|
55,468 |
|
|
|
(5,070 |
) |
|
|
60,538 |
|
Total |
|
|
2,428,579 |
|
|
|
(133,901 |
) |
|
|
(4,735 |
) |
|
|
13,754 |
|
|
|
49,287 |
|
|
|
2,352,984 |
|
|
|
5,420 |
|
|
|
2,347,564 |
|
The Corporation’s debt balance as at December 31, 2016 was as follows:
|
|
|
|
|
|
Cash |
|
|
Non-cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
|
|
Opening Balance $000's |
|
|
Principal Movements $000's |
|
|
Transaction costs $000's |
|
|
Accretion $000's |
|
|
Translation $000's |
|
|
Total $000's |
|
|
Current $000's |
|
|
Long-term $000's |
|
||||||||
USD First Lien Term Loan |
|
|
1,978,763 |
|
|
|
(20,587 |
) |
|
|
— |
|
|
|
7,752 |
|
|
|
— |
|
|
|
1,965,928 |
|
|
|
45,848 |
|
|
|
1,920,080 |
|
EUR First Lien Term Loan |
|
|
307,584 |
|
|
|
(3,204 |
) |
|
|
— |
|
|
|
1,241 |
|
|
|
(9,423 |
) |
|
|
296,198 |
|
|
|
7,512 |
|
|
|
288,686 |
|
USD Second Lien Term Loan |
|
|
161,524 |
|
|
|
— |
|
|
|
— |
|
|
|
4,929 |
|
|
|
— |
|
|
|
166,453 |
|
|
|
(5,610 |
) |
|
|
172,063 |
|
CDN 2013 Debentures |
|
|
21,556 |
|
|
|
(22,561 |
) |
|
|
— |
|
|
|
— |
|
|
|
1,005 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
2,469,427 |
|
|
|
(46,352 |
) |
|
|
— |
|
|
|
13,922 |
|
|
|
(8,418 |
) |
|
|
2,428,579 |
|
|
|
47,750 |
|
|
|
2,380,829 |
|
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:
|
|
1 Year $000's |
|
|
2 Years $000's |
|
|
3 Years $000's |
|
|
4 Years $000's |
|
|
5 Years and Greater $000's |
|
|||||
USD First Lien Term Loan |
|
|
19,443 |
|
|
|
19,443 |
|
|
|
19,443 |
|
|
|
1,842,187 |
|
|
|
— |
|
EUR First Lien Term Loan |
|
|
4,632 |
|
|
|
4,632 |
|
|
|
4,632 |
|
|
|
438,855 |
|
|
|
— |
|
USD Second Lien Term Loan |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
95,000 |
|
Total |
|
|
24,075 |
|
|
|
24,075 |
|
|
|
24,075 |
|
|
|
2,281,042 |
|
|
|
95,000 |
|
(a) |
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 defined below), as at September 30, 2017, the first lien term loans consisted of a $1.96 billion first lien term loan priced at LIBOR plus 3.50% (the “USD First Lien Term Loan”) and a €392 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 giving effect to the Refinancing, Repricing and Prepayments (as defined below), as at September 30, 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
16
Term Loans by 50 basis points to LIBOR plus 350 basis points with a LIBOR floor of 100 basis points and Euribor plus 375 basis points 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.
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 to $95 million, as at September 30, 2017. The applicable and effective interest rates are noted on 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.
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.
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 of the USD First Lien Term Loan bearing a minimum floating interest rate of 4.5% (USD three-month LIBOR plus a
17
3.5% margin, with a LIBOR floor of 1.0%). The March 2015 Swap Agreements, which mature in five years, fix the Euro to USD exchange rate at 1.1102 and fix the Euro interest payments at an average rate of 4.6016%.
In connection with the Refinancing, a subsidiary of the Corporation entered into two additional cross-currency interest rate swap agreements to hedge the interest rate and foreign exchange, 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”). 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 of the USD First Lien Term Loan bearing a minimum floating interest rate of 4.5% (USD three-month LIBOR plus a 3.5% margin, with a LIBOR floor of 1.0%). The August 2015 Swap Agreements, which mature in five years, fix the Euro to USD exchange rate at 1.094 and fix the Euro interest payments at an average rate of 4.657%. During the nine months ended September 30, 2017, the Corporation unwound and settled a notional principal amount of $616.54 million of the Swap Agreements for a gain of $13.9 million.
As part of the Repricing, 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 $12.43 million was recognized as Financial expenses during the nine months ended September 30, 2017 relating to the amortization of the Other comprehensive income balance brought forward from the previous hedge accounting relationship.
During the three and nine months ended September 30, 2017 and 2016, there was no ineffectiveness with respect to the cash flow hedge.
During the three and nine months ended September 30, 2017, $4.62 million and $12.06 million, respectively (September 30, 2016 - $1.51 million and $4.61 million, respectively) was reclassified from “Reserves” to the unaudited interim condensed consolidated statement 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 September 30, 2017 was $95.63 million (derivative assets at December 31, 2016 – $52.04 million).
Net investment hedge accounting
During the period ended September 30, 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 gains arising from the translation of the USD-denominated liabilities that was determined to be an effective hedge during the period was recognized in the unaudited interim condensed consolidated statements of comprehensive income (loss), counterbalancing a portion of the losses arising from translation of the Corporation’s net investment in its foreign operations. During the three and nine months ended September 30, 2017, there was no ineffectiveness with respect to the net investment hedge.
For the three and nine months ended September 30, 2017, the Corporation recorded an unrealized exchange loss on translation of $30.56 million and $122.90 million, respectively (for the three and nine months ended September 30, 2016 – a gain of $6.82 million and a loss of $6.29 million, respectively) 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.
Put liabilities
In connection with the July 31, 2015 acquisition of Stars Fantasy Sports Subco, LLC (“Stars Fantasy”), the operator of, among other things, the Corporation’s StarsDraft 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 nine months ended September 30, 2017, the Corporation acquired the remaining equity interests from the sellers. The derivative as at September 30, 2017 was $nil (December 31, 2016 - $5.59 million).
18
The following table summarizes the fair value of derivatives as at September 30, 2017 and December 31, 2016 and the change in fair value for the nine months ended September 30, 2017 and year ended December 31, 2016:
Derivative Assets |
|
Forward Contracts $000's |
|
|
Cross-currency interest rate swap contracts $000's |
|
|
Currency options $000's |
|
|
Total $000's |
|
||||
Opening balance, as at January 1, 2016 |
|
|
4,012 |
|
|
|
9,473 |
|
|
|
— |
|
|
|
13,485 |
|
Unrealized (loss) gain in fair value |
|
|
(4,012 |
) |
|
|
42,565 |
|
|
|
— |
|
|
|
38,553 |
|
Total derivative asset as at December 31, 2016 |
|
|
— |
|
|
|
52,038 |
|
|
|
— |
|
|
|
52,038 |
|
Acquisition |
|
|
— |
|
|
|
— |
|
|
|
906 |
|
|
|
906 |
|
Realized (gain) loss |
|
|
— |
|
|
|
(13,904 |
) |
|
|
902 |
|
|
|
(13,002 |
) |
Settlement |
|
|
|
|
|
|
— |
|
|
|
404 |
|
|
|
404 |
|
Unrealized loss in fair value |
|
|
— |
|
|
|
(38,134 |
) |
|
|
(1,251 |
) |
|
|
(39,385 |
) |
Total derivative asset as at September 30, 2017 |
|
|
— |
|
|
|
— |
|
|
|
961 |
|
|
|
961 |
|
Current portion |
|
|
— |
|
|
|
— |
|
|
|
961 |
|
|
|
961 |
|
Non-current portion |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Derivative Liabilities |
|
Forward Contracts $000's |
|
|
Cross-currency interest rate swap contracts $000's |
|
|
Put Liability $000's |
|
|
Total $000's |
|
||||
Opening balance, as at January 1, 2016 |
|
|
2,184 |
|
|
|
16,538 |
|
|
|
6,102 |
|
|
|
24,824 |
|
Unrealized loss (gain) in fair value |
|
|
3,106 |
|
|
|
(16,538 |
) |
|
|
(815 |
) |
|
|
(14,247 |
) |
Accretion |
|
|
— |
|
|
|
— |
|
|
|
307 |
|
|
|
307 |
|
Translation |
|
|
(368 |
) |
|
|
— |
|
|
|
— |
|
|
|
(368 |
) |
Total derivative liability as at December 31, 2016 |
|
|
4,922 |
|
|
|
— |
|
|
|
5,594 |
|
|
|
10,516 |
|
Unrealized (gain) loss in fair value |
|
|
(1,736 |
) |
|
|
95,929 |
|
|
|
— |
|
|
|
94,193 |
|
Realized loss on settlement |
|
|
(2,919 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,919 |
) |
Settlement |
|
|
(177 |
) |
|
|
— |
|
|
|
(5,594 |
) |
|
|
(5,771 |
) |
Translation |
|
|
(90 |
) |
|
|
(299 |
) |
|
|
— |
|
|
|
(389 |
) |
Total derivative liability as at September 30, 2017 |
|
|
— |
|
|
|
95,630 |
|
|
|
— |
|
|
|
95,630 |
|
Current portion |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Non-current portion |
|
|
— |
|
|
|
95,630 |
|
|
|
— |
|
|
|
95,630 |
|
The provisions in the unaudited interim condensed consolidated statements of financial position include, among other items, the provision for jackpots, the provision for deferred consideration primarily relating to the deferred payment for the Stars Interactive Group Acquisition and the minimum revenue guarantees or EBITDA support agreement, as applicable, in connection with the sale of WagerLogic Malta Holdings Ltd., the sale of Amaya (Alberta) Inc. (formerly Chartwell Technology Inc.) (“Chartwell”) and CryptoLogic Ltd., to NYX Gaming Group and NYX Sub (the “Chartwell/Cryptologic Sale”), and the initial public offering (the “Innova Offering”) of Innova.
The purchase price for the Stars Interactive Group Acquisition included a deferred payment of $400 million payable on February 1, 2017. The Corporation paid the remaining balance in full during the nine months ended September 30, 2017. The fair value of the deferred payment as at September 30, 2017 of $nil (December 31, 2016 - $195.51 million) is recorded in Provisions.
The carrying amounts and the movements in the provisions during the periods ended September 30, 2017 and December 31, 2016 are as follows:
19
|
Player bonuses and jackpots $000’s |
|
|
Deferred consideration (*) $000’s |
|
|
Minimum revenue guarantee $000’s |
|
|
Other $000’s |
|
|
Total $000’s |
|
||||||
Balance at January 1, 2016 |
|
|
2,688 |
|
|
|
382,728 |
|
|
|
19,395 |
|
|
|
1,087 |
|
|
|
405,898 |
|
Additional provision recognized |
|
|
13,885 |
|
|
|
— |
|
|
|
5,762 |
|
|
|
4,613 |
|
|
|
24,260 |
|
Payments |
|
|
(15,013 |
) |
|
|
(200,000 |
) |
|
|
(8,998 |
) |
|
|
(5,700 |
) |
|
|
(229,711 |
) |
Accretion of discount |
|
|
— |
|
|
|
22,277 |
|
|
|
1,095 |
|
|
|
— |
|
|
|
23,372 |
|
Gain on settlement of deferred consideration |
|
|
— |
|
|
|
(2,466 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,466 |
) |
Foreign exchange translation losses (gains) |
|
|
11 |
|
|
|
(24 |
) |
|
|
382 |
|
|
|
— |
|
|
|
369 |
|
Balance at December 31, 2016 |
|
|
1,571 |
|
|
|
202,515 |
|
|
|
17,636 |
|
|
|
— |
|
|
|
221,722 |
|
Adjustment to provision recognized |
|
|
35,960 |
|
|
|
(815 |
) |
|
|
(379 |
) |
|
|
— |
|
|
|
34,766 |
|
Payments |
|
|
(29,767 |
) |
|
|
(197,510 |
) |
|
|
(7,286 |
) |
|
|
— |
|
|
|
(234,563 |
) |
Accretion of discount |
|
|
— |
|
|
|
2,048 |
|
|
|
673 |
|
|
|
— |
|
|
|
2,721 |
|
Reclassification |
|
|
(1,444 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,444 |
) |
Foreign exchange translation losses |
|
|
123 |
|
|
|
62 |
|
|
|
1,216 |
|
|
|
— |
|
|
|
1,401 |
|
Balance at September 30, 2017 |
|
|
6,443 |
|
|
|
6,300 |
|
|
|
11,860 |
|
|
|
— |
|
|
|
24,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion at December 31, 2016 |
|
|
1,571 |
|
|
|
202,515 |
|
|
|
8,694 |
|
|
|
— |
|
|
|
212,780 |
|
Non-current portion at December 31, 2016 |
|
|
— |
|
|
|
— |
|
|
|
8,942 |
|
|
|
— |
|
|
|
8,942 |
|
Current portion at September 30, 2017 |
|
|
6,443 |
|
|
|
6,300 |
|
|
|
8,769 |
|
|
|
— |
|
|
|
21,512 |
|
Non-current portion at September 30, 2017 |
|
|
— |
|
|
|
— |
|
|
|
3,091 |
|
|
|
— |
|
|
|
3,091 |
|
(*) The closing provision of $6.30 million as at September 30, 2017 is contingent on future events.
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 September 30, 2017, the Preferred Shares are convertible into 58,387,948 Common Shares (as at December 31, 2016 –54,750,496).
During the nine months ended September 30, 2017:
|
• |
the Corporation issued 2,426,150 Common Shares for cash consideration of $9.92 million as a result of the exercise of equity awards. The exercised stock options were initially valued at $3.21 million. Upon the exercise of such equity awards, the value originally allocated to the equity awards in reserves was reallocated to the Common Shares so issued. |
|
• |
the Corporation cancelled 76,437 shares related to the acquisition of Chartwell in 2011 that were unclaimed and surrendered to the Corporation. |
20
The following table highlights the classes of reserves included in the Corporation’s equity:
|
|
Warrants $000’s |
|
|
Equity awards $000’s |
|
|
Treasury shares $000’s |
|
|
Cumulative translation adjustments $000’s |
|
|
Available for sale investments $000’s |
|
|
Derivatives $000’s |
|
|
Other $000’s |
|
Total $000’s |
|
||||||||
Balance – January 1, 2016 |
|
|
303,620 |
|
|
|
21,147 |
|
|
|
(30,035 |
) |
|
|
54,202 |
|
|
|
(12,282 |
) |
|
|
(56,937 |
) |
|
|
1,249 |
|
|
280,964 |
|
Cumulative translation adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,969 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
22,969 |
|
Stock-based compensation |
|
|
— |
|
|
|
10,289 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
10,289 |
|
Exercise of warrants |
|
|
(288,982 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
(288,982 |
) |
Exercise of stock options |
|
|
— |
|
|
|
(294 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
(294 |
) |
Realized losses (gains) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,394 |
|
|
|
(42,263 |
) |
|
|
— |
|
|
(37,869 |
) |
Unrealized (gains) losses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,095 |
) |
|
|
50,865 |
|
|
|
— |
|
|
48,770 |
|
Balance – December 31, 2016 |
|
|
14,638 |
|
|
|
31,142 |
|
|
|
(30,035 |
) |
|
|
77,171 |
|
|
|
(9,983 |
) |
|
|
(48,335 |
) |
|
|
1,249 |
|
|
35,847 |
|
Cumulative translation adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(165,617 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
(165,617 |
) |
Stock-based compensation |
|
|
— |
|
|
|
7,914 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
7,914 |
|
Exercise of equity awards |
|
|
— |
|
|
|
(3,211 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
(3,211 |
) |
Realized (gains) losses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,216 |
) |
|
|
139,157 |
|
|
|
— |
|
|
133,941 |
|
Unrealized losses (gains) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
32,599 |
|
|
|
(135,065 |
) |
|
|
— |
|
|
(102,466 |
) |
Reclassification (See below) |
|
|
50 |
|
|
|
— |
|
|
|
— |
|
|
|
(11,314 |
) |
|
|
9,196 |
|
|
|
2,447 |
|
|
|
(379 |
) |
|
— |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
493 |
|
|
|
— |
|
|
|
— |
|
|
|
5,594 |
|
|
|
(5,127 |
) |
|
960 |
|
Balance – September 30, 2017 |
|
|
14,688 |
|
|
|
35,845 |
|
|
|
(29,542 |
) |
|
|
(99,760 |
) |
|
|
26,596 |
|
|
|
(36,202 |
) |
|
|
(4,257 |
) |
|
(92,632 |
) |
During the nine months ended September 30, 2017, the principal reclassification made by the Corporation was $9.19 million from the Cumulative translation adjustments reserve 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 or December 31, 2016 or Net earnings for the years ending December 31, 2015 or December 31, 2016. 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.
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 September 30, 2017 and December 31, 2016:
|
|
As at September 30, 2017 |
|
|||||||||||||
|
|
Fair value & carrying value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||
Funds - Available for sale |
|
|
18,451 |
|
|
|
18,451 |
|
|
|
— |
|
|
|
— |
|
Bonds - Available for sale |
|
|
117,838 |
|
|
|
117,838 |
|
|
|
— |
|
|
|
— |
|
Equity in quoted companies - Available for sale, fair value through profit/loss |
|
|
187,252 |
|
|
|
169,481 |
|
|
|
17,771 |
|
|
|
— |
|
Equity in private companies - Available for sale |
|
|
6,973 |
|
|
|
— |
|
|
|
— |
|
|
|
6,973 |
|
Derivatives |
|
|
961 |
|
|
|
— |
|
|
|
961 |
|
|
|
— |
|
Total financial assets |
|
|
331,475 |
|
|
|
305,770 |
|
|
|
18,732 |
|
|
|
6,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
95,630 |
|
|
|
— |
|
|
|
95,630 |
|
|
|
— |
|
Provisions |
|
|
11,860 |
|
|
|
— |
|
|
|
— |
|
|
|
11,860 |
|
Total financial liabilities |
|
|
107,490 |
|
|
|
— |
|
|
|
95,630 |
|
|
|
11,860 |
|
21
|
|
As at December 31, 2016 |
|
|||||||||||||
|
|
Fair value & carrying value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||
Funds - Available for sale |
|
|
58,518 |
|
|
|
58,518 |
|
|
|
— |
|
|
|
— |
|
Bonds - Available for sale |
|
|
98,605 |
|
|
|
98,605 |
|
|
|
— |
|
|
|
— |
|
Debentures- Fair value through profit/loss |
|
|
7,556 |
|
|
|
— |
|
|
|
7,556 |
|
|
|
— |
|
Equity in quoted companies - Available for sale |
|
|
123,808 |
|
|
|
115,480 |
|
|
|
— |
|
|
|
8,328 |
|
Equity in private companies - Available for sale |
|
|
6,921 |
|
|
|
— |
|
|
|
— |
|
|
|
6,921 |
|
Derivatives |
|
|
52,038 |
|
|
|
— |
|
|
|
52,038 |
|
|
|
— |
|
Total financial assets |
|
|
347,446 |
|
|
|
272,603 |
|
|
|
59,594 |
|
|
|
15,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
10,516 |
|
|
|
— |
|
|
|
4,922 |
|
|
|
5,594 |
|
Provisions |
|
|
213,141 |
|
|
|
— |
|
|
|
— |
|
|
|
213,141 |
|
Total financial liabilities |
|
|
223,657 |
|
|
|
— |
|
|
|
4,922 |
|
|
|
218,735 |
|
The fair values of other financial assets and liabilities measured at amortized cost on the statements of financial position as at each of September 30, 2017, and December 31, 2016 are as follows:
|
|
As at September 30, 2017 |
|
|||||||||||||
|
|
Fair value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||
First Lien Term Loans |
|
|
2,366,116 |
|
|
|
2,366,116 |
|
|
|
— |
|
|
|
— |
|
USD Second Lien Term Loan |
|
|
95,238 |
|
|
|
95,238 |
|
|
|
— |
|
|
|
— |
|
Total financial liabilities |
|
|
2,461,354 |
|
|
|
2,461,354 |
|
|
|
— |
|
|
|
— |
|
|
|
As at December 31, 2016 |
|
|||||||||||||
|
|
Fair value $000’s |
|
|
Level 1 $000’s |
|
|
Level 2 $000’s |
|
|
Level 3 $000’s |
|
||||
Promissory note |
|
|
4,827 |
|
|
|
— |
|
|
|
— |
|
|
|
4,827 |
|
Total financial assets |
|
|
4,827 |
|
|
|
— |
|
|
|
— |
|
|
|
4,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Lien Term Loans |
|
|
2,336,792 |
|
|
|
2,336,792 |
|
|
|
— |
|
|
|
— |
|
USD Second Lien Term Loan |
|
|
209,870 |
|
|
|
209,870 |
|
|
|
— |
|
|
|
— |
|
Total financial liabilities |
|
|
2,546,662 |
|
|
|
2,546,662 |
|
|
|
— |
|
|
|
— |
|
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.
For the Corporation’s financial instruments which are recognized in the unaudited interim condensed 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 the nine months ended September 30, 2017 in respect of NYX Sub Preferred Shares (see Level 3 fair value table below).
22
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 nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance 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 September 30, 2017 and December 31, 2016, the Corporation assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Corporation 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 in the nine months ended September 30, 2017.
NYX Sub Preferred Shares
As a result of the proposed acquisition of NYX Gaming Group by Scientific Games described in note 7 above, the Corporation changed its valuation methodology for NYX Sub Preferred Shares from a binomial valuation approach to a net present value approach using a discount rate of 2.3%, based on the offer price from Scientific Games. Prior to transfer during the three months ended September 30, 2017, this investment was classified as a Level 3 financial asset (2016: Level 3 financial asset).
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 September 30, 2017, and December 31, 2016 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. The carrying amount approximates the fair value. |
|
- |
Promissory note (Level 3 Promissory note): The Corporation received the full balance of the Promissory note during the nine months ended September 30, 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 nine months ended September 30, 2017 (2016 – 6% discount rate). |
|
- |
Stars Fantasy put option (Level 3 Liability): See note 10 above for the applicable description. The option was exercised during the nine months ended September 30, 2017 (2016 – 5.7% discount rate). |
|
- |
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). |
|
- |
Licensing Agreement (Level 3 Liability): As previously disclosed, in connection with the Chartwell/Cryptologic Sale, a subsidiary of the Corporation entered into a supplier licensing agreement with NYX Gaming Group (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). |
23
The following table shows a reconciliation from opening balances to the closing balances for Level 3 fair values:
|
|
Level 3 Asset |
|
|
Level 3 Promissory note |
|
||
|
|
$000’s |
|
|
$000’s |
|
||
Balance – January 1, 2016 |
|
|
27,679 |
|
|
|
7,700 |
|
Loss included in income from investments |
|
|
(14,124 |
) |
|
|
— |
|
Interest and accretion included in income from investments and financial expenses |
|
|
— |
|
|
|
888 |
|
Purchases |
|
|
11,754 |
|
|
|
— |
|
Sales |
|
|
(2,566 |
) |
|
|
— |
|
Reclassification |
|
|
501 |
|
|
|
— |
|
Conversion of Level 3 instruments |
|
|
(8,377 |
) |
|
|
— |
|
Loss on settlement |
|
|
— |
|
|
|
(3,761 |
) |
Unrealized gain included in other comprehensive income |
|
|
382 |
|
|
|
— |
|
Balance – December 31, 2016 |
|
|
15,249 |
|
|
|
4,827 |
|
Gain included in income from investments |
|
|
(398 |
) |
|
|
— |
|
Interest accretion included in financial expenses |
|
|
— |
|
|
|
256 |
|
Gain on settlement |
|
|
— |
|
|
|
3,001 |
|
Settlement of promissory note |
|
|
— |
|
|
|
(8,084 |
) |
Unrealized gain included in other comprehensive income |
|
|
648 |
|
|
|
— |
|
Transfer out of Level 3 (see notes above) |
|
|
(8,526 |
) |
|
|
— |
|
Balance – September 30, 2017 |
|
|
6,973 |
|
|
|
— |
|
|
|
Level 3 Liability |
|
|
|
|
$000’s |
|
|
Balance – January 1, 2016 |
|
|
399,202 |
|
Accretion |
|
|
23,167 |
|
Repayment of deferred consideration |
|
|
(200,000 |
) |
Gain on settlement of deferred consideration |
|
|
(2,466 |
) |
Acquisition through business combinations |
|
|
5,299 |
|
Payments |
|
|
(7,309 |
) |
Additional provision |
|
|
465 |
|
Translation |
|
|
377 |
|
Balance – December 31, 2016 |
|
|
218,735 |
|
Accretion |
|
|
2,721 |
|
Repayment of deferred consideration |
|
|
(197,510 |
) |
Settlement of put liability |
|
|
(5,638 |
) |
Payments |
|
|
(7,286 |
) |
Adjustment to provision |
|
|
(379 |
) |
Translation |
|
|
1,217 |
|
Balance – September 30, 2017 |
|
|
11,860 |
|
During the three months ended June 30, 2017, the Corporation received a letter regarding a possible tax assessment related to transfer pricing with respect to one of its subsidiaries for periods prior to the Stars Interactive Group Acquisition. The letter was not a formal assessment by the relevant tax authority and the Corporation has challenged the assertions made in the letter. The Corporation does not yet know whether it will receive a formal assessment in the future or if received, exactly what the amount of such assessment will be or on what basis it would be made. The Corporation currently estimates that any economic outflow would not be material to the financial statements and does not consider any economic outflow to be probable. Consequently, the Corporation has not recorded any provision with respect to any such potential tax assessment for the period ended September 30, 2017.
24
Exhibit 99.3
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2017
November 9, 2017
TABLE OF CONTENTS
1 |
|
2 |
|
3 |
|
4 |
|
7 |
|
10 |
|
13 |
|
21 |
|
22 |
|
27 |
|
29 |
|
29 |
|
30 |
|
31 |
|
32 |
|
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING |
33 |
35 |
|
36 |
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 and nine months ended September 30, 2017. This document should be read in conjunction with the information contained in the Corporation’s unaudited interim condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2017 (the “Q3 2017 Financial Statements”), the Corporation’s audited consolidated financial statements and related notes for the year ended December 31, 2016 (the “2016 Annual Financial Statements”) and the Management’s Discussion and Analysis thereon (the “2016 Annual MD&A”), and the Corporation’s annual information form for the year ended December 31, 2016 (the “2016 Annual Information Form” and together with the 2016 Annual Financial Statements and 2016 Annual MD&A, the “2016 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 currently prepares its 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”). See note 4 in the 2016 Annual Financial Statements for information on the change in presentation currency from Canadian dollars to U.S. dollars. 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 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 Q3 2017 Financial Statements.
As at September 30, 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 business 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 taken into account information available to it up to November 9, 2017, the date the Corporation’s board of directors (the “Board”) approved this MD&A and the Q3 2017 Financial Statements. All quarterly information contained herein is unaudited.
1
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This MD&A and the Q3 2017 Financial Statements 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 2016 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 with respect to interactive entertainment or online and mobile 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 distribute, 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; 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 2016 Annual Information Form, elsewhere in this MD&A and the 2016 Annual Reports and in other filings that The Stars Group has made and may make with applicable securities authorities in the future, 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 November 9, 2017 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”) and quarterly net yield (“QNY”), 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.
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. Notwithstanding, the Corporation believes that any such 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, its reputation may be harmed, which could negatively affect its business, results of operations and financial condition.
3
Business Overview and Background
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”).
Through its Stars Interactive Group division, which is based in the Isle of Man and operates globally, 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, StarsDraft, and the PokerStars Championship, PokerStars Festival and PokerStars Megastack live poker tour brands (incorporating the European Poker Tour, PokerStars Caribbean Adventure, Latin American Poker Tour and Asia Pacific Poker Tour). These brands together have more than 115 million 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 majority of the global market share of real-money poker player liquidity, or the volume of real-money poker players, and is among the leaders in play-money poker player liquidity. The Stars Group also continues to estimate that its combined online casino, including PokerStars Casino, is currently among the world’s fastest growing and has one of the largest player bases among its competitors.
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 (particularly for the remainder of 2017 and into 2018), 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 ensure a positive 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. 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 not only 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, but has also made, and may continue to make, changes to its pricing and incentives to ensure that they align with its objectives to
4
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) on certain offerings (which resulted in an effective increase). Most recently, the Corporation launched the Stars Rewards program in July 2017, which is an integrated cross vertical loyalty program focused on customer engagement, retention and experience that it believes will enhance 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 (equal to total customer deposits minus total customer withdrawals made on the Corporation’s real-money platform). 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 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 and generally following a determination that such national regulatory frameworks are compliant with European Union law. Outside of the European Union, The Stars Group anticipates there may be a potential for regulation of online gaming, including online poker, casino and/or sportsbook, which may result in potential licensing or partnerships with private operators or governmental bodies with respect to various jurisdictions. The Stars Group supports regulation of online gaming, including licensing and taxation regimes, 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 industry as a whole, and 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 the Corporation’s business. See also “Regulatory Environment” in the 2016 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 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 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 additional risks and uncertainties related to regulation, see “Risk Factors and Uncertainties—Risks Related to Regulation” in the 2016 Annual Information Form.
For additional information about The Stars Group, see the disclosure and discussion elsewhere in this MD&A, the Corporation’s management’s discussion and analysis for the three and six months ended June 30, 2017 (the “Q2 2017 MD&A”), and the 2016 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 2016 Annual Information Form, as well as the risks and uncertainties contained elsewhere herein, the 2016 Annual
5
Reports and in other filings that The Stars Group has made and may make with applicable securities authorities in the future.
Third Quarter and Subsequent Developments
Below is a general summary of certain recent corporate developments from the third quarter of 2017 through the date hereof. For additional corporate developments and highlights, see the 2016 Annual Reports, the Q2 2017 MD&A, and “Further Information” below.
Name Change and Continuance
On August 1, 2017, the Corporation announced the completion of its corporate name change from Amaya Inc. to The Stars Group Inc. and the continuance of the Corporation under the Business Corporations Act (Ontario) such that it is now an Ontario corporation and subject to such act. The Corporation also announced that it moved its corporate head office to Toronto, Ontario, and that its ticker symbols for its common shares (“Common Shares”) changed to “TSG” on the Nasdaq Global Select Market and “TSGI” on the Toronto Stock Exchange, both effective August 1, 2017. The corporate name change and continuance followed approval by the Corporation’s shareholders present in person or represented by proxy at the Corporation’s annual and special meeting of shareholders held on June 21, 2017.
USD Second Lien Term Loan Prepayments
On August 8, 2017 and September 20, 2017, the Corporation prepaid without penalty $40 million and $75 million, respectively (collectively, the “Prepayments”), under the USD Second Lien Term Loan (as defined below) using cash on its balance sheet, cash flow from operations or a combination thereof, which it expects to result in approximately $9.5 million in annual interest savings. Following the Prepayments, the principal balance of the USD Second Lien Term loan as of the date hereof is $95 million.
6
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 since the Stars Interactive Group Acquisition, it continues to review and assess the importance, completeness and accuracy of such metrics as it relates to its evaluation of its 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-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 fourth quarter of 2014 following the Stars Interactive Group Acquisition. 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 fourth quarter of 2014 were re-calculated accordingly and first provided in the Q2 2017 MD&A. The Corporation believes that readers should consider both QAUs and QNY together as customer growth trends reflected in QAUs and customer monetization trends reflected in QNY 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 (e.g., both poker and casino). 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 September 30, 2017, the Corporation had 2.10 million combined QAUs, which represents an increase of 2.1% over the prior year period. The Corporation believes that the increase when compared to the third quarter of 2016 was primarily the result of the growth and expansion of the Corporation’s real-money online casino and sportsbook product offerings and the re-launch of real-money online poker and casino in Portugal. Notwithstanding, the Corporation’s QAUs were negatively impacted by (i) the cessation of operations in Colombia, Australia and Slovenia, (ii) previously disclosed negative operating conditions in Poland primarily related to constraints on processing payments in that jurisdiction, and (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. 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 customer relationship management 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 2016 Annual Information Form, including under the headings “Business of the Corporation—Online and Mobile Poker”, “—Other Online and Mobile Products” 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 business 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 Revenue” for each of the three and nine months ended September 30, 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
8
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 September 30, 2017, the Corporation’s QNY was $150, which represents an increase of 18.8% from the prior year period. The growth in QNY was primarily the result of 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. During the three months ended September 30, 2017, the Corporation’s constant currency QNY was $144, which represents an increase of 13.9% 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 customer relationship management 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 2016 Annual Information Form, including under the headings “Business of the Corporation—Online and Mobile Poker”, “—Other Online and Mobile Products” 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
|
|
Dec 31, |
|
|
Mar 31, |
|
|
Jun 30, |
|
|
Sep 30, |
|
|
Dec 31, |
|
|
Mar 31, |
|
||||||
$000's |
|
2014 |
|
|
2015 |
|
|
2015 |
|
|
2015 |
|
|
2015 |
|
|
2016 |
|
||||||
Revenue |
|
|
300,211 |
|
|
|
272,292 |
|
|
|
259,500 |
|
|
|
247,327 |
|
|
|
293,201 |
|
|
|
288,518 |
|
Corporate |
|
|
(1,899 |
) |
|
|
(426 |
) |
|
|
(392 |
) |
|
|
(225 |
) |
|
|
(471 |
) |
|
|
(59 |
) |
Other Gaming Revenue |
|
|
(11,815 |
) |
|
|
(12,638 |
) |
|
|
(11,562 |
) |
|
|
(9,729 |
) |
|
|
(13,419 |
) |
|
|
(11,971 |
) |
Poker and Casino & Sportsbook |
|
|
286,497 |
|
|
|
259,228 |
|
|
|
247,546 |
|
|
|
237,373 |
|
|
|
279,311 |
|
|
|
276,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun 30, |
|
|
Sep 30, |
|
|
Dec 31, |
|
|
Mar 31, |
|
|
Jun 30, |
|
|
Sep 30, |
|
||||||
|
|
2016 |
|
|
2016 |
|
|
2016 |
|
|
2017 |
|
|
2017 |
|
|
2017 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
285,762 |
|
|
|
270,681 |
|
|
|
310,285 |
|
|
|
317,320 |
|
|
|
305,305 |
|
|
|
329,443 |
|
Corporate |
|
|
(46 |
) |
|
|
— |
|
|
|
(2 |
) |
|
|
(22 |
) |
|
|
(92 |
) |
|
|
(213 |
) |
Other Gaming Revenue |
|
|
(10,479 |
) |
|
|
(9,632 |
) |
|
|
(12,884 |
) |
|
|
(11,854 |
) |
|
|
(12,762 |
) |
|
|
(12,675 |
) |
Poker and Casino & Sportsbook |
|
|
275,237 |
|
|
|
261,049 |
|
|
|
297,399 |
|
|
|
305,444 |
|
|
|
292,451 |
|
|
|
316,555 |
|
SELECTED FINANCIAL INFORMATION
Selected Financial Information
Selected financial information of the Corporation for the three and nine months ended September 30, 2017 and 2016, and for the year ended December 31, 2016 is set forth below.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
Year ended December 31, |
|
|||||||||||
$000's, except per share amounts |
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
|
2016 |
|
|||||
Revenue |
|
|
329,443 |
|
|
|
270,681 |
|
|
|
952,065 |
|
|
|
844,961 |
|
|
|
1,155,247 |
|
Net Earnings |
|
|
75,874 |
|
|
|
12,523 |
|
|
|
212,110 |
|
|
|
90,511 |
|
|
|
135,550 |
|
Basic Net Earnings Per Common Share |
|
$ |
0.52 |
|
|
$ |
0.09 |
|
|
$ |
1.45 |
|
|
$ |
0.65 |
|
|
$ |
0.96 |
|
Diluted Net Earnings Per Common Share |
|
$ |
0.37 |
|
|
$ |
0.06 |
|
|
$ |
1.05 |
|
|
$ |
0.47 |
|
|
$ |
0.70 |
|
Total Assets (as at) |
|
|
5,353,385 |
|
|
|
5,582,797 |
|
|
|
5,353,385 |
|
|
|
5,582,797 |
|
|
|
5,462,475 |
|
Total Long-Term Liabilities (as at) |
|
|
2,488,399 |
|
|
|
2,504,445 |
|
|
|
2,488,399 |
|
|
|
2,504,445 |
|
|
|
2,412,579 |
|
Total revenue increased for the three and nine months ended September 30, 2017 as compared to the respective prior year periods 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 total revenue calculated on a constant currency basis, see “Foreign Exchange Impact on Revenue” below for each of the three and nine months ended September 30, 2017.
The decrease in the Corporation’s asset base from December 31, 2016 was primarily the result of amortization of its intangible assets and a decrease in the fair value of the Swap Agreements (as defined and described below), while the increase in outstanding long-term liabilities from December 31, 2016 was primarily explained by the Corporation not being required to allocate any excess cash flow to the principal repayment of the First Lien Term Loans (as defined below) during the nine months ended September 30, 2017, which moved $40 million of such First Lien Term Loans from short-term to long-term, as a result of the Refinancing and Repricing (each as defined below).
Other Financial Information
To supplement its Q3 2017 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
10
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.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
$000's, except per share amounts |
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Total Revenue |
|
|
329,443 |
|
|
|
270,681 |
|
|
|
952,065 |
|
|
|
844,961 |
|
Adjusted EBITDA |
|
|
155,767 |
|
|
|
123,164 |
|
|
|
453,305 |
|
|
|
376,489 |
|
Adjusted Cash Flow from Operations |
|
|
141,986 |
|
|
|
84,976 |
|
|
|
393,241 |
|
|
|
278,122 |
|
Adjusted Net Earnings |
|
|
119,595 |
|
|
|
84,979 |
|
|
|
346,990 |
|
|
|
259,686 |
|
Adjusted Net Earnings per Diluted Share |
|
|
$0.58 |
|
|
|
$0.42 |
|
|
|
$1.71 |
|
|
|
$1.34 |
|
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 (loss) before interest and financing costs, income taxes, 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 (outflows) from operating activities net of 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 (loss) 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 6 in the Q3 2017 Financial Statements. For the three and nine months ended September 30, 2017, Diluted Shares equaled 204,800,009 and 202,796,952, respectively.
11
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:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
$000's, except per share amounts |
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Net earnings |
|
|
75,874 |
|
|
|
12,523 |
|
|
|
212,110 |
|
|
|
90,511 |
|
Financial expenses |
|
|
41,040 |
|
|
|
49,458 |
|
|
|
123,326 |
|
|
|
101,734 |
|
Income taxes expense (recovery) |
|
|
2,186 |
|
|
|
(400 |
) |
|
|
856 |
|
|
|
4,078 |
|
Depreciation of property and equipment |
|
|
2,178 |
|
|
|
2,119 |
|
|
|
6,555 |
|
|
|
6,109 |
|
Amortization of intangible and deferred development costs |
|
|
34,453 |
|
|
|
33,326 |
|
|
|
102,411 |
|
|
|
96,919 |
|
EBITDA |
|
|
155,731 |
|
|
|
97,026 |
|
|
|
445,258 |
|
|
|
299,351 |
|
Stock-based compensation |
|
|
3,298 |
|
|
|
1,978 |
|
|
|
7,914 |
|
|
|
8,396 |
|
Termination of employment agreements |
|
|
1,357 |
|
|
|
3,047 |
|
|
|
4,165 |
|
|
|
11,365 |
|
Termination of affiliate agreements |
|
|
— |
|
|
|
1,053 |
|
|
|
407 |
|
|
|
3,386 |
|
Loss on disposal of assets |
|
|
338 |
|
|
|
246 |
|
|
|
599 |
|
|
|
562 |
|
(Gain) loss from investments |
|
|
(9,024 |
) |
|
|
10,589 |
|
|
|
(14,236 |
) |
|
|
14,550 |
|
Acquisition-related costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
199 |
|
Net loss (earnings) from associates and (reversal of) impairment of assets held for sale, associates and intangible assets |
|
|
1,451 |
|
|
|
574 |
|
|
|
(5,861 |
) |
|
|
6,641 |
|
Other costs (see table below) |
|
|
2,616 |
|
|
|
8,651 |
|
|
|
15,059 |
|
|
|
32,039 |
|
Adjusted EBITDA |
|
|
155,767 |
|
|
|
123,164 |
|
|
|
453,305 |
|
|
|
376,489 |
|
Current income tax expense |
|
|
(3,288 |
) |
|
|
(342 |
) |
|
|
(6,690 |
) |
|
|
(5,814 |
) |
Depreciation and amortization (excluding amortization of purchase price allocation intangibles) |
|
|
(5,556 |
) |
|
|
(4,369 |
) |
|
|
(15,740 |
) |
|
|
(12,359 |
) |
Interest (excluding interest accretion and non-refundable late payment fees related to the unpaid balance of the deferred purchase price) |
|
|
(27,328 |
) |
|
|
(33,474 |
) |
|
|
(83,885 |
) |
|
|
(98,630 |
) |
Adjusted Net Earnings |
|
|
119,595 |
|
|
|
84,979 |
|
|
|
346,990 |
|
|
|
259,686 |
|
Diluted Shares |
|
|
204,800,009 |
|
|
|
200,016,913 |
|
|
|
202,796,952 |
|
|
|
193,866,395 |
|
Adjusted Net Earnings per Diluted Share |
|
|
$0.58 |
|
|
|
$0.42 |
|
|
|
$1.71 |
|
|
|
$1.34 |
|
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 |
12
|
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:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
|||||
|
|
$000's |
|
|
$000's |
|
|
$000's |
|
|
$000's |
|
||||
Non-U.S. lobbying and legal expenses |
|
|
797 |
|
|
|
476 |
|
|
|
2,622 |
|
|
|
2,300 |
|
U.S. lobbying and legal expenses |
|
|
2,119 |
|
|
|
2,336 |
|
|
|
9,612 |
|
|
|
9,163 |
|
Strategic review professional fees |
|
|
— |
|
|
|
2,237 |
|
|
|
125 |
|
|
|
7,372 |
|
Retention bonuses |
|
|
41 |
|
|
|
437 |
|
|
|
1,271 |
|
|
|
2,657 |
|
Non-recurring professional fees |
|
|
664 |
|
|
|
413 |
|
|
|
2,168 |
|
|
|
4,833 |
|
AMF and other investigation professional fees (net of insurance proceeds) |
|
|
(1,265 |
) |
|
|
2,587 |
|
|
|
3,888 |
|
|
|
4,492 |
|
Austria gaming duty |
|
|
— |
|
|
|
— |
|
|
|
(5,000 |
) |
|
|
— |
|
Office restructuring and legacy business unit shutdown costs |
|
|
260 |
|
|
|
165 |
|
|
|
373 |
|
|
|
1,222 |
|
Other costs |
|
|
2,616 |
|
|
|
8,651 |
|
|
|
15,059 |
|
|
|
32,039 |
|
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:
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
|
$000's |
|
|
$000's |
|
|
$000's |
|
|
$000's |
|
||||
Net cash inflows from operating activities |
|
144,870 |
|
|
|
86,693 |
|
|
|
370,843 |
|
|
|
201,641 |
|
Customer deposit liability movement |
|
(2,884 |
) |
|
|
(1,717 |
) |
|
|
22,398 |
|
|
|
76,481 |
|
Adjusted Cash Flow from Operations |
|
141,986 |
|
|
|
84,976 |
|
|
|
393,241 |
|
|
|
278,122 |
|
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.
Comparison of the Three Months Ended September 30, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|||||||||||||
$000's except percentage amounts |
|
2017 |
|
|
2016 |
|
|
Variance |
|
|
% Change |
|
||||
Revenue |
|
|
329,443 |
|
|
|
270,681 |
|
|
|
58,762 |
|
|
|
21.7 |
% |
Selling |
|
|
42,587 |
|
|
|
35,502 |
|
|
|
7,085 |
|
|
|
20.0 |
% |
General and administrative |
|
|
140,815 |
|
|
|
136,133 |
|
|
|
4,682 |
|
|
|
3.4 |
% |
Financial |
|
|
41,040 |
|
|
|
49,458 |
|
|
|
(8,418 |
) |
|
|
(17.0 |
%) |
Gaming duty |
|
|
33,396 |
|
|
|
26,829 |
|
|
|
6,567 |
|
|
|
24.5 |
% |
Gain (loss) from investments |
|
|
9,024 |
|
|
|
(10,589 |
) |
|
|
19,613 |
|
|
|
185.2 |
% |
Net loss from associates |
|
|
(2,569 |
) |
|
|
(47 |
) |
|
|
(2,522 |
) |
|
|
(5367.0 |
%) |
Income taxes expense (recovery) |
|
|
2,186 |
|
|
|
(400 |
) |
|
|
2,586 |
|
|
|
646.4 |
% |
Revenue
The revenue increase for the three months ended September 30, 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) the expansion of the geographical reach of the Corporation’s casino and sportsbook products into eligible markets, (iv) user experience and user interface improvements to the Corporation’s sportsbook
13
product, and (v) the re-launch of real-money online poker and real-money online casino in Portugal. Revenues were negatively impacted by a provision for retrospective VAT relating to prior periods in Switzerland following a change in policy by in the Swiss tax authority regarding the relevant tax law. 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 Business Line and Geographic Region
|
|
Three Months Ended September 30, 2017 |
|
|||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Geographic Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Isle of Man |
|
|
84,606 |
|
|
|
4,443 |
|
|
|
— |
|
|
|
89,049 |
|
|
|
— |
|
|
|
89,049 |
|
Malta |
|
|
54,733 |
|
|
|
57,063 |
|
|
|
1 |
|
|
|
111,797 |
|
|
|
— |
|
|
|
111,797 |
|
Italy |
|
|
20,363 |
|
|
|
13,289 |
|
|
|
142 |
|
|
|
33,794 |
|
|
|
— |
|
|
|
33,794 |
|
United Kingdom |
|
|
14,602 |
|
|
|
4,302 |
|
|
|
67 |
|
|
|
18,971 |
|
|
|
— |
|
|
|
18,971 |
|
Spain |
|
|
13,046 |
|
|
|
9,087 |
|
|
|
164 |
|
|
|
22,297 |
|
|
|
— |
|
|
|
22,297 |
|
France |
|
|
13,220 |
|
|
|
2,491 |
|
|
|
127 |
|
|
|
15,838 |
|
|
|
— |
|
|
|
15,838 |
|
Other licensed or approved jurisdictions |
|
|
20,823 |
|
|
|
4,487 |
|
|
|
12,174 |
|
|
|
37,484 |
|
|
|
213 |
|
|
|
37,697 |
|
|
|
|
221,393 |
|
|
|
95,162 |
|
|
|
12,675 |
|
|
|
329,230 |
|
|
|
213 |
|
|
|
329,443 |
|
|
|
Three Months Ended September 30, 2016 (As reclassified) |
|
|||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Geographic Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Isle of Man |
|
|
79,749 |
|
|
|
4,450 |
|
|
|
2 |
|
|
|
84,201 |
|
|
|
— |
|
|
|
84,201 |
|
Malta |
|
|
52,959 |
|
|
|
40,031 |
|
|
|
3 |
|
|
|
92,993 |
|
|
|
— |
|
|
|
92,993 |
|
Italy |
|
|
17,668 |
|
|
|
8,519 |
|
|
|
146 |
|
|
|
26,333 |
|
|
|
— |
|
|
|
26,333 |
|
United Kingdom |
|
|
13,261 |
|
|
|
2,799 |
|
|
|
86 |
|
|
|
16,146 |
|
|
|
— |
|
|
|
16,146 |
|
Spain |
|
|
10,826 |
|
|
|
5,825 |
|
|
|
153 |
|
|
|
16,804 |
|
|
|
— |
|
|
|
16,804 |
|
France |
|
|
10,016 |
|
|
|
886 |
|
|
|
133 |
|
|
|
11,035 |
|
|
|
— |
|
|
|
11,035 |
|
Other licensed or approved jurisdictions |
|
|
12,370 |
|
|
|
1,690 |
|
|
|
9,109 |
|
|
|
23,169 |
|
|
|
— |
|
|
|
23,169 |
|
|
|
|
196,849 |
|
|
|
64,200 |
|
|
|
9,632 |
|
|
|
270,681 |
|
|
|
— |
|
|
|
270,681 |
|
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 September 30, 2017 was $221.4 million as compared to Poker revenue of $196.8 million for the prior year period, which represents an increase of approximately 12.5% year-over-year. The increase in Poker revenue was primarily the result of (i) the implementation of the Stars Rewards loyalty program, (ii) the re-launch of online poker in Portugal, and (iii) positive impacts of foreign exchange fluctuations. 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 provision for retrospective VAT relating to prior periods in Switzerland following a change in policy by in the Swiss tax authority regarding the relevant tax law, (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, (iv) the
14
cessation of operations in Colombia, Australia 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.
Casino & Sportsbook Revenue
Casino & Sportsbook revenue for the three months ended September 30, 2017 was $95.2 million as compared to $64.2 million for the prior year period, which represents an increase of 48.3%. 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, and (iii) user experience and user interface improvements to the Corporation’s sportsbook product. Notwithstanding, Casino & Sportsbook revenues were negatively impacted by, among other things, (i) a provision for retrospective VAT relating to prior periods in Switzerland following a change in policy by in the Swiss tax authority regarding the relevant tax law and (ii) 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 September 30, 2017 or 2016 or that the Corporation otherwise deems relevant based on its historical reporting of the same or otherwise.
Poker
Poker revenue increased in all geographic regions for the three months ended September 30, 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 Romania, Portugal and the Czech Republic (Romania and the Czech Republic had previously operated under the Malta license and the Corporation had previously ceased operations in Portugal). The growth in Malta was negatively impacted by the movement of Romania and Czech Republic to local licensing regimes.
Casino & Sportsbook
Casino & Sportsbook revenue increased in each geographic region for the three months ended September 30, 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 in the Isle of Man and the United Kingdom. Malta was also positively impacted by the expansion of the Corporation’s online casino and sportsbook product offerings into eligible markets. The significant 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 previously obtaining local licenses to operate online gaming in Romania, Portugal and the Czech Republic (Romania and the Czech Republic had previously operated under the Malta license and the Corporation had previously ceased operations in Portugal).
Other Gaming
Other Gaming revenue was relatively flat as a proportion of total revenue during the three months ended September 30, 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
15
the Corporation’s customers) during the three months ended September 30, 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 September 30, 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 4.2% 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 September 30, 2017 using the constant currency exchange rates for its source currencies other than the U.S. dollar, such revenues would have been $316.1 million, which is $13.3 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 16.8%, as opposed to 21.7%, over the prior year period.
Expenses
Selling
The increase in selling expenses for the three months ended September 30, 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 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. This increase was partially offset by a decrease in marketing and television advertising campaigns related to the BetStars brand.
General and Administrative
The increase in general and administrative expenses for the three months ended September 30, 2017 as compared to the prior year period was primarily the result of (i) increased payment processor costs due to higher net deposits in the 2017 period and (ii) an increase in salary expense due to staff restructuring in connection with Corporation’s previously announced operational excellence program and the provision for expected annual staff incentives in the 2017 period.
Financial
The decrease in financial expenses for the three months ended September 30, 2017 as compared to the prior year period was primarily the result of accretion recorded in respect of the deferred consideration for the Stars Interactive Group Acquisition in the prior year period.
Gaming Duty
The increase in gaming duty expenses for the three months ended September 30, 2017 as compared to the prior year period was primarily the result of (i) gaming duty on 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 licensed within the last year such as Portugal and the Czech Republic.
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”.
16
The gain recognized from investments during the three months ended September 30, 2017 as compared to the prior year period was primarily the result of an increase in the value of the Corporation’s retained ownership in NYX Gaming Group Limited (TSXV: NYX) (“NYX Gaming Group”) as a result of the previously announced support agreement with Scientific Games Corporation (“Scientific Games”) relating to the proposed acquisition by Scientific Games of all outstanding ordinary shares of NYX Gaming Group. For the prior year period, the loss from investments comprised (i) a provision recorded relating to an EBITDA support agreement entered into with Innova Gaming Group Inc. (“Innova”) in connection with its previously reported initial public offering on May 5, 2015 and (ii) 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 sale 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 for the three months ended September 30, 2017 as compared to the prior year period was primarily due to (i) an increase in taxable income generated through the Corporation’s Malta license, and (ii) certain adjustments made in the prior period to estimated taxable income in Malta resulting in a lower tax provision in that jurisdiction. The Corporation’s effective corporate income tax rate for the three months ended September 30, 2017, excluding prior year adjustments, was 2.8% as the Corporation primarily operates from the Isle of Man and Malta, which are low tax jurisdictions. In addition to corporate income tax, the Corporation also pays significant amounts of gaming duty, VAT and employment taxes.
Comparison of the Nine Months Ended September 30, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|||||||||||||
$000's except percentage amounts |
|
2017 |
|
|
2016 |
|
|
Variance |
|
|
% Change |
|
||||
Revenue |
|
|
952,065 |
|
|
|
844,961 |
|
|
|
107,104 |
|
|
|
12.7 |
% |
Selling |
|
|
125,458 |
|
|
|
117,280 |
|
|
|
8,178 |
|
|
|
7.0 |
% |
General and administrative |
|
|
408,398 |
|
|
|
433,571 |
|
|
|
(25,173 |
) |
|
|
(5.8 |
%) |
Financial |
|
|
123,326 |
|
|
|
101,734 |
|
|
|
21,592 |
|
|
|
21.2 |
% |
Gaming duty |
|
|
93,583 |
|
|
|
83,682 |
|
|
|
9,901 |
|
|
|
11.8 |
% |
Acquisition-related costs |
|
|
— |
|
|
|
199 |
|
|
|
(199 |
) |
|
|
(100.0 |
%) |
Gain (loss) from investments |
|
|
14,235 |
|
|
|
(14,550 |
) |
|
|
28,785 |
|
|
|
197.8 |
% |
Net (loss) earnings from associates |
|
|
(2,569 |
) |
|
|
644 |
|
|
|
(3,213 |
) |
|
|
(499.0 |
%) |
Income taxes expense |
|
|
856 |
|
|
|
4,078 |
|
|
|
(3,222 |
) |
|
|
(79.0 |
%) |
Revenue
The revenue increase for the nine months ended September 30, 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) the implementation of the Stars Rewards loyalty program, (iv) user experience and user interface improvements to the Corporation’s sportsbook product, and (iv) the re-launch of real-money online poker and real-money online casino in Portugal and the launch of PokerStars NJ. It was also favorably impacted by the Corporation’s previously announced strategy of focusing on recreational players, which has seen signs of success resulting in additional Poker revenue in part as a result of the reinvestment of loyalty program cost reductions and additional rake into customer relationship management and lifecycle campaigns for recreational players. As it relates to currency fluctuations during the nine-month 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.
17
Revenue by Business Line and Geographic Region
|
|
Nine Months Ended September 30, 2017 |
|
|||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Geographic Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Isle of Man |
|
|
255,960 |
|
|
|
22,577 |
|
|
|
— |
|
|
|
278,537 |
|
|
|
— |
|
|
|
278,537 |
|
Malta |
|
|
155,895 |
|
|
|
159,339 |
|
|
|
1 |
|
|
|
315,235 |
|
|
|
— |
|
|
|
315,235 |
|
Italy |
|
|
60,097 |
|
|
|
35,817 |
|
|
|
442 |
|
|
|
96,356 |
|
|
|
— |
|
|
|
96,356 |
|
United Kingdom |
|
|
40,962 |
|
|
|
10,541 |
|
|
|
200 |
|
|
|
51,703 |
|
|
|
— |
|
|
|
51,703 |
|
Spain |
|
|
34,116 |
|
|
|
24,163 |
|
|
|
502 |
|
|
|
58,781 |
|
|
|
— |
|
|
|
58,781 |
|
France |
|
|
36,359 |
|
|
|
6,027 |
|
|
|
385 |
|
|
|
42,771 |
|
|
|
— |
|
|
|
42,771 |
|
Other licensed or approved jurisdictions |
|
|
59,557 |
|
|
|
13,040 |
|
|
|
35,761 |
|
|
|
108,358 |
|
|
|
324 |
|
|
|
108,682 |
|
|
|
|
642,946 |
|
|
|
271,504 |
|
|
|
37,291 |
|
|
|
951,741 |
|
|
|
324 |
|
|
|
952,065 |
|
|
|
Nine Months Ended September 30, 2016 (As reclassified) |
|
|||||||||||||||||||||
|
|
Poker |
|
|
Casino & Sportsbook |
|
|
Other Gaming |
|
|
Total Gaming |
|
|
Corporate |
|
|
Total |
|
||||||
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
|
$000’s |
|
||||||
Geographic Area |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Isle of Man |
|
|
251,190 |
|
|
|
10,666 |
|
|
|
2 |
|
|
|
261,858 |
|
|
|
— |
|
|
|
261,858 |
|
Malta |
|
|
173,247 |
|
|
|
119,931 |
|
|
|
3 |
|
|
|
293,181 |
|
|
|
— |
|
|
|
293,181 |
|
Italy |
|
|
57,699 |
|
|
|
21,346 |
|
|
|
447 |
|
|
|
79,492 |
|
|
|
— |
|
|
|
79,492 |
|
United Kingdom |
|
|
43,319 |
|
|
|
9,932 |
|
|
|
283 |
|
|
|
53,534 |
|
|
|
— |
|
|
|
53,534 |
|
Spain |
|
|
30,456 |
|
|
|
17,453 |
|
|
|
468 |
|
|
|
48,377 |
|
|
|
— |
|
|
|
48,377 |
|
France |
|
|
38,182 |
|
|
|
1,212 |
|
|
|
413 |
|
|
|
39,807 |
|
|
|
— |
|
|
|
39,807 |
|
Other licensed or approved jurisdictions |
|
|
34,752 |
|
|
|
3,389 |
|
|
|
30,466 |
|
|
|
68,607 |
|
|
|
105 |
|
|
|
68,712 |
|
|
|
|
628,845 |
|
|
|
183,929 |
|
|
|
32,082 |
|
|
|
844,856 |
|
|
|
105 |
|
|
|
844,961 |
|
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 nine months ended September 30, 2017 was $642.9 million as compared to Poker revenue of $628.8 million for the prior year period, which represents an increase of approximately 2.2% year-over-year. The increase in Poker revenue was primarily the result of (i) the implementation of the Stars Rewards loyalty program, (ii) 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, (iii) re-launch of online poker in Portugal and launch of PokerStars NJ, and (iv) 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, and (iv) the cessation of operations in Australia, Colombia, Israel and Slovenia. For information on the impact of fluctuations in foreign exchange rates, see “Foreign Exchange Impact on Revenue” below.
18
Casino & Sportsbook revenue for the nine months ended September 30, 2017 was $271.5 million as compared to $183.9 million for the prior year period, which represents an increase of 47.6%. 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, and (iii) the addition of new sports and user experience and user interface improvements to the Corporation’s sportsbook product. 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 nine months ended September 30, 2017 or 2016 or that the Corporation otherwise deems relevant based on its historical reporting of the same or otherwise.
Poker
Poker revenue increased in each geographic region, except in Malta, United Kingdom and France, for the nine months ended September 30, 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 Romania, Portugal and the Czech Republic (Romania and the 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 Romania and Czech Republic to local licensing regimes, and the cessation of operations in Slovenia. The decline in the United Kingdom was primarily due to the devaluation of the Great Britain Pound Sterling against the U.S. dollar. The decline in France was primarily due to an increase in customer relationship management campaigns, 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 nine months ended September 30, 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 in the Isle of Man and the United Kingdom. The significant 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 Romania, Portugal and the Czech Republic (Romania and the 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.
Other Gaming
Other Gaming revenue was relatively flat as a proportion of total revenue during the nine months ended September 30, 2017 as compared to the prior year period.
19
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 nine months ended September 30, 2017 as compared to the prior year period had a positive impact on the Corporation’s Poker, Casino & Sportsbook revenue. During the nine months ended September 30, 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 0.6% 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 nine months ended September 30, 2017 using the constant currency exchange rates for its source currencies other than the U.S. dollar, such revenues would have been $941.8 million, which is $10.3 million higher 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 nine-month period would have increased by 11.5%, as opposed to 12.7%, over the prior year period.
Expenses
Selling
The increase in selling expenses for the nine months ended September 30, 2017 as compared to the prior year period was primarily the result of 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 nine months ended September 30, 2017 as compared to the prior year period was primarily the result of (i) 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, (ii) a reversal of the impairment of the Corporation’s investment in Innova taken in prior years, and (iii) a reduction in non-recurring professional fees, including those related to the Corporation’s strategic alternatives review during the 2016 period. 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 all three verticals.
Financial
The increase in financial expenses for the nine months ended September 30, 2017 as compared to the prior year period was primarily the result of (i) unrealized exchange gains related to the translation of the USD Second Lien Term Loan and the deferred consideration for the Stars Interactive Group Acquisition and (ii) unrealized 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 nine months ended September 30, 2017 as compared to the prior year period was primarily the result of (i) increases in gaming duty on 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 new 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.
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
20
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 nine months ended September 30, 2017 as compared to the prior year period was primarily the result of (i) an increase in the value of the Corporation’s retained ownership in NYX Gaming Group as noted above and (ii) the realized gain on the note received in connection with the sale of a former subsidiary, Cadillac Jack Inc., in 2015 (the “Cadillac Jack Note”). For the prior year period, the loss from investments comprised (i) a provision recorded relating to the Innova EBITDA Support Agreement and (ii) a decrease in the value of the Corporation’s retained ownership of the NYX Sub Preferred Shares.
Income Taxes Expense (Recovery)
The decrease in income taxes for the nine months ended September 30, 2017 as compared to the prior year period was primarily due to (i) a refund of approximately $2.85 million from the Belgian tax authorities relating to the closure of a prior tax audit and (ii) the reversal of a provision for a potential corporate tax liability. The Corporation’s effective corporate income tax rate for the nine months ended September 30, 2017, excluding prior year adjustments, was 2.6% as the Corporation primarily operates from the Isle of Man and Malta, which are low tax jurisdictions. In addition to corporate income tax, the Corporation also pays significant amounts of gaming duty, VAT and employment taxes.
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. Although the presentation currency for each period presented below is currently the U.S. dollar, the fourth quarter of 2015 was initially presented in Canadian dollars.
|
For the three months ended |
|
||||||||||||||||||||||
|
Dec. 31, |
|
Mar. 31, |
|
Jun. 30, |
|
Sept. 30, |
|
Dec. 31, |
|
Mar. 31, |
|
Jun. 30, |
|
Sept. 30, |
|
||||||||
$000’s, except per share amounts |
2015 |
|
2016 |
|
2016 |
|
2016 |
|
2016 |
|
2017 |
|
2017 |
|
2017 |
|
||||||||
Total Revenue |
|
293,201 |
|
|
288,518 |
|
|
285,763 |
|
|
270,681 |
|
|
310,285 |
|
|
317,320 |
|
|
305,305 |
|
|
329,443 |
|
Net Earnings (loss) |
|
(17,119 |
) |
|
55,491 |
|
|
22,497 |
|
|
12,523 |
|
|
45,039 |
|
|
65,753 |
|
|
70,483 |
|
|
75,874 |
|
Net Earnings (loss) from Continuing Operations |
|
(15,226 |
) |
|
55,491 |
|
|
22,497 |
|
|
12,523 |
|
|
45,039 |
|
|
65,753 |
|
|
70,483 |
|
|
75,874 |
|
Basic Net Earnings (loss) per Common Share |
$ |
(0.13 |
) |
$ |
0.42 |
|
$ |
0.16 |
|
$ |
0.09 |
|
$ |
0.31 |
|
$ |
0.45 |
|
$ |
0.48 |
|
$ |
0.52 |
|
Diluted Net Earnings (loss) per Common Share |
$ |
(0.13 |
) |
$ |
0.28 |
|
$ |
0.12 |
|
$ |
0.06 |
|
$ |
0.23 |
|
$ |
0.33 |
|
$ |
0.35 |
|
$ |
0.37 |
|
Basic Net Earnings (loss) from Continuing Operations per Common Share |
$ |
(0.11 |
) |
$ |
0.42 |
|
$ |
0.16 |
|
$ |
0.09 |
|
$ |
0.31 |
|
$ |
0.45 |
|
$ |
0.48 |
|
$ |
0.52 |
|
Diluted Net Earnings (loss) from Continuing Operations per Common Share |
$ |
(0.11 |
) |
$ |
0.28 |
|
$ |
0.12 |
|
$ |
0.06 |
|
$ |
0.23 |
|
$ |
0.33 |
|
$ |
0.35 |
|
$ |
0.37 |
|
The year-over-year revenue increases since the fourth quarter of 2016 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. 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 customer relationship management and lifecycle campaigns for recreational players.
21
For a discussion of trends and variances over the three and nine months ended September 30, 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 (loss) 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. 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 2016 Annual Information Form, including, without limitation, under the headings “Risk Factors and Uncertainties” and “Business of the Corporation—Seasonality” 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 equity and debt securities. 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 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 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 2016 Annual Information Form.
The Corporation believes that it 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, 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”.
22
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 Q3 2017 Financial Statements, as well as the 2016 Annual Information Form under the heading “General Development of the Business”. See also “Risk Factors and Uncertainties” below and in the 2016 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 $2.6 million and $5.5 million in the three months ended September 30, 2017 and 2016, respectively, and foreign currency losses of $2.3 million and foreign currency gains of $24.6 million in the nine months ended September 30, 2017 and 2016, respectively.
For additional information on derivatives, see also note 2 in the 2016 Annual Financial Statements and note 10 in the Q3 2017 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 its EUR First Lien Term Loan (as defined below) and USD Second Lien Term Loan, which each bear interest at variable rates.
As of the date hereof, the USD First Lien Term Loan and USD Second Lien Term Loan each have a LIBOR floor of 1.00% and the EUR First Lien Term Loan has a 0% Euribor floor. As such, the interest rates cannot decrease below 4.50%, 8.00% and 3.75%, respectively. Management monitors movements in the interest rates by frequently reviewing the Euribor and LIBOR.
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 equities, funds and debt securities. 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.
23
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.
The following is a summary of the Corporation’s contractual obligations as at September 30, 2017:
|
|
Payments due by period |
|
|||||||||||||||||
|
|
Total |
|
|
Less than |
|
|
1-3 years |
|
|
4-5 years |
|
|
More than |
|
|||||
$000's |
|
|
|
|
|
1 year |
|
|
|
|
|
|
|
|
|
|
5 years |
|
||
Provisions |
|
|
18,161 |
|
|
|
15,070 |
|
|
|
3,091 |
|
|
|
— |
|
|
|
— |
|
Long Term Debt |
|
|
2,903,440 |
|
|
|
141,691 |
|
|
|
281,598 |
|
|
|
2,480,151 |
|
|
|
— |
|
Derivatives |
|
|
95,630 |
|
|
|
— |
|
|
|
95,630 |
|
|
|
— |
|
|
|
— |
|
Purchase Obligations |
|
|
50,695 |
|
|
|
8,071 |
|
|
|
14,517 |
|
|
|
9,950 |
|
|
|
18,157 |
|
Total |
|
|
3,067,926 |
|
|
|
164,832 |
|
|
|
394,836 |
|
|
|
2,490,101 |
|
|
|
18,157 |
|
During the three months ended September 30, 2017, the Corporation made the Prepayments under the USD Second Lien Term Loan, reducing the principal balance thereof accordingly. For additional information on the Prepayments, see above under “Overview and Outlook—Third Quarter and Subsequent Developments—Prepayments”.
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 September 30, 2017 and December 31, 2016, there were no amounts outstanding under the Credit Facility. However, 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 to $70 million.
For additional information on the proceedings in Kentucky, see below under “Legal Proceedings and Regulatory Actions”, the 2016 Annual Reports and the Q2 2017 MD&A, including under the heading “Legal Proceedings and Regulatory Actions”, as applicable, and note 31 of the 2016 Annual Financial Statements.
24
The following is a summary of long-term debt outstanding as at September 30, 2017 and December 31, 2016 (all capitalized terms used in the table below relating to such long-term debt are defined below):
|
|
Interest rate |
|
|
September 30, 2017, Principal outstanding balance in local denominated currency |
|
|
September 30, 2017 Carrying amount |
|
|
December 31, 2016, Principal outstanding balance in local denominated currency |
|
|
December 31, 2016 Carrying amount |
|
|||||
|
|
|
|
|
|
000’s |
|
|
$000’s |
|
|
000’s |
|
|
$000’s |
|
||||
USD First Lien Term Loan |
|
|
4.80% |
|
|
|
1,900,515 |
|
|
|
1,850,252 |
|
|
|
2,021,097 |
|
|
|
1,965,929 |
|
EUR First Lien Term Loan |
|
|
3.75% |
|
|
|
383,202 |
|
|
|
447,264 |
|
|
|
286,143 |
|
|
|
296,197 |
|
USD Second Lien Term Loan |
|
|
8.30% |
|
|
|
95,000 |
|
|
|
55,468 |
|
|
|
210,000 |
|
|
|
166,453 |
|
Total long-term debt |
|
|
|
|
|
|
|
|
|
|
2,352,984 |
|
|
|
|
|
|
|
2,428,579 |
|
Current portion |
|
|
|
|
|
|
|
|
|
|
5,420 |
|
|
|
|
|
|
|
47,750 |
|
Non-current portion |
|
|
|
|
|
|
|
|
|
|
2,347,564 |
|
|
|
|
|
|
|
2,380,829 |
|
The decrease in outstanding long-term debt from December 31, 2016 to September 30, 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. For additional information regarding the interest on the Corporation’s outstanding long-term debt, including the effective interest rates, see the Q3 2017 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 amount to the following:
|
|
1 Year $000's |
|
|
2 Years $000's |
|
|
3 Years $000's |
|
|
4 Years $000's |
|
|
5 Years and Greater $000's |
|
|||||
USD First Lien Term Loan |
|
|
19,443 |
|
|
|
19,443 |
|
|
|
19,443 |
|
|
|
1,842,187 |
|
|
|
— |
|
EUR First Lien Term Loan |
|
|
4,632 |
|
|
|
4,632 |
|
|
|
4,632 |
|
|
|
438,855 |
|
|
|
— |
|
USD Second Lien Term Loan |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
95,000 |
|
Total |
|
|
24,075 |
|
|
|
24,075 |
|
|
|
24,075 |
|
|
|
2,281,042 |
|
|
|
95,000 |
|
CDN 2013 Debentures
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 September 30, 2017, the first lien term loans consisted of a $1.96 billion first lien term loan priced at LIBOR plus 3.50% (the “USD First Lien Term Loan”) and a €392 million 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 giving effect to the Refinancing, Repricing and Prepayments, as at September 30, 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”).
25
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 50 basis points to LIBOR plus 350 basis points with a LIBOR floor of 100 basis points and Euribor plus 375 basis points 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 three months ended September 30, 2017. For additional information on the Prepayments, see above under “Overview and Outlook—Third Quarter and Subsequent Developments—USD Second Lien Term Loan Prepayments”.
As a result of the Refinancing, Repricing and Prepayments, the Corporation realized aggregate savings of approximately $4.6 million and $9.8 million in interest expense for the three and nine months ended September 30, 2017, respectively.
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 parent of Stars Interactive Group) 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 year ending December 31, 2016 and will not be required to do so during the fiscal years ending December 31, 2017 and 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 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
26
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 September 30, 2017, the fair value of the Swap Agreements represented a liability of $95.63 million. As a result of the Swap Agreements, the Corporation had interest savings of $12.06 million during the year. During the nine months ended September 30, 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 $688.67 million USD First Lien Term Loan is exposed to fluctuations in interest rates.
See also “Risk Factors and Uncertainties” below and in the 2016 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 nine months ended September 30, 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 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 gains arising from the translation of the USD-denominated liabilities that was determined to be an effective hedge during the period was recognized in the consolidated statements of comprehensive income, counterbalancing a portion of the losses arising from translation of the Corporation’s net investment in its foreign operations.
During each of the three and nine months ended September 30, 2017, there was no ineffectiveness with respect to the net investment hedge.
For the three and nine months ended September 30, 2017, the Corporation recorded an unrealized exchange loss on translation of $30.56 million and $122.90 million, respectively, as compared to a gain of $6.82 million and a loss of $6.29 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 payment.
Comparison of the Three Months Ended September 30, 2017 and 2016
The table below outlines a summary of cash inflows and outflows by activity for the three months ended September 30, 2017 and 2016.
|
|
Three Months Ended September 30, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
$000's |
|
|
$000's |
|
||
Net cash inflows from operating activities |
|
|
144,870 |
|
|
|
86,693 |
|
Net cash outflows from financing activities |
|
|
(148,888 |
) |
|
|
(39,274 |
) |
Net cash outflows from investing activities |
|
|
(1,178 |
) |
|
|
(18,321 |
) |
Cash Inflows from Operating Activities
The Corporation generated cash inflows from operating activities for the three months ended September 30, 2017 and 2016. The Corporation’s cash inflows from operating activities increased for the three months ended September 30, 2017 as compared to the prior year period primarily as a result of increased EBITDA generated from the Corporation’s underlying operations and a decrease in customer deposit withdrawals relative to the prior year period.
Cash Outflows from Financing Activities
During the three months ended September 30, 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 USD Second Lien Term Loan, particularly the Prepayments. During the prior year period, the primary expenditure affecting cash outflows from financing activities was also the repayment of long-term debt interest and principal related to the First Lien Term Loans and the USD Second Lien Term Loan.
27
Cash Outflows from Investing Activities
During the three months ended September 30, 2017, the Corporation’s cash outflows from investing activities were primarily driven by capital expenditures, primarily consisting of investments in online poker, casino and sportsbook, as partially offset by the inflow of cash from the sale of all Innova common shares then-held by the Corporation. During the prior year period, the Corporation’s cash outflows from investing activities were primarily driven by (i) cash sweeps for the deferred purchase price for the Stars Interactive Group Acquisition (equal to 35% of certain free cash flow as defined in the merger agreement governing the acquisition), and (ii) capital expenditures, primarily consisting of investments in online poker, casino and sportsbook development.
Comparison of the Nine Months Ended September 30, 2017 and 2016
The table below outlines a summary of cash inflows and outflows by activity for the nine months ended September 30, 2017 and 2016.
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2017 |
|
|
2016 |
|
||
|
|
$000's |
|
|
$000's |
|
||
Net cash inflows from operating activities |
|
|
370,843 |
|
|
|
201,641 |
|
Net cash outflows from financing activities |
|
|
(415,527 |
) |
|
|
(138,554 |
) |
Net cash outflows from investing activities |
|
|
(10,108 |
) |
|
|
(118,570 |
) |
Cash Inflows from Operating Activities
The Corporation generated cash inflows from operating activities for the nine months ended September 30, 2017 and 2016. The Corporation’s cash inflows from operating activities increased for the nine months ended September 30, 2017 as compared to the prior year period primarily as a result of increased EBITDA generated from the Corporation’s underlying operations and a decrease in customer deposit withdrawals relative to the prior year period.
Cash Outflows from Financing Activities
During the nine months ended September 30, 2017, the primary expenditures affecting cash outflows from financing activities were (i) the payment of $197.5 million on the deferred purchase price during the period, (ii) the repayment of long-term debt interest and principal related to the First Lien Term Loans and the USD Second Lien Term Loan, particularly the Prepayments, and (iii) the settlement of an investment margin account previously utilized to acquire strategic investments in 2014. These expenditures were partially offset by a gain on settlement of certain derivatives. During the prior year period, the primary expenditures affecting cash outflows from financing activities were (i) the payment of long-term debt interest and principal, particularly as it related to the First Lien Term Loans and the USD Second Lien Term Loan, and (ii) the repayment of the CDN 2013 Debentures.
Cash Outflows from Investing Activities
During the nine months ended September 30, 2017, the Corporation’s cash outflows from investing activities were primarily driven by (i) capital expenditures, primarily consisting of investments in online poker, casino and sportsbook, and (ii) the acquisition of the remaining interests held by the sellers of Stars Fantasy Sports Subco, LLC, the operator of, among other things, the Corporation’s StarsDraft brand, in each case partially offset by the inflow of cash from the settlement of the Cadillac Jack Note and the sale of all Innova common shares then-held by the Corporation. During the prior year period, the Corporation’s cash outflows from investing activities were primarily driven by (i) cash sweeps for the deferred purchase price, (ii) settlement of certain minimum revenue guarantees in connection with the Corporation’s divestiture of certain former businesses, (iii) capital expenditures, primarily consisting of investments in online poker, casino and sportsbook development, and (iv) the cash collateral delivered as part of the Kentucky Bond Collateral.
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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 Q3 2017 Financial Statements and 2016 Annual Financial Statements, the 2016 Annual MD&A, and the Q2 2017 MD&A. 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 three and nine months ended September 30, 2017.
Change in Critical Accounting Estimates
During the three and nine months ended September 30, 2017, there were no changes to the Corporation’s critical accounting estimates.
Change in Significant Accounting Policies
During the nine months ended September 30, 2017, the Corporation made the following changes to its significant accounting policies, all of which were adopted effective January 1, 2017:
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 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 unaudited interim condensed statement of earnings immediately.
Cash flow hedges
Hedge accounting is discontinued on a prospective basis when the hedge no longer meets the hedge accounting criteria (including when it becomes ineffective), when the hedge instrument is sold, terminated or exercised and when, for cash flow hedges, the designation is revoked and the forecast transaction is no longer expected to occur. The cumulative gain or loss deferred in the unaudited interim condensed statement of other comprehensive income should be classified to the unaudited interim condensed statement of earnings in the same period during which the hedged forecast cash flows affect net earnings. Where the forecast transaction is no longer expected to occur, the cumulative gain or loss deferred in other comprehensive income is transferred immediately to net earnings.
RECENT ACCOUNTING PRONOUNCEMENTS
Changes in Accounting Policies Adopted
During the three and nine months ended September 30, 2017, there were no changes to the Corporation’s accounting policies adopted.
New Accounting Pronouncements – Not Yet Effective
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. 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. Further, IFRS 9 includes new hedge accounting requirements
29
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. Extended disclosures in respect of risk management activity for those choosing to apply the new hedge accounting requirements will also be required under the new standard.
The Corporation intends to adopt IFRS 9 from its effective date of January 1, 2018 but is still finalizing its analysis of the expected impact on its consolidated financial statements, disclosures and related controls, specifically as applied to the classification and measurement of its currently designated available-for-sale investments, as well as the expected impact of adopting or delaying the adoption to a later date of the new hedge accounting requirements. Notwithstanding, the Corporation does not currently expect any such adoption to have a material impact on its future consolidated financial statements.
IFRS 15, Revenues from Contracts with Customers
The Financial Accounting Standards Board and IASB have 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 Programmes, 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: 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 intends to adopt IFRS 15 from its effective date of January 1, 2018 but is still finalizing its analysis of the expected impact on its consolidated financial statements, disclosures and related controls. The Corporation does not currently expect such adoption to have a material impact on its future consolidated financial statements.
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.
OFF BALANCE SHEET ARRANGEMENTS
As at September 30, 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.
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|
|
As at November 7, 2017 |
|
|
|
|
147,511,467 |
|
|
Common Shares issuable upon conversion of 1,139,249 Preferred Shares |
|
|
56,680,120 |
|
Common Shares issuable upon exercise of options |
|
|
7,318,348 |
|
Common Shares issuable upon exercise of warrants |
|
|
4,000,000 |
|
Common Shares issuable upon settlement of other equity-based awards |
|
|
739,543 |
|
Total Common Shares on a fully-diluted basis |
|
|
216,249,478 |
|
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LEGAL PROCEEDINGS AND REGULATORY ACTIONS
Other than as set forth below, there were no material changes or updates to the Corporation’s material legal proceedings or regulatory actions during the three months ended September 30, 2017. For additional information regarding the Corporation’s material legal proceedings and regulatory actions, see the 2016 Annual Reports and Q2 2017 MD&A, particularly under the heading “Legal Proceedings and Regulatory Actions”, as applicable.
Kentucky Proceeding
For information regarding the previously reported proceeding in Kentucky, see above under “Liquidity and Capital Resources—Credit Facility”, the 2016 Annual Information Form and Q2 2017 MD&A, including under the heading “Legal Proceedings and Regulatory Actions” therein, and note 31 to the 2016 Annual Financial Statements. Since the date of the Q2 2017 MD&A, the Corporation has continued to pursue its appeal of the trial court’s order for damages in connection with the proceeding in Kentucky.
The AMF Investigation and Foreign Payments Matter
For information regarding the previously reported Autorité des marchés financiers (“AMF”) investigation and related matters, see below, the 2016 Annual Information Form and Q2 2017 MD&A. For information regarding the foreign payments matter, see below, the 2016 Annual Information Form, including under the headings “Legal Proceedings and Regulatory Actions—Foreign Payments Matter” and “Risk Factors and Uncertainties—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”, and Q2 2017 MD&A.
As previously disclosed, during an internal investigation with respect to the AMF matters, the Board became aware of certain information, which it is reviewing to determine whether the Corporation or any of its subsidiaries may have made improper payments relating to a portion of its historical business that was operated prior to the Stars Interactive Group Acquisition directly or through external consultants to foreign governmental officials in certain jurisdictions outside of Canada and the United States. This historical business, which primarily provided lottery services and sold refurbished gaming terminals to both governments and private businesses, was never profitable and effectively ceased operations in 2014. The Corporation does not currently have operations or hold any licenses or approvals in any of these foreign jurisdictions.
The Board’s review of the possibility of improper foreign payments is ongoing, with the involvement of external counsel, and additional information could become known to it in the future. As previously disclosed, as part of the Board’s review, the Corporation contacted the Royal Canadian Mounted Police (“RCMP”) in Canada and the Department of Justice and Securities Exchange Commission in the United States. These authorities are investigating these matters and the Corporation continues to cooperate with the same, including, without 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.
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.
Class Actions
For information regarding the previously reported class action lawsuits, see the 2016 Annual Information Form and Q2 2017 MD&A.
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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. |
As previously disclosed, 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, 2016. Based on that evaluation, the CEO and CFO concluded that, because of the material weaknesses in the Corporation’s ICFR that existed at December 31, 2016, which were disclosed in the 2016 Annual MD&A under the heading “Disclosure Controls and Procedures and Internal Control Over Financial Reporting—Management Report on Internal Control Over Financial Reporting”, the Corporation’s DC&P were not effective as of September 30, 2017. Notwithstanding these material weaknesses, the Corporation’s management, including the CEO and CFO, concluded that the Q3 2017 Financial Statements present fairly, in all material respects, the Corporation’s financial position, results of operations and cash flows for the periods presented in conformity with IFRS.
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.
As previously disclosed, 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, 2016, based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on that evaluation, the CEO and CFO concluded that the Corporation’s ICFR was not effective as of December 31, 2016, because there were material weaknesses in the same. For a description and discussion of such material weaknesses, see the 2016 Annual MD&A under the heading “Disclosure Controls and Procedures and Internal Control Over Financial Reporting—Management Report on Internal Control Over Financial Reporting”.
Remediation Efforts to Address Identified Material Weaknesses
Management is committed to remediating the material weaknesses in the Corporation’s ICFR identified as of December 31, 2016 and identifying and remediating internal control risks that could be material to the Corporation in the future. If not remediated effectively, the material weaknesses in such ICFR could impact the accuracy and completeness of the Corporation’s financial statements.
The Corporation has implemented the following measures to address the material weaknesses identified as of December 31, 2016:
Derivative Valuations and Hedge Accounting – The Corporation has implemented a change to its internal control over financial reporting relating to derivative valuations and hedge accounting. Throughout the fourth quarter of
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2016, the Corporation performed reviews to identify opportunities to improve the operation of its controls relating to derivative valuations and hedge accounting. In the same quarter, 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. In the first quarter of 2017, management implemented additional internal controls in respect of hedge accounting and fully outsourced derivative valuations and aspects of hedge relationship assessments to the external provider, which will continue to provide a SOC1 Report. Testing of this internal control continued during the second and third quarters of 2017. As a result of this continued testing and certain expected changes in the Corporation’s ICFR environment prior to year-end, management will conclude as to the design and operational effectiveness relating to derivative valuations and hedge accounting when assessing the effectiveness of ICFR as at the end of 2017.
Foreign Exchange Rate Information – The Corporation performed a review of the design and operation of its controls relating to foreign exchange rate information. The Corporation now obtains foreign exchange rate information from an additional reputable source to compare such information against that provided by its previous sole information source and is still in the process of developing an automated control to perform such comparisons in the future. No other changes to the design of this internal control were made in either the second or third quarter of 2017, although testing continued. As a result of this continued testing, management will conclude as to the design and operational effectiveness relating to foreign exchange rate information when assessing the effectiveness of ICFR as at the end of 2017.
The Corporation is committed to maintaining a strong control environment and continuously monitors and assesses the same, including its DC&P and ICFR, in an effort to achieve this goal. The Audit Committee of the Board (the “Audit Committee”) has directed management to continually develop and monitor detailed plans and timetables for completing the testing of the remedial measures outlined above. In addition, under the Audit Committee’s direction, management will continue to review and make necessary changes to the overall design and test the operation of the Corporation’s internal control environment.
As the Corporation implements these remediation efforts and continues to evaluate and work to improve its ICFR, management may determine that additional steps or measures may be necessary to address and remediate the material weaknesses or determine to modify the remediation efforts described above. The Corporation cannot provide assurance that these remediation efforts will be successful or that its ICFR will be effective in accomplishing all control objectives all the time. Management will continue to assess the effectiveness of these internal controls in connection with its evaluations of the effectiveness of its ICFR at year end.
Changes to Internal Control Over Financial Reporting
The Corporation has taken the measures described above under “Remediation Efforts to Address Identified Material Weaknesses”. However, there has been no change in The Stars Group’s ICFR that occurred during the three months ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, The Stars Group’s ICFR.
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 2016 Annual Information Form.
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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 Q3 2017 Financial Statements, the 2016 Annual Reports, particularly under the heading “Risk Factors and Uncertainties” therein, as applicable, and in other filings that the Corporation has made and may make with applicable securities authorities in the future, including those available on SEDAR at www.sedar.com and EDGAR at www.sec.gov. 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.
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Additional information relating to The Stars Group and its business, including, without limitation, the Q3 2017 Financial Statements, the 2016 Annual Reports and other filings that The Stars Group has made and may make with applicable securities authorities in the future, 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
November 9, 2017
(Signed) “Brian Kyle”
_____________________
Brian Kyle
Chief Financial Officer
36
Exhibit 99.4
Form 52-109F2
Certification of Interim Filings
Full Certificate
I, Rafael (Rafi) Ashkenazi, Chief Executive Officer of The Stars Group Inc., certify the following:
1. |
Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of The Stars Group Inc. (the “issuer”) for the interim period ended September 30, 2017. |
2. |
No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
3. |
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
4. |
Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in Regulation 52-109 respecting Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. |
5. |
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings |
|
(a) |
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
|
(i) |
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and |
|
(ii) |
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
|
(b) |
designed ICFR, or caused it 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 the issuer’s GAAP. |
5.1 |
Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). |
5.2 |
ICFR – material weakness relating to design: The issuer has disclosed in its interim MD&A |
for each material weakness relating to design existing at the end of the interim period
|
(a) |
a description of the material weakness; |
|
(c) |
the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness. |
5.3 |
Limitation on scope of design: N/A |
6. |
Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2017 and ended on September 30, 2017 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
Date: November 9, 2017
/s/ Rafael (Rafi) Ashkenazi______
Rafael (Rafi) Ashkenazi
Chief Executive Officer
2
Exhibit 99.5
Form 52-109F2
Certification of Interim Filings
Full Certificate
I, Brian Kyle, Chief Financial Officer of The Stars Group Inc., certify the following:
1. |
Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of The Stars Group Inc. (the “issuer”) for the interim period ended September 30, 2017. |
2. |
No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
3. |
Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
4. |
Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in Regulation 52-109 respecting Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. |
5. |
Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings |
|
(a) |
designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
|
(i) |
material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and |
|
(ii) |
information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
|
(b) |
designed ICFR, or caused it 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 the issuer’s GAAP. |
5.1 |
Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). |
5.2 |
ICFR – material weakness relating to design: The issuer has disclosed in its interim MD&A |
for each material weakness relating to design existing at the end of the interim period
|
(a) |
a description of the material weakness; |
|
(c) |
the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness. |
5.3 |
Limitation on scope of design: N/A |
6. |
Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2017 and ended on September 30, 2017 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
Date: November 9, 2017
/s/ Brian Kyle_______
Brian Kyle
Chief Financial Officer
2